Filed On 1/5/98 · SEC File 333-41405 · Accession Number 908737-98-4
As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
1/05/98 Keystone Precious Metals Hol..Inc 485APOS 5:305 908737
Document/Exhibit Description Pages Size
1: 485APOS Post-Effective Amendment 296± 1,251K
2: EX-99.B11 Miscellaneous Exhibit 2 13K
3: EX-99.B12 Miscellaneous Exhibit 3 15K
4: EX-99.B14 Miscellaneous Exhibit 2 7K
5: EX-99.B17 Miscellaneous Exhibit 2 10K
1933 Act Registration No. 333-41405
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN INTERNATIONAL TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on __________pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a) (1)
[ ] on___________ pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on___________pursuant to paragraph (a) (2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration Statement No. 333-41405 on Form N- 14 of Keystone
Precious Metals Holdings, Inc., a Delaware corporation, the Registrant hereby
adopts the Registration
Statement of such corporation under
the Securities Act of 1933.
EVERGREEN INTERNATIONAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
7. Voting Information Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of Keystone
Precious Metals Holdings, Inc.
dated April 30, 1997, as
amended
13. Additional Information Statement of Additional
about the Company Being Information of Blanchard
Acquired Precious Metals Fund, Inc.
dated November 30,
1997
14. Financial Statements Financial Statements dated
October 31, 1997 of Keystone
Precious Metals Holdings,
Inc.; Financial Statements of
Blanchard Precious Metals
Fund, Inc. dated September 30,
1997; Pro Forma Financial
Statements
Item of Part C of Form N-14 Incorporated by Reference to
Part A Caption - "Comparative
15. Indemnification Information on Shareholders'
Rights - Liability and
Indemnification of Trustees
and Directors"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 6, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of the Blanchard Precious Metals Fund, Inc. (the
"Fund"), to inform you of a Special Shareholders' meeting to be held on February
20, 1998. Before that meeting, I would like your vote on the important issues
affecting your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes three proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Keystone Precious Metals Holdings in exchange for Class A shares of Keystone
Precious Metals Holdings and the assumption by Keystone Precious Metals Holdings
of certain liabilities of the Fund. You will receive shares of Keystone Precious
Metals Holdings having an aggregate net asset value equal to the aggregate net
asset value of your Fund shares. Details about Keystone Precious Metals
Holdings' investment objective, portfolio management team, performance, etc. are
contained in the attached Prospectus/Proxy Statement. The transaction is a
non-taxable event for shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus
Capital Management, Inc.
The third and final proposal requests shareholder consideration of an Interim
Sub-Advisory Agreement between Virtus Capital Management, Inc. and Cavelti
Capital Management, Ltd.
Information relating to the Interim Investment Advisory Agreement and the
Interim Sub-Advisory Agreement is contained in the attached Prospectus/Proxy
Statement.
The Board of Directors has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals presented and sign and return your proxy card in the enclosed
postage-paid envelope today.
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
Blanchard Precious Metals Fund, Inc.
BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Blanchard Precious Metals Fund, Inc. ("Precious Metals") will be
held at the offices of the Evergreen Funds, 200 Berkeley Street, 26th Floor,
Boston, Massachusetts 02116 on February 20, 1998 at 2:00 p.m. for the following
purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of Precious Metals by Keystone Precious Metals Holdings ("Keystone
Precious Metals"), a series of the Evergreen International Trust, in exchange
for Class A shares of Keystone Precious Metals and the assumption by Keystone
Precious Metals of certain identified liabilities of Precious Metals. The Plan
also provides for distribution of such shares of Keystone Precious Metals to
shareholders of Precious Metals in liquidation and subsequent termination of
Precious Metals. A vote in favor of the Plan is a vote in favor of the
liquidation and dissolution of Precious Metals.
2. To consider and act upon the Interim Management Contract between
Precious Metals and Virtus Capital Management, Inc.
3. To consider and act upon the Interim Sub-Advisory Agreement between
Virtus Capital Management, Inc. and Cavelti Capital Management, Ltd.
4. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Directors of Precious Metals has fixed the close of
business on December 26, 1997 as the record date for the determination of
shareholders of Precious Metals entitled to notice of and to vote at the Meeting
or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED
WITHOUT DELAY TO SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AT THE
MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Directors
John W. McGonigle
Secretary
January 6, 1998
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
PROSPECTUS/PROXY STATEMENT DATED JANUARY 6, 1998
Acquisition of Assets of
BLANCHARD PRECIOUS METALS FUND, INC.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
KEYSTONE PRECIOUS METALS HOLDINGS
a series of
Evergreen International Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Blanchard Precious Metals Fund, Inc. ("Precious Metals") in connection with a
proposed Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Precious Metals for consideration at a Special Meeting of
Shareholders to be held on February 20, 1998 at 2:00 p.m. at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Precious Metals to be acquired by Keystone Precious Metals Holdings ("Keystone
Precious Metals") in exchange for Class A shares of Keystone Precious Metals and
the assumption by Keystone Precious Metals of certain identified liabilities of
Precious Metals (hereinafter referred to as the "Reorganization"). Keystone
Precious Metals and Precious Metals are sometimes hereinafter referred to
individually as the "Fund" and collectively as the "Funds." Following the
Reorganization, Class A shares of Keystone Precious Metals will be distributed
to shareholders of Precious Metals in liquidation of Precious Metals and such
Fund will be terminated. No initial sales charge will be imposed in connection
with the shares of Keystone Precious Metals received by holders of shares of
Precious Metals. As a result of the proposed Reorganization, shareholders of
Precious Metals will receive that number of full and fractional Class A shares
of Keystone Precious Metals having an aggregate net asset value equal to the
aggregate net asset value of such shareholder's shares of Precious Metals. The
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
Keystone Precious Metals is a separate series of Evergreen
International Trust, an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The investment objectives of Keystone Precious Metals are to seek
long-term capital appreciation while protecting the purchasing power of
shareholders' capital and, as a secondary objective, to obtain current income.
Keystone Precious Metals invests primarily in common stocks of established
companies directly or indirectly engaged in mining, processing or dealing in
gold or other precious metals and minerals.
The primary investment objective of Precious Metals is to provide
long-term capital appreciation and preservation of purchasing power through
investments in physical precious metals, such as gold, silver, platinum, and
palladium, and in securities of companies involved with precious metals.
Shareholders of Precious Metals are also being asked to approve the
Interim Management Contract with Virtus Capital Management, Inc., a subsidiary
of First Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with
the same terms and fees as the previous advisory agreement between Precious
Metals and Virtus and the Interim Sub-Advisory Agreement between Virtus and
Cavelti Capital Management, Ltd. ("Cavelti Capital") with the same terms and
fees as the previous sub- advisory agreement between Virtus and Cavelti Capital.
The Interim Advisory Agreement and Interim Sub-Advisory Agreement will be in
effect for the period of time between November 28, 1997, the date on which the
merger of Signet Banking Corporation with and into a wholly-owned subsidiary of
First Union Corporation was consummated, and the date of the Reorganization
(scheduled for on or about February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Keystone Precious Metals
that shareholders of Precious Metals should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated January 6,
1998, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Keystone Precious Metals dated October 31,
1997 and Precious Metals dated September 30, 1997, has been filed with the SEC
and is incorporated by reference in its entirety into this Prospectus/Proxy
Statement. A copy of such Statement of Additional Information is available upon
request and without charge by writing to Keystone Precious Metals at 200
Berkeley Street, Boston, Massachusetts 02116, or by calling toll-free
1-800-343-2898.
The Prospectus of Keystone Precious Metals dated April 30, 1997, as
amended, and its Annual Report for the fiscal year ended October 31, 1997 are
incorporated herein by reference in their entirety. Shareholders of Precious
Metals will receive, with this Prospectus/Proxy Statement, copies of the
Prospectus of Keystone Precious Metals. Additional information about Keystone
Precious Metals is contained in its Statement of Additional Information of the
same date which has been filed with the SEC and which is available upon request
and without charge by writing to or calling Keystone Precious Metals at the
address or telephone number listed in the preceding paragraph.
The Prospectus of Precious Metals dated November 30, 1997, insofar as
it relates to Precious Metals only, and not to any other funds described
therein, is incorporated herein in its entirety by reference. Copies of the
Prospectus and related Statement of Additional Information dated the same date,
are available upon request without charge by writing to Precious Metals at the
address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-829- 3863.
Included as Exhibits A, B and C to this Prospectus/Proxy Statement are
a copy of the Plan, the Interim Advisory Agreement and the Interim Sub-Advisory
Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES...............................................6
SUMMARY .....................................................................8
Proposed Plan of Reorganization.................................... 9
Tax Consequences....................................................10
Investment Objectives and Policies of the Funds.....................11
Comparative Performance Information for each Fund...................11
Management of the Funds.............................................12
Investment Advisers and Sub-Adviser.................................12
Administrator.......................................................14
Portfolio Manager...................................................14
Distribution of Shares..............................................14
Purchase and Redemption Procedures..................................15
Exchange Privileges.................................................16
Dividend Policy.....................................................16
Risks ...........................................................17
REASONS FOR THE REORGANIZATION...............................................19
Agreement and Plan of Reorganization............................. 22
Federal Income Tax Consequences.....................................24
Pro-forma Capitalization............................................25
Shareholder Information.............................................26
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES.............................27
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS..............................30
Forms of Organization...............................................30
Capitalization......................................................30
Shareholder Liability...............................................31
Shareholder Meetings and Voting Rights........................... 32
Liquidation or Dissolution..........................................32
Liability and Indemnification of Trustees and
Directors................................................................. 33
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT.........................34
Introduction........................................................34
Comparison of the Interim Advisory Agreement and the
Previous Advisory Agreement................................35
Information about Precious Metals' Investment
Adviser......................................................................36
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT.....................37
Introduction........................................................37
Comparison of the Interim Sub-Advisory Agreement
and the Previous Sub-Advisory Agreement......................................38
ADDITIONAL INFORMATION.......................................................39
VOTING INFORMATION CONCERNING THE MEETING....................................40
FINANCIAL STATEMENTS AND EXPERTS.......................................... 43
LEGAL MATTERS................................................................43
OTHER BUSINESS...............................................................43
APPENDIX A................................................................ 45
APPENDIX B................................................................ 47
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
COMPARISON OF FEES AND EXPENSES
It is anticipated that on or about January 9, 1998 Keystone Precious
Metals will become a multiple class fund. As of that date the Fund will offer
Class A, Class B and Class C shares. It is further anticipated that at that time
current outstanding shares of Keystone Precious Metals will become Class B
shares of the Fund. On or before January 16, 1998, it is anticipated that any
Class B shares of Keystone Precious Metals purchased prior to January 1, 1995
will convert to Class A shares of the Fund. The amounts for Class A shares of
Keystone Precious Metals set forth in the following tables and in the examples
are based on the expenses of Keystone Precious Metals for the fiscal year ended
October 31, 1997. The amounts for shares of Precious Metals set forth in the
following tables and in the examples are based on the expenses for Precious
Metals for the fiscal year ended September 30, 1997. The pro forma amounts for
Class A shares of Keystone Precious Metals are based on what the combined
expenses would have been for Keystone Precious Metals for the fiscal year ending
October 31, 1997. The pro forma numbers reflect the events described above.
The following tables show for Keystone Precious Metals, Precious Metals
and Keystone Precious Metals pro forma, assuming consummation of the
Reorganization, the shareholder transaction expenses and annual fund operating
expenses associated with an investment in the Class A shares of Keystone
Precious Metals and shares of Precious Metals, as applicable.
Comparison of Class A Shares
of Keystone Precious Metals With
Shares of Precious Metals
· Download Table
Keystone
Keystone Precious Precious
Precious Metals Metals Pro
Metals ------ Forma
---------- ----------
Shareholder
Transaction Shares Shares Class A
Expenses ------ ------ -------
Maximum Sales Load None None 4.75%
Imposed on Purchases
(as a percentage of
offering price) (1)
Maximum Sales Load 4.00% None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
Contingent Deferred None None None
Sales Charge (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)
Exchange Fee None None None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee 0.70% 1.00% 0.67%
12b-1 Fees (2) 0.25% 0.75% 0.25%
Other Expenses 1.00% 0.46% 0.64%
--------- -------- ---------
Annual Fund Operating 2.48% 2.21% 1.56%
Expenses --------- --------- ---------
--------- --------- ---------
---------------
(1) The 4.75% sales load, as described in the "Examples" paragraph below,
has been waived for Precious Metals' shareholders.
(2) Class A shares of Keystone Precious Metals can pay up to 0.75% of
average daily net assets as a 12b-1 fee. For the foreseeable future,
the Class A 12b-1 fees will be limited to 0.25% of average daily net
assets.
Examples. The following tables show for Keystone Precious Metals and
Precious Metals, and for Keystone Precious Metals pro forma, assuming
consummation of the Reorganization, examples of the cumulative effect of
shareholder transaction expenses and annual fund operating expenses indicated
above on a $1,000 investment in each class of shares for the periods specified,
assuming a 5% annual return . In the case of Keystone Precious Metals pro forma,
the example does not reflect the imposition of the 4.75% maximum sales load on
purchases of Class A shares since Precious Metals shareholders who receive Class
A shares of Keystone Precious Metals in the Reorganization or who purchase
additional Class A shares of Keystone Precious Metals subsequent to the
Reorganization will not incur any sales load.
· Download Table
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
Keystone
Precious Metals $25 $77 $282
$132
Precious Metals $22 $69 $118 $254
Keystone
Precious Metals $16 $49 $85 $186
Pro Forma
Class A
The purpose of the foregoing examples is to assist Precious Metals
shareholders in understanding the various costs and expenses that an investor in
Keystone Precious Metals would bear directly and indirectly as a result of the
Reorganization as compared with the various direct and indirect expenses
currently borne by a shareholder in Precious Metals. These examples should not
be considered a representation of past or future expenses or annual return.
Actual expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
and, to the extent not inconsistent with such additional information, the
Prospectus of Keystone Precious Metals dated April 30, 1997, as amended, and the
Prospectus of Precious Metals dated November 30, 1997 (which are incorporated
herein by reference), the Plan, the Interim Advisory Agreement and the Interim
Sub- Advisory Agreement, forms of which are attached to this Prospectus/Proxy
Statement as Exhibits A, B and C, respectively.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Precious
Metals in exchange for Class A shares of Keystone Precious Metals and the
assumption by Keystone Precious Metals of certain identified liabilities of
Precious Metals. The identified liabilities consist only of those liabilities
reflected on the Fund's statement of assets and liabilities determined
immediately preceding the Reorganization. The Plan also calls for the
distribution of shares of Keystone Precious Metals to Precious Metals
shareholders in liquidation of Precious Metals as part of the Reorganization. As
a result of the Reorganization, the shareholders of Precious Metals will become
the owners of that number of full and fractional Class A shares of Keystone
Precious Metals having an aggregate net asset value equal to the aggregate net
asset value of the shareholders' shares of Precious Metals, as of the close of
business immediately prior to the date that Precious Metals' assets are
exchanged for shares of Keystone Precious Metals. See "Reasons for the
Reorganization - Agreement and Plan of Reorganization."
The Board of Directors of Precious Metals, including the Directors who
are not "interested persons," as such term is defined in the 1940 Act (the
"Independent Directors"), have concluded that the Reorganization would be in the
best interests of shareholders of Precious Metals, and that the interests of the
shareholders of Precious Metals will not be diluted as a result of the
transactions contemplated by the Reorganization. Accordingly, the Directors have
submitted the Plan for the approval of Precious Metals' shareholders.
THE BOARD OF DIRECTORS OF PRECIOUS METALS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen International Trust, on behalf of Keystone
Precious Metals, have also approved the Plan, and accordingly Keystone Precious
Metals' participation in the Reorganization.
Approval of the Reorganization on the part of Precious Metals will
require the affirmative vote of a majority of Precious Metals' shares voted and
entitled to vote, with all classes voting together as a single class at a
Meeting at which a quorum of the Fund's shares is present. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the Meeting. See "Voting Information
Concerning the Meeting."
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Precious Metals and the
sub-advisory agreement between Virtus and Cavelti Capital. Prior to consummation
of the Merger, Precious Metals received an order from the SEC which permitted
the implementation, without formal shareholder approval, of a new investment
advisory agreement between the Fund and Virtus and a new sub-advisory agreement
between Virtus and Cavelti Capital for a period of not more than 120 days
beginning on the date of the closing of the Merger and continuing through the
date the Interim Advisory Agreement and Interim Sub-Advisory Agreement are
approved by the Fund's shareholders (but in no event later than April 30, 1998).
The Interim Advisory Agreement and the Interim Sub-Advisory Agreement have the
same terms and fees as the previous investment advisory agreement between
Precious Metals and Virtus and the previous sub-advisory agreement between
Virtus and Cavelti Capital, respectively. The Reorganization is scheduled to
take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement and Interim Sub- Advisory
Agreement requires the affirmative vote of (i) 67% or more of the shares of
Precious Metals present in person or by proxy at the Meeting, if holders of more
than 50% of the shares of Precious Metals outstanding on the record date are
present, in person or by proxy, or (ii) more than 50% of the outstanding shares
of Precious Metals, whichever is less. See "Voting Information Concerning the
Meeting."
If the shareholders of Precious Metals do not vote to approve the
Reorganization, the Directors will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Precious Metals
will have received an opinion of Sullivan & Worcester LLP that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Keystone Precious Metals in the Reorganization. The holding
period and aggregate tax basis of shares of Keystone Precious Metals that are
received by Precious Metals' shareholders will be the same as the holding period
and aggregate tax basis of shares of the Fund previously held by such
shareholders, provided that shares of the Fund are held as capital assets. In
addition, the holding period and tax basis of the assets of Precious Metals in
the hands of
Keystone Precious Metals as a result of the Reorganization will be the same as
in the hands of the Fund immediately prior to the Reorganization, and no gain or
loss will be recognized by Keystone Precious Metals upon the receipt of the
assets of the Fund in exchange for shares of Keystone Precious Metals and the
assumption by Keystone Precious Metals of certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Keystone Precious Metals and
Precious Metals are similar in that both seek capital appreciation primarily
through investments in securities of companies related to precious metals. There
are, however, differences between the Funds' objectives and policies.
The investment objectives of Keystone Precious Metals are to seek
long-term capital appreciation while protecting the purchasing power of
shareholders' capital and secondly, to obtain current income. Keystone Precious
Metals invests primarily in common stocks of established companies directly or
indirectly engaged in mining, processing or dealing in gold or other precious
metals and minerals.
The primary investment objective of Precious Metals is to provide
long-term capital appreciation and preservation of purchasing power through
investments in physical precious metals, such as gold, silver, platinum, and
palladium, and in securities of companies involved with precious metals. The
Fund will ordinarily tend to emphasize precious metals securities over physical
precious metals investments.
See "Comparison of Investment Objectives and Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectus and Statement of Additional Information of the
Funds. The total return of Keystone Precious Metals and Precious Metals for the
one, five, and if applicable, ten year periods ended September 30, 1997, and for
both Funds for the periods from inception through September 30, 1997 are set
forth in the table below. The calculations of total return assume the
reinvestment of all dividends and capital gains distributions on the
reinvestment date and the deduction of all recurring expenses (including sales
charges) that were charged to shareholders' accounts.
· Download Table
Average Annual Total Return
1 Year 5 Years 10 Years From
Ended Ended Ended Inception
September September September To
30, 30, 30, September Inception
1997 1997 1997 30, 1997 Date
------- ------- -------- --------- ---------
(19.88%) 6.65% (1.82%) 9.58% 1/30/78
Keystone
Precious
Metals
Precious (15.24%) 9.96% N/A 1.27% 6/22/88
Metals
---------
Important information about Keystone Precious Metals is also contained
in management's discussion of Keystone Precious Metals' performance, attached
hereto as Exhibit D. This information also appears in the most recent Annual
Report of Keystone Precious Metals.
Management of the Funds
The overall management of Keystone Precious Metals and of Precious
Metals is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen International Trust and the Board of Directors of Precious Metals,
respectively.
Investment Advisers and Sub-Adviser
Keystone Investment Management Company ("Keystone") serves as
investment adviser to Keystone Precious Metals. Keystone has served as
investment adviser to the Keystone family of mutual funds since 1932 and as
investment adviser to Keystone Precious Metals since 1984. Keystone is an
indirect wholly-owned subsidiary of First Union National Bank ("FUNB"). FUNB is
a subsidiary of First Union , the sixth largest bank holding company in the
United States based on total assets as of September 30, 1997. The Capital
Management Group of FUNB, Evergreen Asset Management Corp. and Keystone manage
the Evergreen family of mutual funds with assets of approximately $40 billion as
of November 30, 1997. For further information regarding Keystone, FUNB and First
Union, see "Fund Management
and Expenses -Investment Adviser" in the Prospectus of
Keystone Precious Metals.
Keystone manages investments, provides various administrative services
and supervises the daily business affairs of Keystone Precious Metals subject to
the authority of the Evergreen International Trust's Board of Trustees. Keystone
Precious Metals pays Keystone a fee for its services at the annual rate of 0.75%
of the Fund's average daily net assets up to $100,000,000; 0.625% of net assets
between $100,000,000 and $200,000,000; and 0.50% of net assets over
$200,000,000.
Since August 1, 1995, Harbor Capital Management Company, Inc. ("Harbor
Capital"), located at 125 High Street, Boston, Massachusetts 02110, has served
as a consultant to Keystone with respect to Keystone Precious Metals pursuant to
a Consultant Agreement. Under the Consultant Agreement, Harbor Capital provides
Keystone with monthly reports discussing the world's gold bullion markets and
gold stock markets, and advice regarding economic factors an trends in the
precious metals sector. For its services, Harbor Capital receives from Keystone
a fee at the annual rate of 0.10% of Keystone Precious Metals' average daily net
assets. Keystone Precious Metals has no responsibility to pay Harbor Capital's
fee.
Virtus serves as the investment adviser for Precious Metals. As
investment adviser, Virtus is responsible for performing or providing for all
management and administrative services for the Fund. In carrying out its
obligations, Virtus provides or arranges for investment research and supervision
of the Fund's investments; selects and evaluates the performance of the Fund's
sub-adviser, Cavelti Capital; and conducts or arranges for a continuous program
of appropriate sale or other disposition of the Fund's assets, subject at all
times to the direction of the Board of Directors. Virtus compensates Cavelti
Capital from the advisory fee received from Precious Metals. See "Information
Regarding the Interim Sub-Advisory Agreement." For its services as investment
adviser, Virtus receives a fee at an annual rate of 1.00% of Precious Metals'
average daily net assets up to $150,000,000; 0.875% of net assets between
$150,000,000 and $300,000,000; and 0.75% of net assets over $300,000,000.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrator
Federated Administrative Services ("FAS") provides Precious Metals with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of the combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets; and 0.075% on assets in excess of $750 million.
Portfolio Manager
John Madden has been the Portfolio Manager of Keystone Precious Metals
since 1995 and is a Vice President and Senior Portfolio Manager of Keystone.
Before joining Keystone in 1994, Mr. Madden was an investment analyst and then
Vice President at Pioneer Funds, Boston, Massachusetts from 1982 to 1994. He has
over 29 years of investment experience.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of the shares of Keystone Precious Metals. EDI
distributes the Fund's shares directly or through broker-dealers, banks
(including FUNB), or other financial intermediaries. Effective on or about
January 9, 1998, Keystone Precious Metals will offer three classes of shares:
Class A, Class B, and Class C. Each class has separate distribution
arrangements. (See "Distribution -Related Expenses" below.) No class will bear
the distribution expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of Precious Metals will
receive Class A shares of Keystone Precious Metals. Class A shares of Keystone
Precious Metals currently incur Rule 12b-1 fees of 0.25% per year, while shares
of Precious Metals incur 12b-1 fees at the rate of 0.75% per year. Because the
Reorganization will be effected at net asset value without the imposition of a
sales charge, Keystone Precious Metals shares acquired by shareholders of
Precious Metals pursuant to the proposed Reorganization would not be subject to
any initial sales charge or contingent deferred sales charge as a result of the
Reorganization.
The following is a summary description of charges and fees for the
Class A shares of Keystone Precious Metals which will be received by Precious
Metals shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Keystone Precious Metals Prospectus and the Precious Metals
Prospectus and in each Fund's respective
Statement of Additional Information.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the Prospectus for Keystone Precious Metals.
Holders of shares of Precious Metals who receive Class A shares of Keystone
Precious Metals will be able to purchase additional Class A shares of Keystone
Precious Metals and of any other Evergreen fund at net asset value. No initial
sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
Distribution-Related Expenses. Keystone Precious Metals has adopted a
Rule 12b-1 plan with respect to its Class A shares under which the Class may pay
for distribution-related expenses at an annual rate which may not exceed 0.75%
of average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Precious Metals has adopted a Rule 12b-1 plan with respect to its
shares under which Precious Metals may pay for distribution-related expenses at
an annual rate of 0.75% of average daily net assets.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for Keystone Precious Metals
is $1,000 (except for participants in certain retirement plans, for whom there
is no minimum, and for investments under a Systematic Investment Plan, for which
the minimum is $25) and the minimum investment for Precious Metals is $3,000
($2,000 for qualified pension plans). Precious Metals has a minimum investment
requirement of $200 for
subsequent investments. There is no minimum for subsequent purchases of shares
of Keystone Precious Metals. Each Fund provides for telephone, mail or wire
redemption of shares at net asset value as next determined after receipt of a
redemption request on each day the New York Stock Exchange ("NYSE") is open for
trading. Additional information concerning purchases and redemptions of shares,
including how each Fund's net asset value is determined, is contained in the
respective Prospectus for each Fund. Each Fund may involuntarily redeem
shareholders' accounts that have less than $1,000 of invested funds. All funds
invested in each Fund are invested in full and fractional shares. The Funds
reserve the right to reject any purchase order.
Exchange Privileges
Precious Metals currently permits shareholders to exchange such shares
for shares of another fund in the Blanchard Group of Funds or for Investment
shares of other funds managed by Virtus. In addition, such shares may be
exchanged for shares of Federated Emerging Markets Fund. Holders of shares of a
class of Keystone Precious Metals generally may exchange their shares for shares
of the same class of any other Evergreen fund. Precious Metals shareholders will
be receiving Class A shares of Keystone Precious Metals in the Reorganization
and, accordingly, with respect to shares of Keystone Precious Metals received by
Precious Metals shareholders in the Reorganization, the exchange privilege is
limited to the Class A shares of other Evergreen funds. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another Evergreen fund must amount to at least $1,000. The current exchange
privileges, and the requirements and limitations attendant thereto, are
described in each Fund's respective Prospectus and Statement of Additional
Information.
Dividend Policy
Each Fund distributes its net investment income dividends annually.
Distributions of any net realized gains of a Fund will be made at least
annually. Dividends and distributions are reinvested in additional shares of the
same class of the respective Fund, or paid in cash, as a shareholder has
elected. See the respective Prospectus of each Fund for further information
concerning dividends and distributions.
After the Reorganization, shareholders of Precious Metals who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Keystone Precious Metals reinvested
in shares of Keystone Precious Metals. Shareholders of Precious Metals who have
elected to receive dividends and/or distributions
in cash will receive dividends and/or distributions from Keystone Precious
Metals in cash after the Reorganization, although they may, after the
Reorganization, elect to have such dividends and/or distributions reinvested in
additional shares of Keystone Precious Metals.
Each of Keystone Precious Metals and Precious Metals has qualified and
intends to continue to qualify to be treated as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"). While so
qualified, so long as each Fund distributes all of its net investment company
taxable income and any net realized gains to shareholders, it is expected that a
Fund will not be required to pay any federal income taxes on the amounts so
distributed. A 4% nondeductible excise tax will be imposed on amounts not
distributed if a Fund does not meet certain distribution requirements by the end
of each calendar year. Each Fund anticipates meeting such distribution
requirements.
Risks
Since the investment objectives and policies of each Fund are similar,
the risks involved in investing in each Fund's shares are similar. For a
discussion of each Fund's objectives and policies, see "Comparison of Investment
Objectives and Policies." There is no assurance that investment performances
will be positive and that the Funds will meet their investment objectives.
Precious Metals. The profits of the companies in which both Funds
invest, and ultimately the value of the securities of the Funds, are directly
affected by the price of gold and other precious metals and minerals. The price
of gold and other precious metals and minerals, in turn, is subject to
substantial short-term volatility caused by various conditions, including:
monetary and political developments within a particular country and among
various countries, such as currency devaluations or revaluations and exchange
controls; economic and social conditions such as industrial and commercial
demand, and investment and speculation; and trade restrictions between
countries. Because a significant portion of the world's gold ore reserves is
located in South Africa, the political, social and economic conditions there can
affect local and other gold and gold-related companies.
Foreign Securities. Both Funds invest in foreign securities. Securities
markets of foreign countries in which the Funds may invest are generally not
subject to the same degree of regulation as the U.S. markets and may be more
volatile and less liquid than the major U.S. markets. The differences between
investing in foreign and U.S. companies include: (1) less publicly available
information about foreign companies; (2) the lack of uniform financial
accounting standards and practices among countries which could impair the
validity of direct comparisons of valuation measures (such as price/earnings
ratios) for securities in different countries; (3) less readily available market
quotations on foreign companies; (4) differences in government regulation and
supervision of foreign stock exchanges, brokers, listed companies, and banks;
(5) differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgments; (6) generally lower foreign
stock market volume; (7) the likelihood that foreign securities may be less
liquid or more volatile, which may affect the Fund's ability to purchase or sell
large blocks of securities and thus obtain the best price; (8) transaction
costs, including brokerage charges and custodian charges associated with holding
foreign securities, may be higher; (9) the settlement periods for foreign
securities, which are sometimes longer than those for securities of U.S.
issuers, may affect portfolio liquidity; (10) the possibility that foreign
securities held by a Fund may be traded on days that the Fund does not value its
portfolio securities, such as Saturdays and customary business holidays, and
accordingly, the Fund's net asset value may be significantly affected on days
when shareholders do not have access to the Fund; and (11) political and social
instability, expropriation, and political or financial changes which adversely
affect investment in some countries.
Emerging Markets. Investing in securities of issuers in emerging
markets countries involves exposure to economic systems that are generally less
stable than those of developed countries. Investing in companies in emerging
markets countries may involve exposure to national policies that may restrict
investment by foreigners and undeveloped legal systems governing private and
foreign investments and private property. The typically small size of the
markets for securities issued by companies in emerging markets countries and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility for those securities.
When a Fund invests in foreign securities, they usually will be
denominated in foreign currencies, and the Fund may temporarily hold funds in
foreign securities. Thus, the value of a Fund's shares may be affected by
changes in exchange rates.
Precious Metals is a non-diversified investment company. As such, there
is no limit on the percentage of assets which can be invested in the securities
of a single issuer. An investment in Precious Metals, therefore, will entail
greater risk than would
exist in a diversified investment company because the higher percentage of
investments among fewer issuers may result in greater fluctuations in the total
market value of its shares. Any adverse developments affecting the value of the
securities held by Precious Metals will have a greater impact on the total value
of Precious Metals than would be the case if Precious Metals' investments were
diversified among more issuers.
Additional Information. Further information about these risks, as well as
other risks relating to an investment in Keystone Precious Metals, is set forth
in the Prospectus of Keystone Precious Metals at "Risk Factors."
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Precious Metals by various
units of Signet and various unaffiliated parties. It is also expected that
Signet will no longer, upon completion of the Reorganization and similar
reorganizations of other funds in the Signet mutual fund family, provide
investment advisory or administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Directors of
Precious Metals considered and approved the Reorganization as in the best
interests of shareholders of Precious Metals and determined that the interests
of existing shareholders of Precious Metals will not be diluted as a result of
the transactions contemplated by the Reorganization. In addition, the Directors
approved the Interim Advisory Agreement and Interim Sub-Advisory Agreement with
respect to Precious Metals.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise the Blanchard Group of Funds. The
Merger caused, as a matter of law, termination of the investment advisory
agreement between Precious Metals and Virtus and the sub-advisory agreement
between Virtus and Cavelti Capital. Precious Metals has received an order from
the SEC which permits Virtus and Cavelti Capital to continue to act as Precious
Metals' investment adviser and sub-adviser, respectively, without shareholder
approval, for a period of not more than 120 days from the date the Merger was
consummated
(November 28, 1997) to the date of shareholder approval of a new investment
advisory agreement and sub-advisory agreement. Accordingly, the Directors
considered the recommendations of Signet in approving the proposed
Reorganization.
In approving the Plan, the Directors reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Keystone Precious Metals and Precious Metals. Specifically, Keystone
Precious Metals and Precious Metals have similar investment objectives and
policies and comparable risk profiles. See "Comparison of Investment Objectives
and Policies" below. At the same time, the Board of Directors evaluated the
potential economies of scale associated with larger mutual funds and concluded
that operational efficiencies may be achieved upon the combination of Precious
Metals with an Evergreen fund with a greater level of assets. As of September
30, 1997, Keystone Precious Metals' net assets were approximately $138.8 million
and Precious Metals' net assets were approximately $67.0 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Precious Metals continue its existence and be separately
managed by Keystone or one of its affiliates, Precious Metals would be offered
through common distribution channels with the similar Keystone Precious Metals.
Precious Metals would also have to bear the cost of maintaining its separate
existence. Signet and Keystone believe that the prospect of dividing the
resources of the Evergreen mutual fund organization between two similar funds
could result in each Fund being disadvantaged due to an inability to achieve
optimum size, performance levels and the greatest possible economies of scale.
Accordingly, for the reasons noted above and recognizing that there can be no
assurance that any economies of scale or other benefits will be realized, Signet
and Keystone believe that the proposed Reorganization would be in the best
interests of each Fund and its shareholders.
The Board of Directors of Precious Metals met and considered the
recommendation of Signet and Keystone and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Keystone Precious Metals and Precious
Metals; (iv) the comparative performance records of each of the Funds; (v)
compatibility of their investment objectives and policies; (vi) the investment
experience, expertise and resources of Keystone; (vii) the service and
distribution resources available to the Evergreen funds and the broad array of
investment alternatives available to shareholders of the Evergreen funds; (viii)
the personnel and financial resources of First Union and its affiliates; (ix)
the fact that FUNB will bear the expenses incurred by Precious Metals in
connection with the Reorganization; (x) the fact that Keystone Precious Metals
will assume certain identified liabilities of Precious Metals; and (xi) the
expected federal income tax consequences of the Reorganization.
The Directors also considered the benefits to be derived by
shareholders of Precious Metals from the sale of its assets to Keystone Precious
Metals. In this regard, the Directors considered the potential benefits of being
associated with a larger entity and the economies of scale that could be
realized by the participation in such an entity by shareholders of Precious
Metals.
In addition, the Directors considered that there are alternatives
available to shareholders of Precious Metals, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Directors met with
Fund counsel and counsel to the Independent Directors regarding the legal issues
involved. The Trustees of Evergreen International Trust, on behalf of Keystone
Precious Metals, also concluded at a meeting on September 17, 1997 that the
proposed Reorganization would be in the best interests of shareholders of
Keystone Precious Metals and that the interests of the shareholders of Keystone
Precious Metals would not be diluted as a result of the transactions
contemplated by the Reorganization.
THE BOARD OF DIRECTORS OF PRECIOUS METALS
RECOMMENDS THAT THE SHAREHOLDERS APPROVE
THE PROPOSED REORGANIZATION.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Keystone Precious Metals will acquire all of the
assets of Precious Metals in exchange for shares of Keystone Precious Metals and
the assumption by Keystone Precious Metals of certain identified liabilities of
Precious Metals on or about February 27, 1998 or such other date as may be
agreed upon by the parties (the "Closing Date"). Prior to the Closing Date,
Precious Metals will endeavor to discharge all of its known liabilities and
obligations. Keystone Precious Metals will not assume any liabilities or
obligations of Precious Metals other than those reflected in an unaudited
statement of assets and liabilities of Precious Metals prepared as of the close
of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on the
business day immediately prior to the Closing Date. The number of full and
fractional shares of each class of Keystone Precious Metals to be received by
the shareholders of Precious Metals will be determined by multiplying the
respective outstanding class of shares of Precious Metals by a factor which
shall be computed by dividing the net asset value per share of the respective
class of shares of Precious Metals by the net asset value per share of the
respective class of shares of Keystone Precious Metals. Such computations will
take place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Keystone
Precious Metals, will compute the value of each Fund's respective portfolio
securities. The method of valuation employed will be consistent with the
procedures set forth in the Prospectus and Statement of Additional Information
of Keystone Precious Metals, Rule 22c-1 under the 1940 Act, and with the
interpretations of such Rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, Precious Metals will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Precious
Metals will liquidate and distribute pro rata to shareholders of record as of
the close of business on the Closing Date the full and fractional shares of
Keystone Precious Metals received by Precious Metals. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on the share records of Keystone Precious Metals'
transfer agent. Each account will represent the respective pro rata number of
full and fractional shares of Keystone Precious Metals due to the Fund's
shareholders. All issued and outstanding shares of Precious Metals, including
those represented by certificates, will be canceled. The shares of Keystone
Precious Metals to be issued will have no preemptive or conversion rights. After
such distributions and the winding up of its affairs, Precious Metals will be
terminated. In connection with such termination, Precious Metals will file with
the SEC an application for termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Precious Metals' shareholders, accuracy
of various representations and warranties and receipt of opinions of counsel,
including opinions with respect to those matters referred to in "Federal Income
Tax Consequences" below. Notwithstanding approval of Precious Metals'
shareholders, the Plan may be terminated (a) by the mutual agreement of Precious
Metals and Keystone Precious Metals; or (b) at or prior to the Closing Date by
either party (i) because of a breach by the other party of any representation,
warranty, or agreement contained therein to be performed at or prior to the
Closing Date if not cured within 30 days, or (ii) because a condition to the
obligation of the terminating party has not been met and it reasonably appears
that it cannot be met.
The expenses of Precious Metals in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Precious Metals or its shareholders. There are
no liabilities or expected reimbursements in connection with the 12b-1 Plan of
Precious Metals. As a result, no 12b-1 liabilities will be assumed by Keystone
Precious Metals following the Reorganization.
If the Reorganization is not approved by shareholders of Precious
Metals, the Board of Directors of Precious Metals will consider other possible
courses of action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Precious Metals will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Precious Metals solely in
exchange for shares of Keystone Precious Metals and the assumption by Keystone
Precious Metals of certain identified liabilities, followed by the distribution
of Keystone Precious Metals' shares by Precious Metals in dissolution and
liquidation of Precious Metals, will constitute a "reorganization" within the
meaning of section 368(a)(1)(C) of the Code, and Keystone Precious Metals and
Precious Metals will each be a "party to a reorganization" within the meaning of
section 368(b) of the Code;
(2) No gain or loss will be recognized by Precious Metals on the
transfer of all of its assets to Keystone Precious Metals solely in exchange for
Keystone Precious Metals' shares and the assumption by Keystone Precious Metals
of certain identified liabilities of Precious Metals or upon the distribution of
Keystone Precious Metals' shares to Precious Metals' shareholders in exchange
for their shares of Precious Metals;
(3) The tax basis of the assets transferred will be the same to
Keystone Precious Metals as the tax basis of such assets to Precious Metals
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Keystone Precious Metals will include the period during which
the assets were held by Precious Metals;
(4) No gain or loss will be recognized by Keystone Precious Metals upon
the receipt of the assets from Precious Metals solely in exchange for the shares
of Keystone Precious Metals and the assumption by Keystone Precious Metals of
certain identified liabilities of Precious Metals;
(5) No gain or loss will be recognized by Precious Metals' shareholders
upon the issuance of the shares of Keystone Precious Metals to them, provided
they receive solely such shares (including fractional shares) in exchange for
their shares of Precious Metals; and
(6) The aggregate tax basis of the shares of Keystone Precious Metals,
including any fractional shares, received by each of the shareholders of
Precious Metals pursuant to the Reorganization will be the same as the aggregate
tax basis of the shares of Precious Metals held by such shareholder immediately
prior to the Reorganization, and the holding period
of the shares of Keystone Precious Metals, including fractional shares, received
by each such shareholder will include the period during which the shares of
Precious Metals exchanged therefor were held by such shareholder (provided that
the shares of Precious Metals were held as a capital asset on the date of the
Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Precious Metals would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Keystone Precious
Metals shares he or she received. Shareholders of Precious Metals should consult
their tax advisers regarding the effect, if any, of the proposed Reorganization
in light of their individual circumstances. It is not anticipated that the
securities of the combined portfolio will be sold in significant amounts in
order to comply with the policies and investment practices of Keystone Precious
Metals. Since the foregoing discussion relates only to the federal income tax
consequences of the Reorganization, shareholders of Precious Metals should also
consult their tax advisers as to the state and local tax consequences, if any,
of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Keystone
Precious Metals and Precious Metals as of September 30, 1997 and the
capitalization of Keystone Precious Metals on a pro forma basis as of that date,
giving effect to the proposed acquisition of assets at net asset value and the
conversion of 3,900,247 Keystone Precious Metals Class B shares to Class A
shares. See "Comparison of Fees and Expenses." The pro forma data reflects an
exchange ratio of approximately 0.27988 Class A shares of Keystone Precious
Metals issued for each share of Precious Metals.
Capitalization of Keystone Precious Metals,
Precious Metals and Keystone
Precious Metals (Pro Forma)
· Download Table
Keystone
Keystone
Precious Precious
Metals Metals
-------- ---------
Precious
Metals (After
Reorgani-
zation)
------------
Net Assets
Shares......................... N/A $67,037,240 N/A
Class A........................ N/A N/A $141,860,060
Class B........................ $63,943,537
$138,766,357 N/A -------------
------------ ------------
Total Net Assets $67,037,240 $205,803,597
$138,766,357
Net Asset Value Per
Share
Shares......................... N/A $5.37 N/A
Class A........................ N/A N/A $19.18
Class B........................ $19.18 N/A $19.18
Shares Outstanding
Shares......................... N/A 12,486,361 N/A
Class A........................ N/A 7,396,168
N/A
Class B........................ N/A 3,333,149
7,233,396 ------------ -------------
------------
All Classes.................... 7,233,396 12,486,361
10,729,317
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
Shareholder Information
As of December 26, 1997 (the "Record Date"), there were 11,681,703
shares of beneficial interest of Precious Metals outstanding.
As of November 30, 1997, the officers and Directors of Precious Metals
beneficially owned as a group less than 1% of the outstanding shares of Precious
Metals. To
Precious Metals' knowledge, the following persons owned beneficially or of
record more than 5% of Precious Metals' total outstanding shares as of November
30, 1997:
· Download Table
Percentage
Percentag of Shares of
e of Class
Shares
No. of Before After
Name and Address Shares Reorgan- Reorgan-
ization ization
Charles Schwab 9.31% 3.74% Class A
Co. Inc. 1,068,625
101 Montgomery St.
San Francisco, CA
94104-4122
National Financial 5.42% 2.18% Class A
Services Corp. for 622,217
the Exclusive
Benefit of
Customers
Attn. Mutual Funds
Fifth Floor
200 Liberty St.
One World Financial
Center
New York, NY
10281-1003
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectus and Statement of Additional
Information of each Fund. The investment objectives, policies and restrictions
of Keystone Precious Metals can be found in the Prospectus of Keystone Precious
Metals under the caption "Investment Objectives and Policies." The investment
objectives, policies and restrictions of Precious Metals can be found in the
Prospectus of the Fund under the caption "The Funds' Investment Objectives and
Policies." Unlike the investment objectives of Precious Metals, which are
fundamental, the investment objectives of Keystone
Precious Metals are non-fundamental and can be changed by the Board of Trustees
without shareholder approval.
The investment objectives of Keystone Precious Metals are to provide
shareholders with long-term capital appreciation and with protection of the
purchasing power of their capital and, as a secondary objective, to obtain
current income. Under normal circumstances, Keystone Precious Metals pursues its
objectives by investing at least 80% of its assets in common stocks of companies
that are engaged in, or which receive at least 50% of their revenue from other
companies engaged in, exploration, mining, processing or dealing in precious
metals (gold, silver, platinum and palladium) and minerals, such as diamonds.
For purposes of this policy, a company is considered to be engaged in a business
or activity if at least 50% of the company's assets, revenues or profits are
derived from that business or activity.
Currently, Keystone Precious Metals has a policy of investing a portion
of its assets in domestic or foreign issuers that operate in the Republic of
South Africa, the principal location of the known free-world gold ore reserves.
Keystone Precious Metals generally makes such investments by purchasing American
Depository Receipts. Keystone Precious Metals does not invest directly in
precious metals, but may invest up to 25% of its total assets in common or
preferred stock of wholly-owned subsidiaries that make such investments.
Currently, Keystone Precious Metals has one such subsidiary, Precious Metals
(Bermuda) Ltd.
The investment objective of Precious Metals is to provide long-term
capital appreciation and preservation of purchasing power through investments in
physical precious metals and securities of companies involved with precious
metals.
A secondary objective of Precious Metals is to reduce the risk of loss
of capital and decrease the volatility often associated with precious metals
investments by changing the allocation of the Fund's assets from precious metals
securities to physical precious metals investments and/or investing in
short-term instruments and government securities during periods when the
sub-adviser believes the precious metals markets may experience declines.
For the purpose of Precious Metals, the term "precious metals securities"
refers to the debt and equity securities of domestic and foreign companies
listed on domestic and foreign exchanges which are directly involved in the
exploration, development, mining, refining, manufacturing, dealing or marketing
of precious metals or precious metals products. A
company will be considered to be "involved in" such activity if it derives more
than 50% of its revenues from or devotes more than 50% of its assets to such
activity. The Fund may invest in (1) publicly-traded common stocks, (2)
securities convertible into common stocks, such as convertible preferred stock,
convertible debentures, convertible rights and warrants (to the extent
permissible by the Fund's investment policies), and (3) debt securities of such
companies, all of which are believed by the sub-adviser to have the potential
for appreciation.
Precious Metals, unlike Keystone Precious Metals, may, from time to
time, invest up to 5% of its assets in unrated foreign debt securities which are
judged by the Fund's sub- adviser to be of at least comparable quality to
lower-rated U.S. debt securities (usually defined as Baa or lower by Moody's
Investors Service or BBB or lower by Standard & Poor's Ratings Group). Precious
Metals may invest up to 49% of its total assets in physical precious metals
through holdings in bullion or precious metals certificates or storage receipts
representing the physical metals.
Precious Metals and Keystone Precious Metals may purchase contracts for
forward delivery of physical precious metals. Forward contracts for precious
metals are contracts between the Fund and institutions dealing in precious
metals for the future receipt or delivery of metals at a price fixed at the time
of the transaction.
Both Funds may invest in derivatives such as options and futures.
Under normal conditions, Precious Metals has at least 65% of its total
assets invested in precious metals securities and physical precious metals
investments. Under other circumstances, the Fund may invest up to 100% of its
assets in short-term instruments, including commercial paper, bank certificates
of deposit, bankers' acceptances and securities of the U.S. government and its
agencies and instrumentalities as well as cash and cash equivalents denominated
in foreign currency.
Neither Keystone Precious Metals nor Precious Metals may invest more
than 5% of its assets in securities of any one issuer or purchase more than 10%
of the outstanding voting securities of any one issuer. However, because
Precious Metals is a non-diversified portfolio for purposes of the 1940 Act,
these restrictions apply to 50% of the assets of Precious Metals. As a
diversified portfolio under the 1940 Act, the same restrictions apply to 75% of
the assets of Keystone
Precious Metals. Non-diversification may increase investment risks.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen International Trust and Precious Metals are both open-end
management investment companies registered with the SEC under the 1940 Act which
continuously offer shares to the public. Evergreen International Trust is
organized as a Delaware business trust, and Precious Metals is organized as a
Maryland corporation. Evergreen International Trust is governed by a Declaration
of Trust, By-Laws and a Board of Trustees. Evergreen International Trust is also
governed by applicable Delaware and federal law. Keystone Precious Metals is a
series of Evergreen International Trust. Precious Metals is governed by its
Articles of Incorporation, ByLaws and a Board of Directors, as well as
applicable Maryland and federal law.
As set forth in the Supplement to the Prospectus of Keystone Precious
Metals, effective December 22, 1997, Keystone Precious Metals Holdings, Inc.,
was reorganized (the "Delaware Reorganization") from a Delaware corporation into
a series (Keystone Precious Metals ) of Evergreen International Trust. In
connection with the Delaware Reorganization, the Fund's investment objectives
were reclassified from "fundamental" to "non-fundamental" and therefore may be
changed without shareholder approval; the Fund adopted certain standardized
investment restrictions; and the Fund eliminated or reclassified from
fundamental to non- fundamental certain of the Fund's other fundamental
investment restrictions. On January 9, 1998 Keystone Precious Metals will change
its name to Evergreen Precious Metals Fund.
Capitalization
The beneficial interests in Keystone Precious Metals are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. Precious Metals' authorized shares consist of 1,000,000,000 shares of
common stock, par value $.001 per share. Evergreen
International Trust's Declaration of Trust and Precious Metals' Articles of
Incorporation permit the Trustees or Directors respectively, to allocate shares
into an unlimited number of series, and classes thereof, with rights determined
by the Trustees or Directors, all without shareholder approval. Currently,
Precious Metals has only a single series. Fractional shares may be issued by
either Fund. Each Fund's shares represent equal proportionate interests in the
assets belonging to the Funds. Shareholders of each Fund are entitled to receive
dividends and other amounts as determined by the Trustees or Directors.
Shareholders of each Fund vote separately, by class, as to matters, such as
approval of or amendments to Rule 12b-1 distribution plans, that affect only
their particular class and by series as to matters, such as approval of or
amendments to investment advisory agreements or proposed reorganizations, that
affect only their particular series.
Shareholder Liability
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen International Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen International Trust (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of the Trust. Accordingly, the risk of a shareholder of
Evergreen International Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen International Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen International Trust on behalf of Keystone Precious
Metals nor Precious Metals is required to hold annual meetings of shareholders.
However, a meeting of shareholders for the purpose of voting upon the question
of removal of a Trustee or Director, respectively, must be called when requested
in writing by the holders of at least 10% of the outstanding shares of Evergreen
International Trust or Precious Metals. In addition, each is required to call a
meeting of shareholders for the purpose of electing Trustees or Directors if, at
any time, less than a majority of the Trustees or Directors then holding office
were elected by shareholders. Neither Evergreen International Trust nor Precious
Metals currently intends to hold regular shareholder meetings. Neither Evergreen
International Trust nor Precious Metals permits cumulative voting. For Keystone
Precious Metals and Precious Metals, a majority of the votes cast and entitled
to vote is sufficient to act on a matter (unless otherwise specifically required
by the applicable governing documents or other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen International Trust, each
share of Keystone Precious Metals is entitled to one vote for each dollar of net
asset value applicable to each share. Under the voting provisions governing
Precious Metals, each share is entitled to one vote. The net asset values of the
mutual funds which are each a series of Evergreen International Trust have
different net asset values per share and can be expected to change in relation
to one another in the future. Because of the divergence in net asset values, a
given dollar investment in a fund with a lower net asset value will purchase
more shares and under Precious Metals' voting provisions have more votes, than
the same investment in a fund with a higher net asset value. Under the
Declaration of Trust of Evergreen International Trust, voting power is related
to the dollar value of a shareholder's investment rather than to the number of
shares held.
Liquidation or Dissolution
In the event of the liquidation of Keystone Precious Metals or Precious
Metals the shareholders are entitled to receive, when, and as declared by the
Trustees or Directors, respectively, the excess of the assets belonging to such
Fund or attributable to the class over the liabilities belonging to the Fund or
attributable to the class. In either case, the assets so distributable to
shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Trustees and Directors
The Articles of Incorporation of Precious Metals provide that no
Director or officer shall be liable unless such Director or officer is found to
have acted in bad faith, with willful misfeasance, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
The Articles of Incorporation of Precious Metals provide that a present
or former Director or officer is entitled to indemnification against liabilities
and expenses with respect to claims related to his or her position with the
Fund, provided that no indemnification shall be provided to a Director or
officer against any liability to the Fund or the shareholders by reasons of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen International Trust, a
Trustee is liable to the Trust and its shareholders only for such Trustee's own
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
later determined to preclude indemnification and certain other conditions are
met.
The foregoing is only a summary of certain characteristics of the
operations of the Declaration of Trust of Evergreen International Trust,
Articles of Incorporation of Precious Metals, By-Laws, and Delaware and Maryland
law and is not a complete description of those documents or law. Shareholders
should refer to the provisions of such Declaration of Trust, Articles of
Incorporation, By-Laws, and Delaware and Maryland law directly for more complete
information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Directors of Precious Metals recommends that shareholders of
Precious Metals approve the Interim Advisory Agreement. The Merger became
effective on November 28, 1997. Pursuant to an order received from the SEC all
fees payable under the Interim Advisory Agreement will be placed in escrow and
paid to Virtus if shareholders approve the contract within 120 days of its
effective date. The Interim Advisory Agreement will remain in effect until the
earlier of the Closing Date for the Reorganization or two years from its
effective date. The terms of the Interim Advisory Agreement are essentially the
same as the Previous Advisory Agreement (as defined below). The only difference
between the Previous Advisory Agreement and the Interim Advisory Agreement, if
approved by shareholders, is the length of time each Agreement is in effect. A
description of the Interim Advisory Agreement pursuant to which Virtus continues
as investment adviser to Precious Metals, as well as the services to be provided
by Virtus pursuant thereto is set forth below under "Advisory Services." The
description of the Interim Advisory Agreement in this Prospectus/Proxy Statement
is qualified in its entirety by reference to the Interim Advisory Agreement,
attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management, is an indirect wholly-owned subsidiary of
First Union. The address of Virtus is 707 East Main Street, Suite 1300,
Richmond, Virginia 23219. Virtus has served as investment adviser pursuant to an
Investment Advisory Agreement dated July 12, 1995. As used herein, the
Investment Advisory Agreement for Precious Metals is referred to as the
"Previous Advisory Agreement." At a meeting of the Board of Directors of
Precious Metals held on September 16, 1997, the Directors, including a majority
of the Independent Directors, approved the Interim Advisory Agreement for
Precious Metals.
The Directors have authorized Precious Metals to enter into the Interim
Advisory Agreement with Virtus. Such Agreement became effective on November 28,
1997. If the Interim Advisory Agreement for Precious Metals is not approved by
shareholders, the Directors will consider appropriate actions to be taken with
respect to Precious Metals' investment advisory arrangements at that time. The
Previous Advisory Agreement was last approved by the Directors, including a
majority of the Independent Directors, on May 11, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus is responsible for
managing Precious Metals and overseeing the investment of its assets, subject at
all times to the supervision of the Board of Directors. Virtus selects, monitors
and evaluates the Fund's sub-adviser. Virtus periodically reviews the
sub-adviser's performance record and will make a change, if necessary, subject
to approval of the Board of Directors and shareholders.
FAS currently acts as administrator of Precious Metals. FAS will continue
during the term of the Interim Advisory Agreement as Precious Metals'
administrator for the same compensation as currently received . An affiliate of
FAS currently performs transfer agency services for Precious
Metals' shareholders. Commencing February 9, 1998 Evergreen Service Company
will provide such transfer agency services for the same fees charged by Precious
Metals' current transfer agent. See "Summary - Administrator."
Fees and Expenses. The investment advisory fees and expense limitations for
Precious Metals under the Previous Advisory Agreement and the Interim Advisory
Agreement are identical. See "Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. Virtus may, if it deems appropriate, assume
expenses of Precious Metals to the extent that the Fund's expenses exceed such
lower expense limitation as Virtus may, by notice to the Precious Metals,
voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous Advisory
Agreement, Precious Metals was required to pay or cause to be paid all of its
own expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to Precious Metals or to any shareholder for any act or
omission in the course of or connected in any way with rendering services or for
any losses that may be sustained in the purchase, holding or sale of any
security.
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Precious Metals (as defined in the 1940 Act) or by a vote
of its Board of Directors on 60 days' written notice to Virtus or by Virtus on
60 days' written notice to Precious Metals. Also, the Interim Advisory Agreement
will automatically terminate in the event of its assignment (as defined in the
1940 Act). The Previous Advisory Agreement contained identical provisions as to
termination and assignment.
Information about Precious Metals' Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, The Virtus Funds, other funds of the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
For the fiscal year ended September 30, 1997 and the period from May 1,
1996 to September 30, 1996, Virtus received from Precious Metals management fees
of $744,283 and $442,945, respectively. For the fiscal year ended April 30,
1996, the Fund's investment management fee paid to Virtus and the prior manager
was $840,942. Signet acts as custodian for Precious Metals and received $50,200
for the fiscal year ended September 30, 1997. Commencing on or about January 20,
1998 FUNB will as Precious Metals' custodian during the term of the Interim
Advisory Agreement.
The Board of Directors considered the Interim Advisory Agreement as
part of its overall approval of the Plan. The Board of Directors considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of
Directors also considered the fact that there were no material differences
between the terms of the Interim Advisory Agreement and the terms of the
Previous Advisory Agreement.
THE DIRECTORS OF PRECIOUS METALS RECOMMEND
THAT SHAREHOLDERS APPROVE THE
INTERIM ADVISORY AGREEMENT.
INFORMATION REGARDING THE INTERIM SUB-ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Directors of Precious Metals recommends that shareholders of
Precious Metals approve the Interim Sub-Advisory Agreement. Such Agreement
became effective on November 28, 1997. Pursuant to an order from the SEC, all
fees payable under the Interim Sub-Advisory Agreement will be placed in escrow
and paid to Cavelti Capital if shareholders approve the contract within 120 days
of its effective date. The Interim Sub-Advisory Agreement will remain in effect
until the earlier of the Closing Date for the Reorganization or two years from
its effective date. The terms of the Interim Sub-Advisory Agreement are
essentially the same as the Previous Sub-Advisory Agreement (as defined below).
The only difference between the Previous Sub-Advisory Agreement and the Interim
Sub-Advisory Agreement, if approved by shareholders, is the length of time the
Agreement is in effect. A description of the Interim Sub- Advisory Agreement
pursuant to which Cavelti Capital continues as the investment sub-adviser to
Precious Metals, as well as the services to be provided by Cavelti Capital
pursuant thereto, is set forth below under "Sub-Advisory Services." The
description of the Interim Sub-Advisory Agreement in this Prospectus/Proxy
Statement is qualified in its entirety by reference to the Interim Sub-Advisory
Agreement, attached hereto as Exhibit C.
Cavelti Capital Management, Ltd., 4100 Yonge Street, Willowdale,
Ontario MP2 2B6 Canada, has served as sub- adviser to Precious Metals pursuant
to a Sub- Advisory Agreement dated July 11, 1995 (the "Previous Sub- Advisory
Agreement") and is responsible for the day-to-day management of Precious Metals'
portfolio. See "Summary Investment Advisers and Sub-Adviser." Cavelti Capital is
a Canadian money management firm specializing in bullion and precious metals
mining shares. Peter C. Cavelti, the President of Cavelti Capital, has extensive
experience in the field of precious metals. Cavelti Capital clients include
government agencies, financial institutions, mining companies and Canadian
closed-end funds.
The Directors have authorized Precious Metals to enter into the Interim
Sub-Advisory Agreement with Virtus and Cavelti Capital. Such Agreement became
effective on November 28, 1997. If the Interim Sub-Advisory Agreement for
Precious Metals is not approved by shareholders, the Directors will consider
appropriate actions to be taken with respect to Precious Metals' investment
sub-advisory arrangements at that time. The Previous Sub- Advisory Agreement was
last approved by the Directors, including a majority of the Independent
Directors, on May 11, 1997.
Comparison of the Interim Sub-Advisory Agreement and the Previous
Sub-Advisory Agreement
Sub-Advisory Services. The management and advisory services to be
provided by Cavelti Capital under the Interim Sub-Advisory Agreement are
identical to those currently provided by Cavelti Capital under the Previous
Sub-Advisory Agreement. Under the Previous Sub-Advisory Agreement, Cavelti
Capital supervised the investment and reinvestment of the cash, securities or
other properties comprising Precious Metals' portfolio, subject at all times to
the direction of Virtus and the policies and control of Precious Metals' Board
of Directors.
Fees and Expenses. The investment sub-advisory fees under the Previous
Sub-Advisory Agreement and the Interim Sub-Advisory Agreement are identical. As
compensation for its sub-advisory services under the Previous Sub-Advisory
Agreement Cavelti Capital was paid by Virtus a monthly fee at the annual rate of
0.30% of the first $150 million of the Fund's average daily net assets; plus
0.2625% of the Fund's average daily net assets in excess of $150 million but
less than $300 million; plus 0.255% of the Fund's average daily net assets in
excess of $300 million.
The fee paid to Cavelti Capital by Virtus for the fiscal year ended
September 30, 1997 was $223,285. The fee paid to Cavelti Capital for the period
May 1, 1996 to September 30, 1996 was $269,873. The fee paid to Cavelti Capital
by Virtus for the period from July 12, 1995 through April 30, 1996 was $228,140.
The names and addresses of the principal executive officers and
directors of Cavelti Capital are set forth in Appendix B to this
Prospectus/Proxy Statement.
Limitation of Liability. The Previous Sub-Advisory Agreement provided
that in the absence of willful misfeasance, bad faith or gross negligence on the
part of Cavelti Capital or its officers, directors, or employees or reckless
disregard by Cavelti Capital of its duties under the Agreement, Cavelti
Capital shall not be liable to Virtus, Precious Metals or to any shareholder of
Precious Metals for any act or omission in the course of, or connected with,
rendering services thereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. The Interim Sub-Advisory Agreement
contains an identical provision.
Termination; Assignment. The Interim Sub-Advisory Agreement provides
that it may be terminated without penalty by vote of a majority of the
outstanding voting securities of Precious Metals (as defined in the 1940 Act) or
by a vote of a majority of Precious Metals' entire Board of Directors on 60
days' written notice to Cavelti Capital or by Virtus or Cavelti Capital on 60
days' written notice to the other party to the Agreement. Also, the Interim
Sub-Advisory Agreement will automatically terminate in the event of its
assignment (as defined in the 1940 Act). The Previous Sub-Advisory Agreement
contained identical provisions as to termination and assignment.
The Board of Directors considered the Interim Sub-Advisory Agreement as
part of its overall approval of the Plan. The Board of Directors considered,
among other things, the factors set forth above in "Reasons for the
Reorganization." The Board of Directors also considered the fact that there were
no material differences between the terms of the Interim Sub-Advisory Agreement
and the terms of the Previous Sub-Advisory Agreement.
THE DIRECTORS OF PRECIOUS METALS RECOMMEND
THAT SHAREHOLDERS APPROVE THE
INTERIM SUB-ADVISORY AGREEMENT.
ADDITIONAL INFORMATION
Keystone Precious Metals. Information concerning the operation and
management of Keystone Precious Metals is incorporated herein by reference from
the Prospectus dated April 30, 1997, as amended, a copy of which is enclosed,
and Statement of Additional Information dated April 30, 1997. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Keystone Precious Metals at the address listed on the cover page
of this Prospectus/Proxy Statement or by calling toll-free 1-800- 343-2898.
Precious Metals. Information about the Fund is included in its current
Prospectus dated November 30, 1997 and in the Statement of Additional
Information of the same date, that has been filed with the SEC, all of which are
incorporated herein by reference. Copies of the Prospectus and Statement of
Additional Information are available upon request and without
charge by writing to Precious Metals at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Keystone Precious Metals and Precious Metals are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information, including
proxy material, and charter documents with the SEC. These items can be inspected
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661- 2511 and Seven World Trade Center, Suite 1300, New York, New
York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Directors of Precious Metals to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116 and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Precious Metals on or about January 6, 1998. Only shareholders
of record as of the close of business on the Record Date will be entitled to
notice of, and to vote at, the Meeting or any adjournment thereof. The holders
of a majority of the outstanding shares entitled to vote, at the close of
business on the Record Date, present in person or represented by proxy, will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization, FOR the Interim Advisory Agreement, FOR the Interim Sub-Advisory
Agreement and FOR any other matters deemed appropriate. Proxies that reflect
abstentions and "broker non-votes" (i.e., shares held by brokers or nominees as
to which (i) instructions have not been received from the beneficial owners or
the persons entitled to vote or (ii) the broker or nominee does not have
discretionary voting power on a particular matter) will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum, but will not be counted as shares voted and will have no effect on
the vote regarding the Plan. However, such "broker non-votes" will have the
effect of being counted as votes against the Interim Advisory Agreement and the
Interim Sub- Advisory Agreement which must be approved by a percentage of the
shares present at the Meeting or a majority of the outstanding voting
securities. A proxy may be revoked at any time on or before the Meeting by
written notice to the Secretary of Precious Metals, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. Unless revoked, all valid proxies will be
voted in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby, FOR approval of the Interim Advisory Agreement and FOR approval of the
Interim Sub-Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote at the Meeting at which a quorum of the
Fund's shares is present. Approval of the Interim Advisory Agreement and Interim
Sub-Advisory Agreement will require the affirmative vote of (i) 67% or more of
the outstanding voting securities if holders of more than 50% of the outstanding
voting securities are present, in person or by proxy, at the Meeting, or (ii)
more than 50% of the outstanding voting securities, whichever is less. Each full
share outstanding is entitled to one vote and each fractional share outstanding
is entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of Keystone or Signet, their affiliates or
other representatives of Precious Metals (who will not be paid for their
soliciting activities). Shareholder Communications Corporation has been engaged
by Precious Metals to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Maryland law or the Articles of Incorporation of Precious
Metals to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not expected
to result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Reorganization is consummated, shareholders will be
free to redeem the shares of Keystone Precious Metals which they receive in the
transaction at their then-current net asset value. Shares of Precious Metals may
be redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Precious Metals may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior to the Reorganization or
exchanging such shares in the Reorganization.
Precious Metals does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Precious Metals
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Keystone Precious Metals are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Precious Metals whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Keystone Precious Metals as of October 31,
1997, and the financial statements and financial highlights for the periods
indicated therein, have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Precious Metals
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of the
Blanchard Funds for the year ended September 30, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Keystone
Precious Metals will be passed upon by Sullivan & Worcester LLP, Washington,
D.C.
OTHER BUSINESS
The Directors of Precious Metals do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE DIRECTORS OF PRECIOUS METALS RECOMMEND APPROVAL OF THE PLAN, THE
INTERIM ADVISORY AGREEMENT AND THE INTERIM SUB-ADVISORY AGREEMENT, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN, THE INTERIM ADVISORY AGREEMENT AND THE INTERIM
SUB-ADVISORY AGREEMENT.
January 6, 1998
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson, Vice Virtus Capital Management, Inc.
President, Assistant 707 East Main Street
Secretary Suite 1300
Richmond, Virginia 23219
L. Robert Cheshire, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
John E. Gray, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
Name Address
---- -------
First Union National Bank
201 South College
David C. Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
APPENDIX B
The names and addresses of the principal executive officers and directors
of Cavelti Capital Management, Ltd. are as follows:
OFFICERS:
Name Address
---- -------
Peter C. Cavelti Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
Heinz Thoma Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
Carolyn Cavelti Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
DIRECTORS:
Name Address
---- -------
Peter C. Cavelti Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
Heinz Thoma Cavelti Capital Management, Ltd.
4100 Yonge Street
Willowdale, Ontario M2P 2B6
Canada
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen International
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to the
Keystone Precious Metals Holdings series (the "Acquiring Fund"), and Blanchard
Precious Metals Fund, Inc., a Maryland corporation, with its principal place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779,(the
"Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund is an open-end, registered investment company
of the management type, and the Acquiring Fund is a separate investment series
of an open-end, registered investment company of the management type and the
Selling Fund owns securities that generally are assets of the character in which
the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Board of Directors of the Selling Fund has determined that
the Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund
Shares and that the interests of the existing shareholders of the Selling Fund
will not be diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable time prior to the
Closing Date, furnish the Acquiring Fund with a list of its portfolio securities
and other investments. In the event that the Selling Fund holds any investments
that the Acquiring Fund may not hold, the Selling Fund, if requested by the
Acquiring Fund, will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the Selling Fund and the Acquiring Fund
portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein shall require the Selling Fund to dispose of any investments or
securities if, in the reasonable judgment of the Selling Fund, such disposition
would adversely affect the tax-free nature of the Reorganization or would
violate the Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling Fund immediately
prior to the Reorganization, in each case calculated in accordance with such
Rule 2830.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of shares of
the Selling Fund will receive Class A shares of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Blanchard Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a Maryland Corporation duly organized,
validly existing, and in good standing under the laws of the State of Maryland.
(b) The Selling Fund is a Maryland Corporation that is
registered as an investment company classified as a management company of the
open-end type, and its registration with the Securities and Exchange Commission
(the "Commission") as an investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of its Articles of Incorporation or By-Laws or of
any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected on the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its
business or its ability to consummate the transactions herein
contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund. All of the issued and outstanding
shares of the Selling Fund will, at the time of the Closing Date, be held by the
persons and in the amounts set forth in the records of the transfer agent as
provided in paragraph 3.4. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be
transferred to the Acquiring Fund pursuant to paragraph 1.2 and full right,
power, and authority to sell, assign, transfer, and deliver such assets
hereunder, and, upon delivery and payment for such assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund and accepted by the
Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type,
and its registration with the Commission as an investment company under the 1940
Act is in full force and effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at February
28, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since February 28, 1997, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes
of this subparagraph (g), a decline in the net asset value of the Acquiring Fund
shall not constitute a material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Keystone
Precious Metals Holdings, Inc. (the "Predecessor Fund"), a Delaware corporation,
as of the date hereof. The Acquiring Fund shall deliver to the Selling Fund a
certificate of the Predecessor Fund of even date making the representations set
forth in Section 4.2.1 with respect to the Predecessor Fund to the extent
applicable to the Predecessor Fund as of the date hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. The Selling Fund will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist
the Acquiring Fund in obtaining such information as the Acquiring
Fund reasonably requests concerning the beneficial ownership of the Selling Fund
shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by the Selling Fund's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.8 CAPITAL LOSS CARRYFORWARDS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this
Agreement are duly authorized and upon such delivery will be legally issued and
outstanding and fully paid and non-assessable. No shareholder of the Acquiring
Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of the Selling Fund. Such opinion shall contain such other assumptions
and limitations as shall be in the opinion of Sullivan & Worcester LLP
appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the Selling
Fund's President or Vice President and the Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of the Selling Fund.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a Maryland corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland
and has the power to own all of its properties and assets and to carry on its
business as presently conducted.
(b) The Selling Fund is a separate investment series of a
Maryland corporation registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the State of Maryland is required for consummation by the Selling Fund
of the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act, and as may be required under state
securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Selling Fund's Articles of Incorporation or By-laws, or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Selling Fund
is a party or by which it or any of its properties may be bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Selling Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," the Interim Sub- Advisory Agreement
and the Previous Sub-Advisory Agreement, as set forth under the caption
"Information Regarding the Interim Sub-Advisory Agreement" and the description
of voting requirements applicable to approval of the Interim Advisory Agreement
and Interim Sub-Advisory Agreement, as set forth under the caption "Voting
Information Concerning the Meeting," insofar as the latter constitutes a summary
of applicable voting requirements under the Investment Company Act of 1940, as
amended, are, in each case, accurate and fairly present the information required
to be shown by the applicable requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and
the Selling Fund is neither a party to nor subject to the provisions of any
order, decree or judgment of any court or governmental body, which materially
and adversely affects its business other than as previously disclosed in the
Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the closing Date an
opinion of C. Grant Anderson, Esq., Assistant Secretary of the Selling Fund, in
form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable.
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement, on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Maryland law, that as Dickstein Shapiro Morin & Oshinsky
LLP and C. Grant Anderson are not admitted to the bar of Maryland, such opinions
are based either upon the review of published statutes, cases and rules and
regulations of the State of Maryland or upon an opinion of Maryland counsel.
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of the Selling Fund's
Articles of Incorporation and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided
that either party hereto may for itself waive any of such
conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Selling Fund responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that such unaudited
pro forma financial statements do not comply as to form in all material respects
with the applicable accounting requirement of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by
the Acquiring Fund and described in such letter (but not an
examination in accordance with generally accepted auditing standards), the
Capitalization Table appearing in the Registration Statement and Prospectus and
Proxy Statement has been obtained from and is consistent with the accounting
records of the Selling Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus and
Proxy Statement were prepared based on the valuation of the Selling Fund's
assets in accordance with the Selling Fund's Articles of Incorporation and the
Acquiring Fund's then current prospectus and statement of additional information
pursuant to procedures customarily utilized by the Acquiring Fund in valuing its
own assets;
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing
standards), the Capitalization Table appearing in the Registration Statement and
Prospectus and Proxy Statement has been obtained from and is consistent with the
accounting records of the Acquiring Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, the respective Trustees, Directors
or officers, to the other party or its Trustees, Directors or officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the State of Maryland,
without giving effect to the conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Acquiring Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of the Evergreen International Trust personally,
but shall bind only the trust property of the Acquiring Fund, as provided in the
Declaration of Trust of the Trust. The execution and delivery of this Agreement
have been authorized by the Trust on behalf of the Acquiring Fund and signed by
authorized officers of the Trust, acting as such, and neither such authorization
by such Trustees nor such execution and delivery by such officers shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the
Acquiring Fund as provided in the Declaration of Trust of the Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN INTERNATIONAL TRUST
ON BEHALF OF KEYSTONE
PRECIOUS METALS HOLDINGS
By:
Name:
Title:
BLANCHARD PRECIOUS METALS
FUND, INC.
By:
Name:
Title:
EXHIBIT B
BLANCHARD PRECIOUS METALS FUND, INC.
INTERIM MANAGEMENT CONTRACT
This Contract is made this 28th day of November, 1997 between Virtus
Capital Management, Inc., a Maryland corporation having its principal place of
business in Richmond, Virginia (the "Manager"), and Blanchard Precious Metals
Fund, Inc., a Maryland corporation having its principal place of business in
Pittsburgh,
Pennsylvania (the "Corporation").
WHEREAS the Corporation is an open-end management investment company as
that term is defined in the Investment Company Act of 1940, as amended,
and is registered as such with the Securities and Exchange Commission;
and
WHEREAS Manager is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Corporation hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Corporation which executes an exhibit to this
Contract, and Manager accepts the appointments. Subject to the direction of the
Directors of the Corporation, Manager shall provide or procure on behalf of each
of the Funds all management and administrative services. In carrying out its
obligations under this paragraph, the Manager shall: (i) provide or arrange for
investment research and supervision of the investments of the Funds; (ii) select
and evaluate the performance of each Fund's Portfolio Sub-Adviser; (iii) select
and evaluate the performance of the Administrator; and (iv) conduct or arrange
for a continuous program of appropriate sale or other disposition and
reinvestment of each Fund's assets.
2. Manager, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's investment objective and policies and the
provisions and restrictions contained in the Articles of Incorporation and
By-Laws of the Corporation and as set forth in the Registration Statements and
exhibits as may be on file with the Securities and Exchange Commission.
3. Each Fund shall pay or cause to be paid all of its own expenses and
its allocable share of Corporation expenses, including, without limitation, the
expenses of organizing the
Corporation and continuing its existence; fees and expenses of Directors and
officers of the Corporation; fees for management services and administrative
personnel and services; expenses incurred in the distribution of its shares
("Shares"), including expenses of administrative support services; fees and
expenses of preparing and printing its Registration Statements under the
Securities Act of 1933 and the Investment Company Act of 1940, as amended, and
any amendments thereto; expenses of registering and qualifying the Corporation,
the Funds, and Shares of the Funds under federal and state laws and regulations;
expenses of preparing, printing, and distributing prospectuses (and any
amendments thereto) to shareholders; interest expense, taxes, fees, and
commissions of every kind; expenses of issue (including cost of Share
certificates), purchase, repurchase, and redemption of Shares, including
expenses attributable to a program of periodic issue; charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder servicing
agents, and registrars; printing and mailing costs, auditing, accounting, and
legal expenses; reports to shareholders and governmental officers and
commissions; expenses of meetings of Directors and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues and such
nonrecurring items as may arise, including all losses and liabilities incurred
in administering the Corporation and the Funds. Each Fund will also pay its
allocable share of such extraordinary expenses as may arise including expenses
incurred in connection with litigation, proceedings, and claims and the legal
obligations of the Corporation to indemnify its officers and Directors and
agents with respect thereto.
4. Each of the Funds shall pay to Manager, for all services rendered to
each Fund by Manager hereunder, the fees set forth in the exhibits attached
hereto.
5. If, for any fiscal year, the total of all ordinary business expenses
of the Fund, including all investment advisory fees but excluding distribution
fees, taxes, interest and extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which Shares of the Fund
are offered for sale Manager shall reduce its management fee in order to reduce
such excess expenses, but will not be required to reimburse the Fund for any
ordinary business expenses which exceed the amount of its management fee for
such fiscal year. The amount of any such reduction is to be borne by the Manager
and shall be deducted from the monthly management fee otherwise payable to the
Manager during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of
the then current fiscal year which shall have elapsed at the date of termination
of this Agreement.
6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.
7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses of one
or more of the Funds) to the extent that any Fund's expenses exceed such lower
expense limitation as the Manger may, by notice to the Fund, voluntarily declare
to be effective.
8. This Contract shall begin for each Fund as of the date of execution
of the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) until the earlier of the
Closing Date defined in the Agreement and Plan of Reorganization dated as of
November 26, 1997 with respect to each Fund or for two years from the date of
this Contract set forth above and thereafter for successive periods of one year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically approved at
least annually by the vote of a majority of the Directors of the Corporation,
including a majority of the Directors who are not parties to this Contract or
interested persons of any such party cast in person at a meeting called for that
purpose; and (b) Manager shall not have notified a Fund in writing at least
sixty (60) days prior to the anniversary date of this Contract in any year
thereafter that it does not desire such continuation with respect to that Fund.
If a Fund is added after the first approval by the Directors as described above,
this Contract will be effective as to that Fund upon execution of the applicable
exhibit and will continue in effect until the next annual approval of the
Contract by the Directors and thereafter for successive periods of one year,
subject to approval as described above.
9. Notwithstanding any provision in this Contract, it may be terminated
at any time with respect to any Fund, without the payment of any penalty, by the
Directors of the Corporation or by a vote of the shareholders of that Fund on
sixty (60) days' written notice to Manager.
10. This Contract may not be assigned by Manager and shall
automatically terminate in the event of any assignment. Manager may employ or
contract with such other person, persons, corporation, or corporations at its
own cost and expense as it
shall determine in order to assist it in carrying out this
Contract.
11. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the obligations or duties under this Contract on the
part of Manager, Manager shall not be liable to the Corporation or to any of the
Funds or to any shareholder for any act or omission in the course of or
connected in any way with rendering services or for any losses that may be
sustained in the purchase, holding, or sale of any security.
12. This Contract may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by the vote of a
majority of the Directors of the Corporation, including a majority of the
Directors who are not parties to this Contract or interested persons of any such
party to this Contract (other than as Directors of the Corporation) cast in
person at a meeting called for that purpose, and where required by Section
15(a)(2) of the Act, on behalf of a Fund by a majority of the outstanding voting
securities of such Fund as defined in Section 2(a)(42) of the Act.
13. The Manager acknowledges that all sales literature for investment
companies (such as the Corporation) are subject to strict regulatory oversight.
The Manager agrees to submit any proposed sales literature for the Corporation
(or any Fund) or for itself or its affiliates which mentions the Corporation (or
any Fund) to the Corporation's distributor for review and filing with the
appropriate regulatory authorities prior to the public release of any such sales
literature, provided, however, that nothing herein shall be construed so as to
create any obligation or duty on the part of the Manager to produce sales
literature for the Corporation (or any Fund). The Corporation agrees to cause
its distributor to promptly review all such sales literature to ensure
compliance with relevant requirements, to promptly advise Manager of any
deficiencies contained in such sales literature, to promptly file complying
sales literature with the relevant authorities, and to cause such sales
literature to be distributed to prospective investors in the Corporation.
14. Notice is hereby given that this instrument is executed on behalf
of the Directors of the Corporation as Directors and not individually and that
the obligations of this instrument are not binding upon any of the Directors, or
any of the officers, employees, agents or shareholders of the Corporation
individually but are binding only upon the assets and property of the
Corporation. Notice is also hereby given that the obligations pursuant to this
instrument of a particular Fund and of the Corporation with respect to that
particular Fund shall be limited solely to the assets of that particular Fund.
15. This Contract shall be construed in accordance with and governed by
the laws of the Commonwealth of Pennsylvania.
16. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
EXHIBIT A
to the
Management Contract
BLANCHARD PRECIOUS METALS FUND, INC.
For all services rendered by Manager hereunder, the above-named Funds
of the Corporation shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee equal
to the following percentage ("the applicable percentage") of the average daily
net assets of each Fund
Name of Fund Percentage of Net Assets
Blanchard Precious 1% of the first $150 million
Metals Fund, Inc. of average daily net assets,
.875% of the Fund's
average daily net
assets in excess of
$150 million but not
exceeding $300
million and .75% of
the Fund's average
daily net assets in
excess of $300
million.
The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.
The management fee so accrued shall be paid to Manager daily.
Witness the due execution hereof this 28th day of November, 1997.
Attest: Virtus Capital Management, Inc.
________________________ By: ___________________________
Assistant Secretary Senior Vice President
Attest: Blanchard Precious Metals Fund, Inc.
________________________ By: ____________________________
Assistant Secretary Vice President
EXHIBIT C
INTERIM SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 28th day of November, 1997 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"), and
CAVELTI CAPITAL MANAGEMENT, LTD., a Canadian money management firm (the
"Portfolio Manager" or "Cavelti") with respect to the following recital of fact:
R E C I T A L
WHEREAS, Blanchard Precious Metals Fund, Inc. (the "Corporation") is
registered as an open-end non-diversified management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules
and regulations promulgated thereunder; and
WHEREAS, the Portfolio Manager is registered as an investment advisor
under the Investment Advisers Act of 1940, as amended, and engages in the
business of acting as an investment advisor; and
WHEREAS, the Corporation is authorized to issue shares of Common Stock
in separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Corporation intends to initially offer shares in one
series called the BLANCHARD PRECIOUS METALS FUND, INC. (such series, being
referred to as the "Fund"); and
WHEREAS, the Corporation and the Manager have entered into an agreement
to provide for management services for the Fund on the terms and conditions set
forth therein (the "Interim Management Agreement"); and
WHEREAS, the Portfolio Manager proposes to render investment advisory
services to the Manager in connection with the Manager's responsibilities to the
Fund's portfolio on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Investment Management. Cavelti shall act as the
Portfolio Manager for the Fund and shall, in such capacity,
supervise the investment and reinvestment of the cash, securities
or other properties comprising the Fund's portfolio, subject at all times to the
direction of the Manager and the policies and control of the Corporation's Board
of Directors. Cavelti shall give the Fund the benefit of its best judgment,
efforts and facilities in rendering its services as Portfolio Manager.
2. Investment Analysis and Implementation. In carrying
out its obligation under paragraph 1 hereof, the Portfolio
Manager shall:
(a) use the same skill and care in providing such service as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) obtain and evaluate pertinent information about
significant developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund's portfolio and whether concerning the individual issuers
whose securities are included in the Fund's portfolio or the activities
in which the issuers engage, or with respect to securities which the
Portfolio Manager considers desirable for inclusion in the Fund's
portfolio;
(c) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report
thereon to the Manager;
(d) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly
report thereon to the Manager; and
(e) take, on behalf of the Fund, all actions which appear to
the Fund and the Manager necessary to carry into effect such purchase
and sale programs and supervisory functions as aforesaid, including the
placing of orders for the purchase and sale of securities for the Fund
and the prompt reporting to the Manager of such purchases and sales.
3. Broker-Dealer Relationships. The Portfolio Manager is responsible
for decisions to buy and sell securities for the Fund's portfolio, broker-dealer
selection, and negotiation of brokerage commission rates. The Portfolio
Manager's primary consideration in effecting a security transaction will be
execution at the most favorable price. In selecting a broker-dealer to execute
each particular transaction, the Portfolio Manager will take the following into
consideration: the best net price available, the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution
of the broker-dealer to the investment performance of the Fund on a continuing
basis. Accordingly, the price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Directors may determine, the
Portfolio Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Fund to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Portfolio
Manager determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Portfolio Manager's overall responsibilities with respect to the Fund and to its
other clients as to which it exercises investment discretion. The Portfolio
Manager is further authorized to allocate the orders placed by it on behalf of
the Fund to its affiliated broker-dealer or to such brokers and dealers who also
provide research or statistical material, or other services to the Fund or the
Portfolio Manager. Such allocation shall be in such amounts and proportions as
the Portfolio Manager shall determine and the Portfolio Manager will report on
said allocations regularly to Manager indicating the brokers to whom such
allocations have been made and the basis therefor.
4. Control by Board of Directors. Any investment program undertaken by
the Portfolio Manager pursuant to this Agreement, as well as any other
activities undertaken by the Portfolio Manager on behalf of the Fund pursuant
thereto, shall at all times be subject to any directives of the Board of
Directors of the Corporation. The Manager shall provide the Portfolio Manager
with written notice of all such directives, so long as this Agreement remains in
effect.
5. Compliance with Applicable Requirements. In carrying
out its obligations under this Agreement, the Portfolio Manager
shall at all times conform to:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of
the Corporation under the Securities Act of 1933 and the
1940 Act; and
(c) any other applicable provisions of state and
federal law.
6. Expenses. The expenses connected with the Fund shall be borne by the
Portfolio Manager as follows:
The Portfolio Manager shall maintain, at its expense and
without cost to the Manager or the Fund, a trading function in order to carry
out its obligations under subparagraph (e) of paragraph 2 hereof to place orders
for the purchase and sale of portfolio securities for the Fund.
7. Delegation of Responsibilities. Upon request of the Manager and with
the approval of the Corporation's Board of Directors, the Portfolio Manager may
perform services on behalf of the Fund which are not required by this Agreement.
Such services will be performed on behalf of the Fund and the Portfolio
Manager's cost in rendering such services may be billed monthly to the Manager,
subject to examination by the Manager's independent accountants. Payment or
assumption by the Portfolio Manager of any Fund expense that the Portfolio
Manager is not required to pay or assume under this Agreement shall not relieve
the Manager or the Portfolio Manager of any of their obligations to the Fund or
obligate the Portfolio Manager to pay or assume any similar Fund expense on any
subsequent occasions.
8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Portfolio Manager monthly
compensation of the sum of the amounts determined by applying the following
annual rates to the Fund's aggregate daily net assets: .30% of the Fund's net
assets up to the first $150 million; .2625% of the Fund's net assets in excess
of $150 million but less than $300 million; plus .255% of the Fund's net assets
in excess of $300 million. Compensation under this Agreement shall be calculated
and accrued daily and the amounts of the daily accruals shall be paid monthly.
If this Agreement becomes effective subsequent to the first day of a month or
shall terminate before the last day of a month, compensation for that part of
the month this Agreement is in effect shall be prorated in a manner consistent
with the calculation of the fees as set forth above. Payment of the Portfolio
Manager's compensation for the preceding month shall be made as promptly as
possible after the end of each month.
9. Expense Limitation. If, for any fiscal year, the total of all
ordinary business expenses of the Fund, including all investment advisory fees
but excluding brokerage commissions and fees, payments pursuant to the Rule
12b-1 Plan then in effect, taxes, interest and extraordinary expenses such as
litigation, would exceed the most restrictive expense limits imposed by a
statute or regulatory authority of any jurisdiction in which shares of the Fund
are offered for sale, the investment advisory fee, which the Manager would
otherwise receive from the Fund,
shall be reduced by the amount of such excess. The fee which the Portfolio
Manager would otherwise receive from the Manager pursuant to Paragraph 8 of this
Agreement shall also be reduced proportionately. For example, if the Manager's
fee is reduced by 1/4, the Portfolio Manager's fee from the Manager will also be
reduced by 1/4. Such reduction shall be deducted from the monthly fee otherwise
payable to the Portfolio Manager by the Manager and, if such amount should
exceed such monthly fee, the Portfolio Manager agrees to repay the Manager such
amount of its fee previously received with respect to make up the deficiency no
later than the last day of the first month of the next succeeding fiscal year.
For the purposes of this paragraph, the term "fiscal year" shall exclude the
portion of the current fiscal year which shall have elapsed prior to the date
hereof and shall include the portion of the then current fiscal year which shall
have elapsed at the date of termination of this Agreement.
10. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect until the
earlier of the Closing Date defined in the Agreement and Plan of Reorganization
dated November 26, 1997 with respect to the Fund or for two years after its
effective date, and shall remain in effect thereafter if approved in the manner
set forth in Section 11 hereof.
11. Renewal. Following the expiration of its initial term, the
Agreement shall continue in force and effect from year to year, provided that
such continuance is specifically approved at least annually:
(a) by the Corporation's Board of Directors or by the vote of
a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the Directors who
are not parties to this agreement or interested persons of a party to
this Agreement (other than as a Director of the Corporation), by votes
cast in person at a meeting specifically called for such purpose.
12. Termination. This Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Corporation's Board of Directors or
by vote of a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), or by the Manager or the Portfolio Manager,
on sixty (60) days' written notice to the other party. This Agreement shall
automatically terminate: (a) in the event of its assignment, the term
"assignment" having the meaning defined in Section 2(a)(4) of the 1940 Act, or
(b) in the event that the
Interim Management Agreement between the Fund and the Manager shall terminate.
13. Liability of the Portfolio Manager. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Portfolio Manager
or its officers, directors or employees, or reckless disregard by the Portfolio
Manager of its duties under this Agreement, the Portfolio Manager shall not be
liable to the Manager, the Corporation or to any shareholder of the Corporation
for any act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
14. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Manager
for this purpose shall be 707 East Main Street, Suite 1300, Richmond, Virginia
23219, that of the Corporation for this purpose shall be Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779, and the address of the Portfolio
Manager for this purpose shall be 4100 Yonge Street, Willowdale, Ontario M2P 2B6
Canada.
15. Questions of Interpretation. Any questions of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
court, by rules, regulations or orders of the Securities and Exchange Commission
issued pursuant to said Act. In addition, where the effect of a requirement of
the 1940 Act reflected in the provision of this Agreement is revised by rule,
regulation or order of the Securities and Exchange Commission, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By
Title: Senior Vice President Title: Vice President
Attest: CAVELTI CAPITAL MANAGEMENT, LTD.
By
Title: Title:
EXHIBIT D
PAGE 3
A Discussion With
Your Fund Manager
[Photo of
John C. Madden, Jr.
Goes Here]
JOHN C. MADDEN, JR. IS A VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER OF
KEYSTONE PRECIOUS METALS HOLDINGS, INC. AND KEYSTONE GLOBAL RESOURCES AND
DEVELOPMENT FUND. A CHARTERED FINANCIAL ANALYST, MR. MADDEN HAS MORE THAN
30 YEARS OF EXPERIENCE IN INVESTMENT RESEARCH AND MANAGEMENT, SPECIALIZING
IN PRECIOUS METALS, NATURAL RESOURCES AND ENERGY. HE HOLDS A BA FROM YALE
UNIVERSITY.
(Q) GIVEN THE RECENT WEAKNESS IN THE GOLD MARKET, WHAT ARE THE REASONS TO OWN A
FUND THAT INVESTS PRIMARILY IN GOLD-RELATED SECURITIES?
(A) Despite recent negative returns, we believe a long-term investment in
gold-related securities adds valuable diversification to any portfolio. Holding
gold-related stocks can help offset market fluctuations, because their
performance generally differs from that of broader stock and bond market
indexes. We've seen ample evidence of this contrarian performance during the
current strong economic cycle. Gold mining stocks can also provide a hedge
against inflation and currency uncertainties. We continue to believe that the
best way to take advantage of the unpredictable nature of these markets is to
maintain exposure to high quality gold stocks.
(Q) WHAT FACTORS CONTRIBUTED TO THE LOW PRICE OF GOLD DURING THE PERIOD?
(A) Real and rumored central bank sales have had a negative effect on bullion
prices since early 1996, related largely to moves by European countries toward
monetary union. But the specific catalyst for the July downturn-- the
announcement by the Australian central bank that they had sold 160 tonnes of
gold, accounting for two-thirds of their holdings-- had an inordinate impact
because it was so unexpected. Australia is not directly associated with the EMU,
and it is also a large gold producer. Bearish gold speculators responded
accordingly. It's also important to remember that market conditions for most
other investments have remained unusually strong this year, diminishing gold's
attraction as a valuable investment.
[Performance Graph Goes Here]
Comparative performance of Keystone Precious Metals Holdings, Inc. and key
market indexes, February 28 - August 31, 1997.
Percentage
Spot Gold KPMH* Lipper Gold Fund Index
-10.8% -23.2% -26.9%
Financial Times Index:
North America Australia Africa
-20.7% -27.9% -38.1%
North American gold stocks had the best relative performance.
*Includes reinvested dividends.
PAGE 4
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
· Download Table
ASSET ALLOCATION
(AS A PERCENTAGE OF
PORTFOLIO ASSETS)
AUGUST 31, 1997 FEBRUARY 28, 1997
North America 65% 59%
South Africa 23% 27%
Australia 12% 14%
(Q) DID GEOGRAPHIC DIVERSIFICATION HELP THE FUND'S PERFORMANCE?
(A) Yes, the Fund's overweighting in North American gold stocks helped
performance. All gold-related stocks fared considerably worse than the metal,
but performance varied widely by region. As you can see from the chart, South
African gold stocks declined almost twice as much as stocks of North American
companies, which in turn declined more than the price of gold. North American
companies accounted for 65% of the Fund's holdings as of August 31, 1997.
(Q) WHAT CHANGES DID YOU MAKE IN THE FUND'S PORTFOLIO?
(A) We increased the percentage of North American stocks and pared back holdings
in Australia and South Africa. Some of the shift is due to the differential
performance of these regions, but we did actively increase our exposure to the
stronger North American market during the period. We also expanded the non-gold
holdings of the Fund, specifically in platinum and diamond producers.
(Q) PLEASE DESCRIBE ONE OF THE NON-GOLD HOLDINGS.
(A) Stillwater Mining is a North American miner of palladium and platinum,
metals used in jewelry, electronics and automobile catalytic converters. With
substantial reserves, Stillwater is the largest primary source of platinum and
palladium outside of South Africa. Production is from the Stillwater Complex, a
unique deposit in southern Montana. The stock has underperformed recently, due
to management changes and operating difficulties, but a recently completed
expansion will double ore throughput to 2,000 tons per day next year and reduce
costs, which we believe should help stock performance. A second mine on the same
ore body is also under development, which has the potential of doubling output
again by early in the next decade.
(Q) WHAT ABOUT GOLD STOCKS?
(A) In the gold area, we have added to our holdings of a relatively small U.S.
producer, Canyon Resources. This past spring, Canyon successfully brought on
stream the Briggs mine in southern California, with planned production of 75,000
ounces per year at a cash cost of $240 per ounce. While other prospects for
development exist in the vicinity of Briggs, our main interest in Canyon
involves its joint venture with Phelps Dodge: the MacDonald project in Montana.
The location of this project, along the scenic Blackfoot River, has made the
permitting process quite arduous. However, if the mine goes forward, Canyon will
be a 28% owner of a 300,000 ounce operation to which the stock market is
currently assigning little value.
(Q) WHAT IS YOUR STRATEGY FOR MANAGING THE FUND?
(A) The Fund's objective is to seek long-term capital appreciation and
protection of purchasing power by investing in common stocks of gold-oriented or
other precious metal and minerals companies. As a sector fund, it is likely to
experience greater price fluctuation than more diversified investments, but we
rely on a conservative strategy to reduce the level of volatility. We focus on
companies with growing reserves and expanding production that may have a greater
ability to maintain their value during periods of lower gold prices. We believe
this approach offers Fund investors the advantages of ongoing exposure to the
potential of gold stocks, but with reduced downside risk.
PAGE 5
TOP 10 HOLDINGS
AS OF AUGUST 31, 1997
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PERCENTAGE OF
STOCK (COUNTRY) NET ASSETS
Newmont Mining Corp. (United States) 11.3
Euro Nevada Mining (Canada) 8.8
Franco Nevada Mining (Canada) 8.5
Pioneer Group (United States) 5.5
Homestake Mining (United States) 4.8
Getchell Gold (Canada) 4.7
Newmont Gold (United States) 4.5
Stillwater Mining (United States) 3.6
Prime Resources Group (Canada) 3.2
Normandy Mining (Australia) 3.1
Growth of an Investment
[Performance Growth Graph Goes Here]
Growth of an investment in Keystone Precious Metals Holdings, Inc.
In Thousands
A $10,000 investment in Keystone Precious Metals Holdings, Inc. made on August
31, 1987 with all distributions reinvested was worth $8,350 on August 31, 1997.
Past performance is no guarantee of future results.
(Q) WHAT IS YOUR OUTLOOK FOR THE GOLD MARKET?
(A) Over the past few years, gold investments have had a difficult time
competing against a strong U.S. economy, a long bull market for stocks, a strong
dollar and minimal inflation. Under these circumstances, investors haven't
needed what gold has to offer, and without investment appeal, the price has
languished. While demand, particularly in emerging countries, is still positive,
gold as an investment will only move up substantially when its perceived value
relative to other financial assets improves. Looking ahead, we do not expect the
lows we saw this past summer to continue, and believe the price will recover
modestly by the end of the year. Longer term, any number of economic or
investment scenarios could improve the environment for gold. In particular,
forthcoming decisions regarding the European Monetary Union will be critical.
We believe the companies in your Fund's portfolio are in a good position to
benefit from even modest increases in the price of the metal.
*
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, N.C. 28288-1195
PAGE 6
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
SCHEDULE OF INVESTMENTS-- AUGUST 31, 1997 (UNAUDITED)
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SHARES VALUE
COMMON STOCKS-- 99.0%
AUSTRALIA-- 12.3%
2,899,200 * Acacia Resources Ltd............ $ 3,190,932
800,000 Delta Gold NL................... 986,160
3,381,582 Normandy Mining Ltd............. 4,094,039
3,500,000 * Perilya Mines NL................ 1,515,194
1,052,000 Plutonic Resources NL........... 2,994,992
1,376,304 Ross Mining NL.................. 787,693
799,600 Sons of Gwalia Ltd.............. 2,522,838
16,091,848
CANADA-- 33.7%
100,100 * Aber Resources Ltd.............. 1,312,314
26,000 Agnico Eagle Mines Ltd.......... 227,553
104,700 Barrick Gold Corp............... 2,368,147
400,000 * Bema Gold Corp.................. 2,103,368
750,000 Euro Nevada Mining Ltd.......... 11,480,281
470,000 Franco Nevada Mining Ltd........ 11,155,411
179,700 * Getchell Gold Corp.............. 6,109,800
50,000 * International Precious Metals
Corp.......................... 353,125
150,000 * Kinross Gold Corp............... 646,875
337,100 * Orvana Minerals Corp............ 1,214,118
524,800 * Prime Resources Group Inc....... 4,233,935
300,000 * Repadre Capital Corp............ 1,620,745
185,300 * TVX Gold Inc.................... 961,244
429,000 * Vengold Inc..................... 154,511
43,941,427
SOUTH AFRICA-- 22.6%
289,520 * Ashanti Goldfields Ltd. GDR**... 3,003,770
2,932,916 * Avgold Ltd. ADR................. 2,675,665
150,000 Avmin Ltd. ADR.................. 1,837,500
110,000 De Beers Centenary.............. 3,505,275
45,200 De Beers Consolidated Mines Ltd.
ADR........................... 1,446,400
300,000 Elandsrand Gold Mining Ltd.
ADR........................... 1,023,120
SHARES VALUE
COMMON STOCKS-- CONTINUED
SOUTH AFRICA-- CONTINUED
283,000 Free St Consolidated Gold Mines
Ltd. ADR...................... $ 1,432,687
75,000 Free State Consolidated Gold
Mines Ltd..................... 379,676
267,000 * Harmony Gold Mining Ltd ADR..... 1,294,710
150,000 * Harmony Gold Mining Ltd......... 727,379
300,000 * Randgold & Exploration Co.
Ltd........................... 1,055,100
70,000 Randgold Resources Inc.**....... 962,500
72,800 Rustenberg Platinum Holdings.... 1,237,515
18,500 Vaal Reefs Exploration & Mining
Ltd........................... 922,733
638,000 Vaal Reefs Exploration & Mining
Ltd. ADR...................... 3,209,937
288,585 * Western Areas Gold Mining Ltd.
ADR........................... 2,414,331
20,900 Western Deep Levels Ltd......... 501,172
75,000 Western Deep Levels Ltd. ADR.... 1,809,375
29,438,845
UNITED STATES-- 30.4%
499,000 * Canyon Resource Corp............ 1,122,750
448,000 Homestake Mining Co............. 6,272,000
135,000 Newmont Gold Co................. 5,838,750
347,650 Newmont Mining Corp............. 14,709,941
220,000 Pioneer Group Inc............... 7,136,250
220,900 * Stillwater Mining Company....... 4,638,900
39,718,591
TOTAL COMMON STOCKS
(COST $136,134,202)............. 129,190,711
TOTAL LONG-TERM INVESTMENTS
(COST $136,134,202)............................ 129,190,711
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
BLANCHARD PRECIOUS METALS FUND, INC.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
KEYSTONE PRECIOUS METALS HOLDINGS
a Series of
EVERGREEN INTERNATIONAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Blanchard Precious Metals
Fund, Inc. ("Precious Metals"), to Keystone Precious Metals Holdings ("Keystone
Precious Metals"), a series of Evergreen International Trust, in exchange for
Class A shares of beneficial interest, $.001 par value per share, of Keystone
Precious Metals, consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
(1) The Statement of Additional Information of Keystone Precious
Metals dated April 30, 1997 , as amended;
(2) The Statement of Additional Information of Precious Metals
dated November 30, 1997;
(3) Annual Report of Precious Metals for the year ended September
30, 1997;
(4) Annual Report of Keystone Precious Metals for the year ended
October 31, 1997; and
(5) Pro Forma Combining Financial Statements (unaudited) dated
October 31, 1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Keystone Precious Metals and Precious Metals dated January 6, 1998.
A copy of the Prospectus/Proxy Statement may be obtained without charge by
calling or writing to Keystone Precious Metals or Precious Metals at the
telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is January 6,
1998.
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
APRIL 30, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Precious Metals Holdings, Inc. (the "Fund") dated April 30, 1997, as
supplemented from time to time. You may obtain a copy of the prospectus from the
Fund's principal underwriter, Evergreen Keystone Distributor, Inc., or your
broker-dealer.
TABLE OF CONTENTS
Page
The Fund............................................................2
Service Providers...................................................2
Investment Restrictions.............................................3
Distributions and Taxes.............................................6
Valuation of Securities.............................................7
Brokerage...........................................................8
Sales Charge........................................................9
Distribution Plan..................................................11
Directors and Officers.............................................12
Investment Adviser.................................................16
Consultant.........................................................17
Principal Underwriter..............................................18
Sub-administrator..................................................19
Expenses...........................................................19
Standardized Total Return and
Yield Quotations.................................................20
Financial Statements...............................................21
Additional Information.............................................21
Appendix..........................................................A-1
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THE FUND
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The Fund's primary investment objective is to provide shareholders with
long-term capital appreciation and with protection of the purchasing power of
their capital. Obtaining current income is a secondary objective. Keystone
Investment Management Company ("Keystone") serves as the Fund's investment
adviser.
Certain information about the Fund is contained in its prospectus. This
statement of additional information ("SAI") provides additional information
about the Fund that may be of interest to some investors.
--------------------------------------------------------------------------------
SERVICE PROVIDERS
--------------------------------------------------------------------------------
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SERVICE PROVIDER
----------------------------------------- -----------------------------------------------------------------------
Investment adviser (referred to Keystone Investment Management Company, 200
Berkeley in this SAI as "Keystone") Street, Boston, Massachusetts 02116 (Keystone is a wholly-owned
subsidiary of First Union Keystone, Inc. ("First
Union Keystone"), also located at 200 Berkeley Street,
Boston, Massachusetts 02116)
Principal underwriter (referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 W. 55th Street, New York,
New York 10019
Marketing services agent and Evergreen Keystone Investment Services, Inc. (formerly
predecessor to EKD (referred to Keystone Investment Distributors Company), 200 Berkeley
in this SAI as "EKIS") Street, Boston, Massachusetts 02116
Sub-administrator (referred to in The BISYS Group, Inc., or an affiliate, 3435 Stelzer Road,
this SAI as "BISYS") Columbus, Ohio 43219
Transfer and dividend disbursing Evergreen Keystone Service Company (formerly Keystone
agent (referred to in this SAI as Investor Resource Center, Inc.), 200 Berkeley Street,
"EKSC") Boston, Massachusetts 02116 (EKSC is a wholly-owned
subsidiary of Keystone)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants
Custodian State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110
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INVESTMENT RESTRICTIONS
--------------------------------------------------------------------------------
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental and may not
be changed without the vote of a majority of the Fund's outstanding voting
shares (as defined in the Investment Company Act of 1940, as amended (the "1940
Act")). Unless otherwise stated, all references to the Fund's assets are in
terms of current market value.
The Fund may not do the following:
(1) issue any senior securities;
(2) sell securities short, unless at the time it owns an equal amount
of such securities or, by virtue of ownership of convertible or exchangeable
securities, it has the right to obtain through conversion or exchange of such
other securities an amount equal to the securities sold short, in which case the
Fund will retain such securities as long as it is in a short position;
(3) purchase or sell securities on margin, but it may obtain such
short-term credits as may be necessary for the clearance of purchased and sold
securities;
(4) invest in oil and gas interests, puts, calls, straddles, spreads
and options, except that the Fund may write covered call options traded on the
London Stock Exchange, a national securities exchange or the over-the-counter
market and purchase call options to close out previously written call options;
this restriction shall not apply to the extent the investments of one or more
domestic or foreign wholly-owned subsidiaries in metals or minerals contracts
might be considered options;
(5) borrow money, except that the Fund may (a) borrow money from banks
for emergency or extraordinary purposes in aggregate amounts up to 5% of its net
assets and (b) enter into reverse repurchase agreements;
(6) underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of securities of the type referred to
in subparagraph (12) below, the Fund may be deemed to be an underwriter under
certain U.S. securities laws;
(7) invest more than 5% of its total assets taken at market value in
the securities of any one issuer, not including securities of the U.S.
government and its instrumentalities and the securities of one or more domestic
or foreign wholly-owned subsidiaries;
(8) purchase or sell real estate or interests therein or real estate
mortgages, provided that the foregoing shall not prevent the Fund from
purchasing or selling (a) readily marketable securities which are secured by
interests in real estate and (b) readily marketable securities of companies
which deal in real estate, including real estate investment trusts;
(9) purchase or sell commodities or commodity contracts, except that
the Fund may invest in the securities of one or more domestic or foreign
wholly-owned subsidiaries which deal in precious metals and minerals and
contracts relating thereto subject to the limitation that no such investment may
be made if at the time thereof the fair value of all such investments exceeds,
or by virtue of such investment would exceed, an amount equal to 25% of the then
market value of the Fund's total assets, and except also that the Fund may
engage in currency or other financial futures and related options transactions;
(10) make loans to other persons, except through the investment of up
to 25% of the total assets of the Fund in one or more domestic or foreign
wholly-owned subsidiaries; for the purposes of this restriction, the purchase of
a portion of an issue of bonds, notes, debentures or other obligations
distributed publicly, whether or not the purchase is made upon the original
issuance of such securities, will not be deemed to be the making of a loan;
(11) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets;
(12) invest more than 15% of its net assets in securities for which
market quotations are not readily available, or in repurchase agreements
maturing in more than seven days; except that this restriction shall not apply
to the Fund's investments in one or more domestic or foreign wholly-owned
subsidiaries, and except also that the Fund may write covered call options
traded on the over-the-counter market and purchase call options to close out
existing positions;
(13) invest more than 5% of the value of the Fund's total assets in the
securities of any issuers which have a record of less than three years
continuous operation, including the similar operations of predecessors or
parents, or equity securities of issuers which are not readily marketable,
except that this restriction shall not apply to the Fund's investments in one or
more domestic or foreign wholly-owned subsidiaries;
(14) purchase the securities of any other investment company, except
that it may make such a purchase (a) in the open market involving no commission
or profit to a sponsor or dealer, other than the customary broker's commission,
and (b) as part of a merger, consolidation or acquisition of assets; provided
that immediately after any such purchase (a) not more than 10% of the Fund's
total assets would be invested in such securities and (b) not more than 3% of
the voting stock of such company would be owned by the Fund;
(15) purchase or retain the securities of any issuer if the Treasurer
of the Fund has knowledge that those officers and/or Directors of the Fund or
its investment adviser who own individually more than 1/2 of 1% of the
securities of such issuer together own more than 5% of the securities of such
issuer;
(16) invest in companies for the purpose of exercising control or
management, except for one or more domestic or foreign wholly-owned
subsidiaries; or
(17) acquire, directly or indirectly, more than 10% of the voting
securities of any issuer other than one or more domestic or foreign wholly-owned
subsidiaries.
For purposes of Investment Restriction (1) the definition of senior
securities is deemed not to include the borrowings described in Investment
Restriction (5) and reverse repurchase agreements.
The Fund's purchase of securities of other investment companies, as
described in Investment Restriction (14), results in the layering of expenses,
such that shareholders indirectly bear a proportionate share of the expenses of
those investment companies, including operating costs, investment advisory and
administrative fees.
As a matter of practice, the Fund treats reverse repurchase agreements
as borrowings subject to the limitations of the 1940 Act. For further
information about reverse repurchase agreements, see the section on "Additional
Investment Information" in the Fund's prospectus. Also, as a matter of practice,
the Fund does not pledge its assets except in the course of portfolio trading.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Additional restrictions adopted by the Fund, which may be changed by
the Fund's Board of Directors and which are more restrictive than the
fundamental restrictions adopted by the Fund's shareholders, provide that (1)
the Fund shall not purchase the securities of any other investment company,
including unit investment trusts; (2) assets of the Fund may not be pledged or
otherwise encumbered nor transferred or assigned for the purpose of securing a
debt, except in the course of portfolio trading; and (3) the Fund may not borrow
money, except that it may borrow from banks on a temporary basis to facilitate
the redemption of shares or for extraordinary purposes and with the consent of
the Fund's custodian bank with respect to the conditions of the loan.
If a percentage limit is satisfied at the time of investment,
a later increase or decrease resulting from a change in value of a
security or a decrease in Fund assets is not a violation of the limit.
The Fund pursues its objectives by investing, under normal
circumstances, at least 80% of its assets in common stocks of companies that are
engaged in, or receive at least 50% of their revenue from other companies
engaged in, exploration, mining, processing or dealing in gold, gold bullion or
other precious metals and minerals such as silver, platinum, palladium and
diamonds. (A company will be considered to be engaged in a business or activity
if at least 50% of its assets, reserves or profits are from that business or
activity.)
The Fund invests in securities of South African mining companies only
after considering such factors as profitability of operations, adequacy of ore
reserves and the prices at which the metals and minerals mined by these
companies are selling in the free market.
When investing in securities of South African companies or other
foreign issuers, the Fund may purchase American Depositary Receipts ("ADRs").
ADRs are negotiable certificates issued by a United States ("U.S.") bank
representing the right to receive securities of a foreign issuer deposited in
that bank or a correspondent bank. While there are variations as to
marketability, ADRs representing shares of most of the better known South
African gold mining and mining finance companies are characterized by relatively
active trading markets. The Fund may purchase the foreign securities directly
when it is in its best interests to do so. The Fund will purchase only foreign
securities that are listed on recognized domestic or foreign securities
exchanges.
The Fund's normal expectation in purchasing a security is that its
anticipated performance level will be reached over the longer rather than
shorter term, although the rate of portfolio turnover will not be a limiting
factor when portfolio changes are deemed appropriate. It is anticipated,
however, that the Fund's annual portfolio turnover rate, exclusive of
investments made in or by any subsidiary, will not exceed 100%. A 100% portfolio
turnover rate would occur, for example, if the value of the lesser of cost of
purchases or proceeds from sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during such
year, excluding in each case short-term securities. The turnover rate may also
be affected by cash requirements for redemptions of the Fund's shares. A high
turnover rate would result in increased costs to the Fund for brokerage
commissions or their equivalent.
The Fund will not invest directly in precious metals and minerals or
contracts relating thereto. Any wholly-owned subsidiary of the Fund, however,
may invest in precious metals and minerals, subject to the limitation that no
investment in precious metals and minerals may be made by any wholly-owned
subsidiary or subsidiaries of the Fund if at the time thereof the market value
of all such investments by subsidiaries exceeds, or by virtue of such investment
would exceed, an amount equal to 25% of the then market value of the Fund's
total assets. In the event that, because of fluctuations in the market value of
a subsidiary's investments or in the market value of the Fund's total assets, or
other reasons, the Fund's investments in a subsidiary or subsidiaries represent
more than 25% of the market value of the Fund's total assets, the Fund will not
be required to take any action to reduce such investments, although it will do
so when it is in its best interests.
In making purchases of precious metals and minerals, a wholly-owned
subsidiary may utilize contracts that contemplate delivery of the metal or
mineral at a future date, provided in each case that it instructs the custodian
of its assets to segregate and maintain in a separate account cash or short-term
U.S. government securities at least equal to the aggregate contract price less
the aggregate margin deposit. A wholly-owned subsidiary may, from time
to time, engage in short-term trading in metals and minerals, that is, selling
metals and minerals held for a relatively brief period of time, usually less
than three months. Short-term trading will be used primarily to preserve capital
when a subsidiary anticipates there will be a market decline, or to realize gain
after a market increase when a subsidiary anticipates that continued increases
are unlikely. A wholly-owned subsidiary will engage in short-term trading only
if it believes that the transaction, net of costs, including any commissions,
will be in the best interest of the Fund. Whether short-term trading will be
advantageous to a subsidiary will depend on its anticipation and evaluation of
relevant market factors. A wholly-owned subsidiary will not engage in any
activity other than investing in precious metals and minerals, or contracts
relating thereto.
A wholly-owned subsidiary will not incur any obligations for which the
Fund may be directly or indirectly liable. The assets of a wholly-owned
subsidiary will be held either by the Fund's custodian or by a foreign branch of
a major U.S. banking institution.
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DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
The Fund will make distributions to its shareholders of dividends from
net investment income and net realized capital gains, if any, annually in shares
or, at the option of the shareholder, in cash. (Distributions or ordinary income
may be eligible in whole or in part for the corporate 70% dividends received
deduction.) Shareholders who have not opted, prior to the record date for any
distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the ex-dividend day after adjustment for the distribution. Net asset
value is used in computing the number of shares in both gains and income
distribution reinvestments. Account statements and/or checks, as appropriate,
will be mailed to shareholders within seven days after the Fund pays the
distribution. Unless the Fund receives instructions to the contrary from a
shareholder before the record date, it will assume that the shareholder wishes
to receive that distribution and future gains and income distributions in
shares. Instructions continue in effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of how long the shareholder has held Fund shares. If such
shares are held less than six months and redeemed at a loss, however, the
shareholder will recognize a long- term capital loss on such shares to the
extent of the long-term capital gain distribution received in connection with
such shares. If the net asset value of the Fund's shares is reduced below a
shareholder's cost by a capital gains distribution, such distribution, to the
extent of the reduction, would be a return of investment though taxable as
stated above. Since distributions of capital gains depend upon profits actually
realized from the sale of securities by the Fund, they may or may not occur. The
foregoing comments relating to the taxation of dividends and distributions paid
on the Fund's shares relate solely to federal income taxation. Such dividends
and distributions may also be subject to state and local taxes.
Any capital gains realized by any wholly-owned subsidiary and paid as a
dividend by such subsidiary to the Fund will be treated as ordinary income (and
not as capital gains) by the Fund and taken into consideration in computing the
Fund's net income.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined, to the best of the
Fund's ability, to be taxable as ordinary income. Shareholders of the Fund will
be advised annually of the federal income tax status of distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to the Fund's shareholders, a
shareholder will be required to include in his gross income both actual
dividends and the amount the Fund advises him is his pro rata portion of income
taxes withheld by foreign governments from interest and dividends paid on the
Fund's investments. The shareholder will be entitled, however, to take the
amount of his share of such foreign taxes withheld as a credit against his
United States income tax, or to treat his share of the foreign tax withheld as
an itemized deduction from his gross income, if that should be to his advantage.
In substance, this policy enables the shareholder to benefit from the same
foreign tax credit or deduction that he would have received if he had been the
individual owner of foreign securities and had paid foreign income tax on the
income therefrom. As in the case of individuals receiving income directly from
foreign sources, the above described tax credit and deductions are subject to
certain limitations.
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VALUATION OF SECURITIES
--------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) Investments, including ADRs, are usually valued at the closing
sales price or, in the absence of sales and for over-the-counter securities, the
mean of bid and asked quotations. Management values the following securities at
prices it deems in good faith to be fair: (a) securities for which complete
quotations are not readily available; and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value or
if no sale occurred. ADRs, certificates representing shares of foreign
securities deposited in domestic and foreign banks, are traded and valued in
U.S. dollars. Those securities traded in foreign currency amounts are translated
into United States dollars as follows: market value of investments, assets and
liabilities at the daily rate of exchange; purchases and sales of investments,
income and expenses at the rate of exchange prevailing on the respective dates
of such transactions. Net unrealized foreign exchange gains/losses are a
component of unrealized appreciation/depreciation on investments.
(2) Short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market. Short-term investments maturing in more than sixty days
when purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(3) The Fund's Board of Directors values the following securities at
prices it deems in good faith to be fair: (a) securities, including restricted
securities, for which complete quotations are not readily available; (b) listed
securities if, in the Board's opinion, the last sales price does not reflect a
current market value or if no sale occurred; (c) the Fund's investment in any
subsidiary; and (d) other assets.
--------------------------------------------------------------------------------
BROKERAGE
--------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund,
2. the efficiency with which the transaction is effected,
3. the broker's ability to effect the transaction where a large
block is involved,
4. the broker's readiness to execute potentially difficult
transactions in the future,
5. the financial strength and stability of the broker,
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services"), and
7. the Fund's management weighs these considerations in
determining the overall reasonableness of the brokerage
commissions paid.
Should the Fund or Keystone receive services from a broker, the Fund
would consider such services to be in addition to, and not in lieu of, the
services Keystone is required to perform under the Advisory Agreement. Keystone
believes that the cost, value and specific application of such services are
generally indeterminable and cannot be practically allocated between the Fund
and its other clients who may indirectly benefit from the availability of such
information. Similarly, the Fund may indirectly benefit from information made
available as a result of transactions effected for Keystone's other clients.
Under the Advisory Agreement, Keystone is permitted to pay higher brokerage
commissions for brokerage and research services in accordance with Section 28(e)
of the Securities Exchange Act of 1934. In the event Keystone follows such a
practice, it will do so on a basis that is fair and equitable to the Fund.
The Fund's Board of Directors has determined that the Fund may consider
sales of Fund shares as a factor when selecting brokers to execute portfolio
transactions, subject to the requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects that purchases and sales of securities will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark-up or reflect a dealer's mark-down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers,
unless more favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD, or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Directors periodically reviews the Fund's brokerage
policy. In the event of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the Board of Directors may change,
modify or eliminate any of the foregoing practices.
--------------------------------------------------------------------------------
SALES CHARGE
--------------------------------------------------------------------------------
The Fund may charge a contingent deferred sales charge (a "CDSC") when
you redeem certain of its shares within four calendar years after the month in
which you purchase the shares. The Fund charges a CDSC as reimbursement for
certain expenses, such as commissions or shareholder servicing fees, that it has
incurred in connection with the sale of its shares (see "Distribution Plan"). If
imposed, the Fund deducts the CDSC from the redemption proceeds you would
otherwise receive. CDSCs attributable to your shares are, to the extent
permitted by the National Association of Securities Dealers, Inc. ("NASD"), paid
to EKD or its predecessor.
CALCULATING THE CDSC
The CDSC is a declining percentage of the lesser of (1) the net asset
value of the shares you redeemed, or (2) the net asset value at time of purchase
of such shares. The CDSC is calculated according to the following schedule:
REDEMPTION TIMING CDSC
During the calendar year of purchase....................4.00%
During the first calendar year after the
year of purchase......................................3.00%
During the second calendar
year after the year of purchase.......................2.00%
During the third calendar year
after the year of purchase............................1.00%
Thereafter..............................................0.00%
In determining whether a CDSC is payable and, if so, the percentage
charge applicable, the Fund will first redeem shares not subject to a CDSC and
will then redeem shares you have held the longest.
CDSC WAIVERS. The Fund does not impose a CDSC when the amount you are
redeeming represents:
1. an increase in the value of the shares redeemed above the
total cost of such shares due to increase in the net asset
value per share of the Fund;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares you have held for all or part of more than four
consecutive calendar years;
4. shares that are held in the accounts of a shareholder who has
died or become disabled;
5. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
6. automatic withdrawals from the ERISA plan of a shareholder who
is a least 59 1/2 years old;
7. shares in an account that the Fund has closed because the
account has an aggregate net asset value of less than $1,000;
8. automatic withdrawals under a Systematic Withdrawal Plan of up
to 1% per month of your initial account balance;
9. withdrawals consisting of loan proceeds to a retirement plan
participant;
10. financial hardship withdrawals made by a retirement plan
participant;
11. withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan;
12. shares purchased by a bank or trust company in a single
account in the name of such bank or trust company as trustee
if the initial investment in shares of the Fund, any other
Keystone Classic Fund and/or any Evergreen Keystone Fund, is
at least $500,000 and any commission paid by the Fund and such
other fund at the time of such purchase is not more than 1% of
the amount invested;
13. shares purchased by certain Directors, Trustees, officers and
employees of the Fund, Keystone, EKD and certain of their
affiliates, and to members of the immediate families of such
persons; and
14. shares purchased by registered representatives of firms with
dealers agreements with EKD.
EXCHANGES. The Fund does not charge a CDSC on exchanges of shares
between funds in the Keystone Classic Fund Family that have adopted distribution
plans pursuant to Rule 12b-1 under the 1940 Act. If you do exchange shares of
one such fund for shares of another such fund, the Fund will deem the calendar
year of the exchange, for purposes of any future CDSC, to be the year the shares
tendered for exchange were originally purchased.
--------------------------------------------------------------------------------
DISTRIBUTION PLAN
--------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear the expenses of distributing their shares if
they comply with various conditions, including the adoption of a distribution
plan containing certain provisions set forth in Rule 12b-1. The Fund bears some
of the costs of selling its shares under a distribution plan adopted pursuant to
Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The NASD limits such annual expenditures to 1.00%, of
which 0.75% may be used to pay such distribution costs and 0.25% may be used to
pay shareholder service fees. The NASD also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales since the
inception of the Fund's Distribution Plan plus interest at the prime rate plus
1.00% on unpaid amounts thereof (less any CDSCs paid by shareholders to EKD or
EKIS).
Payments under the Distribution Plan are currently made to EKD (which
may reallow all or part to others, such as broker-dealers) (1) as commissions
for Fund shares sold; (2) as shareholder service fees in respect of shares
maintained by the recipient and outstanding on the Fund's books for specific
periods; and (3) as interest. Amounts paid or accrued to EKD and EKIS in the
aggregate may not exceed the annual limitation referred to above. EKD generally
reallows to broker-dealers or others a commission equal to 4.00% of the price
paid for each Fund share sold. In addition, EKD generally reallows to
broker-dealers or others a shareholder service fee at a rate of 0.25% per annum
of the net asset value of shares maintained by such recipient and outstanding on
the books of the Fund for specified periods.
If the Fund is unable to pay EKD a commission on a new sale because the
annual maximum (0.75% of average daily net assets) has been reached, EKD
intends, but is not obligated, to continue to accept new orders for the purchase
of Fund shares and to pay commissions and service fees to broker-dealers in
excess of the amount it currently receives from the Fund ("Advances"). While the
Fund is under no contractual obligation to reimburse such Advances, EKD and
EKIS, its predecessor, intend to seek full reimbursement for Advances from the
Fund (together with interest at the prime rate plus 1.00%) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
permitted limits. If the Fund's Independent Directors (Directors who are not
interested persons, as defined in the 1940 Act, and who have no direct or
indirect financial interest in the operation of the Fund's Distribution Plan or
any agreement related thereto) authorize such payments, the effect will be to
extend the period of time during which the Fund incurs the maximum amount of
costs allowed by the Distribution Plan.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under the Distribution Plan must be reported to the
Independent Directors quarterly. The Independent Directors may
require or approve changes in the implementation or operation of the
Distribution Plan, and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent Directors, such costs could, for some period of time, be higher than
such costs permitted by most other plans presently adopted by other investment
companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Directors, or by vote of a majority of the outstanding shares of the
Fund. If the Distribution Plan is terminated, EKD will ask the Independent
Directors to take whatever action they deem appropriate under the circumstances
with respect to payment of Advances.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of both (1) the Fund's Board of Directors and (2) the Independent Directors
cast in person at a meeting called for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund is required to
commit the selection and nomination of candidates for Independent Directors to
the discretion of the Independent Directors.
The Independent Directors of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefitted the Fund.
--------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
--------------------------------------------------------------------------------
The Directors and officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
FREDERICK AMLING: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers, Cre
dito Emilano (banking).
LAURENCE B. ASHKIN: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all funds in the Evergreen
Family of Funds other than Evergreen Investment
Trust; real estate developer and construction
consultant; and President of Centrum Equities and
Centrum Properties, Inc.
CHARLES A. AUSTIN III: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
FOSTER BAM: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds other than Evergreen
Investment Trust; Partner in the law firm of
Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition
Corporation and Rehabilitation Corporation of
America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chief Executive Officer of the Fund and each of the
other funds in the Keystone Families of Funds;
Chairman of the Board and Director of the Fund;
Chairman of the Board and Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and
Chairman of its Investment Committee); former
Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; and
former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice Presi dent, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Asso ciates
(environmental consulting); and former Director,
Keystone Investments, Inc. and Keystone.
JAMES S. HOWELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Trustee or Director of all the funds in
the Evergreen Family of Funds; former Chairman of
the Distribution Foundation for the Carolinas; and
former Vice President of Lance Inc. (food
manufacturing).
LEROY KEITH, JR.: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Eco nomic
Advisers; Chairman of the Board and Director,
Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Com pany,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Sales Representative
with Nucor-Yamoto, Inc. (steel producer).
THOMAS L. MCVERRY: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; former Vice President and
Director of Rexham Corporation; and former Director
of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Partner in the law
firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; Vice
Chair and former Executive Vice President, DHR
International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruit ment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RUSSELL A. SALTON, III MD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; Medical Director, U.S.
Health Care/Aetna Health Services; and former
Managed Health Care Consultant; former President,
Primary Physician Care.
MICHAEL S. SCOFIELD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Attorney, Law Offices
of Michael S. Scofield.
RICHARD J. SHIMA: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman, Environmental Warranty, Inc. (insurance
agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corpora tion;
former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller,
Inc.
ANDREW J. SIMONS: Director of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Families of Funds; President and Treasurer of all
the funds in the Evergreen Family of Funds; Senior
Managing Director, Furman Selz LLC since 1992;
Managing Director from 1984 to 1992; Consultant,
BISYS Fund Services since 1996; 230 Park Avenue,
Suite 910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Families of Funds; Secretary of all
of the funds in the Evergreen Family of Funds;
Senior Vice President and Director of Administration
and Regulatory Services, BISYS Fund Services since
1995; Vice President/Assistant General Counsel,
Alliance Capital Management from 1988 to 1995; 3435
Stelzer Road, Columbus, Ohio.
* This Director may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
The Fund does not pay any direct remuneration to any officer or
Director who is an "affiliated person" of Keystone or any of its affiliates. See
"Investment Adviser." During the fiscal year ended February 28, 1997, the
unaffiliated Directors received retainers or fees totaling $7,175 from the Fund.
For the year December 31, 1996, aggregate compensation received by Independent
Trustees on a fund complex wide basis (which includes over 30 mutual funds) was
$411,000. As of March 31, 1997, the Directors and officers beneficially owned
less than 1.00% of the Fund's then outstanding shares.
Except as set forth above, the address of all of the Fund's Directors
and the address of the Fund is 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Set forth below for each of the Independent Directors receiving in
excess of $60,000 for the fiscal period of March 1, 1996 through February 28,
1997 is the aggregate compensation paid to such Independent Directors by the
Evergreen Keystone Funds:
Total
Compensation
From
Aggregate Registrant
Compensation and Fund
from Complex Paid
Name Registrant To Director
------------------------- ------------ -------------
James S. Howell $0 $66,000
Russell A Salton, III M.D. $0 $61,000
Michael S. Scofield $0 $61,000
--------------------------------------------------------------------------------
INVESTMENT ADVISER
--------------------------------------------------------------------------------
INVESTMENT ADVISER
Subject to the general supervision of the Fund's Board of Directors,
Keystone provides investment advice, management and administrative services to
the Fund.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by First Union National Bank of North Carolina ("FUNB"), a
wholly-owned subsidiary of First Union. Keystone Investments was acquired by
FUNB by merger into a wholly-owned subsidiary of FUNB, which entity then assumed
the First Union Keystone name and succeeded to the business of the predecessor
corporation. Contemporaneously with the Acquisition, the Fund entered into a new
investment advisory agreement with Keystone and into a principal underwriting
agreement with EKD, an indirect wholly-owned subsidiary of The BISYS Group, Inc.
("BISYS"). The new investment advisory agreement (the "Advisory Agreement") was
approved by the shareholders of the Fund on December 9, 1996, and became
effective on December 11, 1996.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, Keystone and Evergreen Asset Management
Corp., a wholly-owned subsidiary of FUNB, manage or otherwise oversee the
investment of over $60 billion in assets belonging to a wide range of clients,
including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Directors, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Directors; (5) brokerage commissions, brokers' fees and expenses;
(6) issue and transfer taxes; (7) costs and expenses under the Distribution
Plan; (8) taxes and trust fees payable to governmental agencies; (9) the cost
of share certificates; (10) fees and expenses of the registration and
qualification of the Fund and its shares with the Securities and Exchange
Commission ("SEC")or under state or
other securities laws; (11) expenses of preparing, printing and mailing
prospectuses, statements of additional information, notices, reports and proxy
materials to shareholders of the Fund; (12) expenses of shareholders' and
Directors' meetings; (13) charges and expenses of legal counsel for the Fund and
for the Independent Directors of the Fund on matters relating to the Fund; and
(14) charges and expenses of filing annual and other reports with the SEC and
other authorities, and all extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set
forth below:
Aggregate Net
Asset Value of Fund
Management Fee Shares
--------------------------------------------------------------------------
3/4 of 1% of the first $ 100,000,000, plus
5/8 of 1% of the next $ 100,000,000, plus
1/2 of 1% of amounts over $ 200,000,000.
Keystone's fee is computed as of the close of business each business day and
payable monthly.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Directors of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Directors cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Directors or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its assignment.
--------------------------------------------------------------------------------
CONSULTANT
--------------------------------------------------------------------------------
Since August 1, 1995, Harbor Capital has served as a consultant to
Keystone with respect to the Fund and its subsidiary pursuant to a Consultant
Agreement. In accordance with the terms of the Consultant Agreement, Harbor
Capital provides Keystone with monthly reports discussing the world's gold
bullion markets and gold stock markets, and advice regarding economic factors
and trends in the precious metals sectors. For its services under the Consultant
Agreement, Harbor Capital receives from Keystone a fee at the annual rate of
0.10% of the Fund's average daily net assets.
The Consultant Agreement shall continue in effect from year to year if
the parties thereto agree. The Consultant Agreement may be terminated by either
party, without penalty, on 60 days' written notice to the other party. Neither
party may assign the Consultant Agreement without the consent of the other
party.
--------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with EKD. EKD, which is not affiliated with First
Union, replaces EKIS as the Fund's principal underwriter. EKIS may no longer
serve as principal underwriter of the Fund due to regulatory restrictions
imposed by the Glass-Steagall Act upon national banks such as FUNB and their
affiliates, that prohibit such entities from acting as the underwriters of
mutual fund shares. While EKIS may no longer serve as principal underwriter of
the Fund as discussed above, EKIS may continue to receive compensation from the
Fund or EKD in respect of underwriting and distribution services performed prior
to the termination of EKIS as principal underwriter. In addition, EKIS may also
be compensated by EKD for the provision of certain marketing support services to
EKD at an annual rate of up to 0.75% of the average daily net assets of the
Fund, subject to certain restrictions.
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers and
others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it. In
its capacity as principal underwriter, EKD or EKIS, its predecessor, may receive
payments from the Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (1) by a vote of a
majority of the Independent Directors, and (2) by vote of majority of the
Directors, in each case, cast in person at a meeting called for that purpose.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Directors or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its assignment.
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software, and Fund data files.
--------------------------------------------------------------------------------
SUB-ADMINISTRATOR
--------------------------------------------------------------------------------
BISYS, or an affiliate, provides personnel to serve as officers of the
Fund, and provides certain administrative services to the Fund pursuant to a
sub-administrator agreement. For its services under that agreement, BISYS
receives from Keystone a fee based on the aggregate average daily net assets of
the Fund at a rate based on the total assets of all mutual funds administered by
BISYS for which FUNB affiliates also serve as investment adviser. The
sub-administrator fee is calculated in accordance with the following schedule:
Aggregate Average Daily Net Assets Of Mutual Funds
Sub-Administrator Administered By BISYS For Which Any Affiliate Of
Fee FUNB Serves As Investment Adviser
--------------------------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also
serve as investment advisers were approximately $29.2 billion as of February 28,
1997.
--------------------------------------------------------------------------------
EXPENSES
--------------------------------------------------------------------------------
INVESTMENT ADVISORY FEE
For each of the Fund's last three fiscal years, the table below lists
the total dollar amounts paid by the Fund to Keystone for investment
advisory services rendered. For more information, see "Investment Adviser."
Percent of Fund's Fee Paid to
Average Net Assets Keystone under
represented by the Advisory
Fiscal Year Ended Keystone's Fee Agreement
------------------- ----------------------- -----------------------
February 28, 1997 0.69% $1,322,411
February 29, 1996 0.69% $1,354,605
February 28, 1995 0.68% $1,396,523
DISTRIBUTION PLAN EXPENSES
For the fiscal year ended February 28, 1997, the Fund paid $1,923,248
to EKD or EKIS under its Distribution Plan. For more information, see
"Distribution Plan."
UNDERWRITING COMMISSIONS
For each of the Fund's last three fiscal years, the table below lists
the aggregate dollar amounts of underwriting commissions (front-end sales
charges, plus distribution fees, plus CDSCs) paid with respect to the public
distribution of the Fund's shares. The table also indicates the aggregate dollar
amount of underwriting commissions retained by EKD or EKIS. For more
information, see "Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Aggregate Dollar Amount of Underwriting Commissions
Fiscal Year Ended Underwriting Commissions Retained by EKD or EKIS
------------------ --------------------------- --------------------------
February 28, 1997 $2,088,781 $1,058,137
February 29, 1996 $2,102,338 $920,700
February 28, 1995 $2,179,660 $255,046
BROKERAGE COMMISSIONS
Fiscal Year Ended Brokerage Commissions Paid
------------------------- --------------------------------------
February 28, 1997 $477,545
February 29, 1996 $438,893
February 28, 1995 $523,800
--------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
--------------------------------------------------------------------------------
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over the one, five and ten year periods on a hypothetical $1,000
investment which would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.
The cumulative total returns of the Fund for the one, five and ten year
periods ended February 28, 1997 were -7.89% (including CDSCs), 64.62% and
66.16%, respectively. The compounded average annual rates of return for the one,
five and ten year periods ended February 28, 1997 were -7.89% (including CDSCs),
10.48% and 5.21%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund presently does not
intend to advertise current yield.
Any given total return or current yield quotations should not be
considered representative of the Fund's total return or current yield for any
future period.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the SEC:
Schedule of Investments as of February 28, 1997;
Financial Highlights for each of the years in the ten-year period ended
February 28, 1997;
Statement of Assets and Liabilities as of February 28, 1997;
Statement of Operations for the year ended February 28, 1997;
Statements of Changes in Net Assets for each of the years in the
two-year period ended February 28, 1997;
Notes to Financial Statements; and
Independent Auditors' Report dated March 31, 1997.
A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
To the best of the Fund's knowledge, as of March 31, 1997, the
following was the only shareholder of record who owned 5% or more the Fund's
outstanding shares:
% OF FUND
Merrill Lynch Pierce Fenner & Smith 13.42%
For Sole Benefit of Its Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1.00% of the Fund's net
assets in any 90-day period. Securities delivered in payment of redemptions
would be valued at the same value assigned to them in computing the net asset
value per share and would, to the extent permitted by law, be readily
marketable. Shareholders receiving such securities would incur brokerage costs
upon sale of the securities.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information or in supplemental sales
literature issued by the Fund or EKD, and no person is entitled to rely on any
information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office in Washington, D.C. upon
payment of the fee prescribed by the rules and regulations promulgated by the
SEC.
A-1
APPENDIX
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by Standard & Poor's Ratings Group ("S&P"), PRIME-1 by Moody's Investors
Service ("Moody's") or F-1 by Fitch Investors Service, Inc. ("Fitch").
These ratings and other money market instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S government include a variety
of Treasury securities that differ only in their interest rates, maturities and
dates of issuance. Treasury bills have maturities of one year or less. Treasury
notes have maturities of one to ten years, and Treasury bonds generally have
maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities include direct obligations of the U.S. Treasury and
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks, Federal
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
10787
A-2
Some obligations of U.S. government agencies and instrumentalities,
such as Treasury bills and Government National Mortgage Association ("GNMA")
pass-through certificates, are supported by the full faith and credit of the
U.S.; others, such as securities of Federal Home Loan Banks, by the right of the
issuer to borrow from the Treasury; still others, such as bonds issued by the
Federal National Mortgage Association, a private corporation, are supported only
by the credit of the instrumentality. Because the U.S. government is not
obligated by law to provide support to an instrumentality it sponsors, the Fund
will invest in the securities issued by such an instrumentality only when
Keystone determines that the credit risk with respect to the instrumentality
does not make its securities unsuitable investments. U.S. government securities
will not include international agencies or instrumentalities in which the U.S.
government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the InterAmerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks, including their branches abroad and of U.S. branches
of foreign banks, which are members of the Federal Reserve System or the Federal
Deposit Insurance Corporation, and have at least $1 billion in deposits as of
the date of their most recently published financial statements. The Fund will
not acquire time deposits or obligations issued by the International Bank for
Reconstruction and Development, the Asian Development Bank or the Inter-American
Development Bank. Additionally, the Fund currently does not intend to purchase
such foreign securities (except to the extent that certificates of deposit of
foreign branches of U.S. banks may be deemed foreign securities) or purchase
certificates of deposit, bankers' acceptances or other similar obligations
issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
OPTIONS TRANSACTIONS
The Fund is authorized to write (i.e., sell) covered call options and to
purchase call options, including purchasing call options to close out covered
call options previously written. A call option obligates a writer to sell and
gives a purchaser the right to buy the underlying security at the stated
exercise price at any time until the stated expiration date.
The Fund will only write call options that are covered, which means
that the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
10787
A-3
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund may write a call option on any portfolio
security for which call options are available and listed on the London Stock
Exchange or a national securities exchange. The Fund will receive a premium for
writing a call option but will give up, until the expiration date, the
opportunity to profit from an increase in the underlying security's price above
the exercise price. The Fund will retain the risk of loss from a decrease in the
price of the underlying security. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked options which the Fund will not do) but capable
of enhancing the Fund's total returns.
The premium received by the Fund for writing a covered call option will
be recorded as a liability in the Fund's statement of assets and liabilities.
This liability will be adjusted daily to the option's current market value,
which will be the latest sale price at the time as of which the net asset value
per share of the Fund is computed (the close of the New York Stock Exchange),
or, in the absence of such sale, at the latest bid quotation. The liability will
be extinguished upon expiration of the option, the purchase of an identical
option in a closing transaction or delivery of the underlying security upon
exercise of the option.
The London Options Clearing House is the issuer of, and the obligor on,
every option traded on the London Stock Exchange and will be the issuer of, and
the obligor on, those covered call options written by the Fund which are traded
on the London Stock Exchange. The Fund will be required to make escrow
arrangements to secure its obligation to deliver to the London Options Clearing
House the underlying security of each such covered call option which the Fund
writes.
The Options Clearing Corporation is the issuer of, and the obligor on,
every option traded on a national securities exchange and will be the issuer of,
and the obligor on, those covered call options written by the Fund which are
traded on a national securities exchange. The Fund will be required to make
escrow arrangements to secure its obligation to deliver to The Options Clearing
Corporation the underlying security of each such covered call option which the
Fund writes.
Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions would fail to
meet their obligations to the Fund. In addition, the abililty to terminate
over-the-counter option positions may be more limited than in the case of
exchange traded options positions. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities.
The Fund will purchase call options to close out a covered call option
it has written. When it appears that a covered call option written by the Fund
is likely to be exercised, the Fund may consider it appropriate to avoid having
to sell the underlying security. Or, the Fund may wish to extinguish a covered
call option, which it has written in order to be free to sell the underlying
security, to realize a profit on the previously written call option or to write
another covered call option on the underlying security. In all such instances,
the Fund can close out the previously written call option by purchasing a call
option on the same underlying security with the same exercise price and
expiration date. (The Fund may, under certain circumstances, also be able to
transfer a previously written call option.) The Fund will realize a short-term
capital gain if the amount paid to purchase the call option plus transaction
costs is less than the premium received for writing the covered call option. The
Fund will realize a short-term capital loss if the amount paid to purchase the
call option plus transaction costs is greater than the premium received for
writing the covered call option.
A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
10787
A-4
market will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.
If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
In the past the Fund has qualified for, and elected to receive, the
special tax treatment afforded regulated investment companies under Subchapter M
of the Code. Although the Fund intends to continue to qualify for such tax
treatment, in order to do so it must, among other things, derive less than 30%
of its gross income from gains from the sale or other disposition of securities
held for less than three months. Because of this, the Fund may be restricted in
the writing of call options where the underlying securities have been held less
than three months, in the writing of covered call options which expire in less
than three months and in effecting closing purchases with respect to options
which were written less than three months earlier. As a result, the Fund may
elect to forego otherwise favorable investment opportunities and may elect to
avoid or delay effecting closing purchases or selling portfolio securities, with
the risk that a potential loss may be increased or a potential gain may be
reduced or turned into a loss.
Under the Code, gain or loss attributable to a closing transaction and
premiums received by the Fund for writing a covered call option which is not
exercised may constitute short-term capital gain or loss. Under provisions of
the Tax Reform Act of 1986, effective for taxable years beginning after October
22, 1986, a gain on an option transaction which qualifies as a "designated
hedge" transaction under Treasury regulations may be offset by realized or
unrealized losses on such designated transaction. The netting of gain against
such losses could result in a reduction in gross income from options
transactions for purposes of the 30 percent test.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market
10787
A-5
decline or change in interest rates, and, by doing so, provide an alternative to
the liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions that are related to
currency and other financial futures contracts for the hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the U.S. are The Board of Trade of
the City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, GNMA certificates, 90-day domestic bank
certificates of deposit, 90-day commercial paper, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be authorized. The standard contract size
is $100,000 for futures contracts in U.S. Treasury bonds, U.S.
10787
A-6
Treasury notes and GNMA certificates, and $1,000,000 for the other designated
contracts. While U.S. Treasury bonds, U.S. Treasury bills and U.S. Treasury
notes are backed by the full faith and credit of the U.S. government and GNMA
certificates are guaranteed by a U.S. government agency, the futures contracts
in U.S. government securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS/STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently stock index futures contracts can be purchased or sold on the
S&P Index of 500 Stocks, the S&P Index of 100 Stocks, the New York Stock
Exchange Composite Index, the Value Line Index and the Major Market Index. It is
expected that futures contracts trading in additional stock indices will be
authorized. The standard contract size is $500 times the value of the index.
The Fund does not believe that differences between existing stock
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transac-tions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position
10787
A-7
would be less valuable, and the Fund would be required to make a variation
margin payment to the Broker. At any time prior to expiration of the futures
contract, the Fund may elect to close the position. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its Custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price, the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs,
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures contracts are similar
to options on stocks except that an option on a currency or other financial
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) rather than to purchase or
sell currency or other instruments making up a financial futures index at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
10787
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The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency or other financial
futures contracts is analagous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures 