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PROSPECTUS May 1, 1998, as amended
August 10, 1998
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[Evergreen Logo
Appears Here]
EVERGREEN VARIABLE ANNUITY TRUST
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Evergreen VA Fund Evergreen VA Growth and Income Fund Evergreen VA Foundation
Fund Evergreen VA Global Leaders Fund Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund Evergreen VA Small Cap Equity Income Fund
Evergreen VA International Growth Fund
The Evergreen Variable Annuity Trust (the "Trust") is designed to
provide investors with a selection of investment alternatives which seek to
provide capital growth, income and diversification through its eight investment
series (the "Funds"). The Trust is an open-end management investment company.
This amended Prospectus sets forth concise information about the Trust and the
Funds that a prospective investor should know before investing. Shares of the
Funds are only sold to separate accounts funding variable annuity and variable
life insurance contracts issued by life insurance companies. The address of the
Trust is 200 Berkeley Street, Boston, Massachusetts 02116.
A Statement of Additional Information for the Trust dated May 1, 1998,
as amended August 10, 1998 has been filed with the Securities and Exchange
Commission and is incorporated by reference herein. The Statement of Additional
Information provides information regarding certain matters discussed in this
amended Prospectus and other matters which may be of interest to investors, and
may be obtained without charge by calling the Trust at (800)321-9332. There can
be no assurance that the investment objective of any Fund will be achieved.
Investors are advised to read this Prospectus carefully.
The shares offered by this Prospectus are not deposits or obligations
of any bank or any subsidiaries of a bank, are not endorsed or guaranteed by 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 risk, including the possible loss of principal.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Keep This Prospectus for Future Reference
<PAGE>
TABLE OF CONTENTS
-----------------
OVERVIEW OF THE FUNDS.........................................................4
FINANCIAL HIGHLIGHTS..........................................................5
DESCRIPTION OF THE FUNDS......................................................8
INVESTMENT OBJECTIVES AND POLICIES...................................8
INVESTMENT PRACTICES AND RESTRICTIONS ..............................19
SPECIAL RISK CONSIDERATIONS.........................................31
MANAGEMENT OF THE FUNDS......................................................35
INVESTMENT ADVISERS.................................................35
ADMINISTRATOR.......................................................37
PORTFOLIO MANAGERS..................................................37
SUB-ADVISER...................................................... 39
SALE AND REDEMPTION OF SHARES................................................39
PARTICIPATING INSURANCE COMPANIES...................................39
PURCHASES........................................................ 40
REDEMPTIONS.........................................................40
DIVIDENDS........................................................ 41
TAX STATUS..........................................................41
EFFECT OF BANKING LAWS..............................................42
GENERAL INFORMATION..........................................................42
CUSTODIAN, AND TRANSFER AND DIVIDEND PAYING AGENT...................42
EXPENSES OF THE TRUST............................................ 43
SHAREHOLDER RIGHTS..................................................43
DESCRIPTION OF SHARES...............................................44
PERFORMANCE.........................................................44
GENERAL ........................................................ 48
<PAGE>
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OVERVIEW OF THE FUNDS
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The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus. See "Description of the
Funds" and "Management of the Funds."
The investment adviser to the Evergreen VA Fund, Evergreen VA Growth
and Income Fund, Evergreen VA Foundation Fund, Evergreen VA Global Leaders Fund
and Evergreen VA Small Cap Equity Income Fund is Evergreen Asset Management
Corp. ("Evergreen Asset") which, with its predecessors, has served as investment
adviser to the Evergreen group of mutual funds since 1971. Evergreen Asset is a
wholly-owned subsidiary of First Union National Bank ("FUNB"), which in turn is
a subsidiary of First Union Corporation, the sixth largest bank holding company
in the United States. Lieber & Company, which is also a wholly-owned subsidiary
of FUNB, furnishes Evergreen Asset with information, investment recommendations,
advice and assistance to augment its investment advisory services. The Capital
Management Group of FUNB serves as investment adviser to Evergreen VA Aggressive
Growth Fund. The investment adviser to the Evergreen VA Strategic Income Fund
and Evergreen VA International Growth Fund is Keystone Investment Management
Company ("Keystone") which, along with its predecessors, has provided investment
advisory and management services since 1932. Keystone is a wholly-owned
subsidiary of FUNB.
Evergreen VA Fund seeks to achieve capital appreciation by investing in
the securities of little-known or relatively small companies, or companies
undergoing changes which the Fund's investment adviser believes will have
favorable consequences. Income will not be a factor in the selection of
portfolio investments.
Evergreen VA Growth and Income Fund seeks to achieve a return composed
of capital appreciation in the value of its shares and current income. The Fund
will attempt to meet its objective by investing in the securities of companies
which are undervalued in the marketplace relative to those companies' assets,
breakup value, earnings, or potential earnings growth.
Evergreen VA Foundation Fund seeks, in order of priority, reasonable
income, conservation of capital and capital appreciation. The Fund invests
principally in income-producing common and preferred stocks, securities
convertible into or exchangeable for common stocks and fixed income securities.
<PAGE>
Evergreen VA Global Leaders Fund seeks to achieve capital
appreciation by investing primarily in a diversified portfolio of
U.S. and non-U.S. equity securities of companies located in the
world's major industrialized countries.
The Fund's investment adviser will attempt to screen the largest
companies in the world's major industrialized countries and cause the Fund to
invest, in the opinion of the Fund's investment adviser, in the 100 best based
on certain qualitative and quantitative criteria.
Evergreen VA Strategic Income Fund seeks high current income from
interest on debt securities and, secondarily, considers potential for growth of
capital in selecting securities.
Evergreen VA Aggressive Growth Fund seeks long-term capital
appreciation by investing primarily in common stocks of emerging growth
companies and in larger, more well established companies, all of which are
viewed by the Fund's investment adviser as having above average appreciation
potential.
Evergreen VA Small Cap Equity Income Fund seeks to achieve a return
consisting of current income and capital appreciation in the value of its
shares. The Fund invests in common and preferred stocks, securities convertible
into or exchangeable for common stocks and fixed income securities. In
attempting to achieve its objective, the Fund invests primarily in companies
with total market capitalizations of less than $500 million.
Evergreen VA International Growth Fund seeks long-term growth of
capital. As a secondary objective, the Fund seeks modest income.
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FINANCIAL HIGHLIGHTS
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The tables on the following pages present, for Evergreen VA Fund,
Evergreen VA Foundation Fund, Evergreen VA Growth and Income Fund, Evergreen VA
Global Leaders Fund, Evergreen VA Strategic Income Fund and Evergreen VA
Aggressive Growth Fund financial highlights for a share outstanding throughout
each period presented. The information in the tables has been audited by KPMG
Peat Marwick LLP. The report of KPMG Peat Marwick LLP with respect to the Funds
is incorporated by reference in the Funds' Statement of Additional Information.
The following information for each Fund should be read in conjunction with the
financial statements and related notes which are incorporated by reference in
the Funds' Statement of Additional Information.
<PAGE>
The offering of shares of the Evergreen VA Small Cap Equity Income Fund
commenced on May 1, 1998 and the offering of shares of the Evergreen VA
International Growth Fund is expected to commence on the date of this amended
Prospectus. Accordingly, no comparable data is available for shares of these
Funds.
Further information about a Fund's performance is contained in the
Fund's annual report to shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
Evergreen VA Fund
Year Ended
December 31,
---------------------------
1997** 1996*
----- ----
<S> <C> <C>
Per Share Data:
Net asset value, beginning of period ............................. $ 11.41 $ 10.00
--------- --------
Income from investment operations:
Net investment income ........................................... 0.06 0.05
Net realized and unrealized gain on investments ................. 4.15 1.44
--------- --------
Total from investment operations ................................. 4.21 1.49
--------- --------
Less distributions from:
Net investment income ........................................... ( 0.05) ( 0.05)
Net realized gain on investments ................................ ( 0.68) ( 0.03)
--------- --------
Total distributions .............................................. ( 0.73) ( 0.08)
--------- --------
Net asset value, end of period ................................... $ 14.89 $ 11.41
========= ========
Total Return ..................................................... 37.16 % 14.90 %
Ratios and Supplemental Data:
Ratios to average net assets:
Total expenses .................................................. 1.01 % 1.00 %+
Total expenses, excluding indirectly paid expenses .............. 1.00 % 1.00 %+
Total expenses, excluding fee waivers and/or reimbursements ..... 1.31 % 2.38 %+
Net investment income ........................................... 0.42 % 0.87 %+
Portfolio turnover rate .......................................... 32% 6%
Average commission rate paid per share ........................... $ 0.0576 $ 0.0661
Net assets end of period (thousands) ............................. $ 21,600 $ 10,862
</TABLE>
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+ Annualized.
* For the period from March 1, 1996 (commencement of operations) to December
31, 1996.
** Calculated using average shares outstanding throughout the period.
<TABLE>
<CAPTION>
Evergreen VA Foundation Fund
Year Ended
December 31,
------------------------------
1997** 1996*
----- ----
<S> <C> <C>
Per Share Data:
Net asset value, beginning of period .............................. $ 11.31 $ 10.00
---------- ----------
<PAGE>
Income from investment operations:
Net investment income ............................................ 0.26 0.16
Net realized and unrealized gain on investments .................. 2.86 1.37
---------- ----------
Total from investment operations .................................. 3.12 1.53
---------- ----------
Less distributions from:
Net investment income ............................................ (0.24) (0.16)
Distributions in excess of net investment income ................. 0(a) 0
Net realized gain on investments ................................. (0.65) (0.06)
---------- ----------
Total distributions ............................................... (0.89) (0.22)
---------- ----------
Net asset value, end of period .................................... $ 13.54 $ 11.31
========== ==========
Total Return ...................................................... 27.80% 15.30%
Ratios and Supplemental Data:
Ratios to average net assets:
Total expenses ................................................... 1.01% 1.00%+
Total expenses, excluding indirectly paid expenses ............... 1.00% 1.00%+
Total expenses, excluding fee waivers and/or reimbursements ...... 1.10% 1.72%+
Net investment income ............................................ 2.15% 2.70%+
Portfolio turnover rate ........................................... 26% 12%
Average commission rate paid per share ............................ $ 0.0675 $ 0.0675
Net assets end of period (thousands) .............................. $ 31,840 $ 15,812
</TABLE>
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+ Annualized.
* For the period from March 1, 1996 (commencement of operations) to December
31, 1996.
(a) Amount is less than 1/2 of one cent per share. ** Calculated using average
shares outstanding throughout the period.
<TABLE>
<CAPTION>
Evergreen VA Growth and Income Fund
Year Ended
December 31,
---------------------------
1997** 1996*
----- ----
<S> <C> <C>
Per Share Data:
Net asset value, beginning of period ............................. $ 11.83 $ 10.00
--------- --------
Income from investment operations:
Net investment income ........................................... 0.08 0.06
Net realized and unrealized gain on investments ................. 4.01 1.84
--------- --------
Total from investment operations ................................. 4.09 1.90
--------- --------
Less distributions from:
Net investment income ........................................... ( 0.07) ( 0.06)
Net realized gain on investments ................................ ( 0.56) ( 0.01)
--------- --------
Total distributions .............................................. ( 0.63) ( 0.07)
--------- --------
Net asset value, end of period ................................... $ 15.29 $ 11.83
========= ========
Total Return ..................................................... 34.66 % 19.00 %
Ratios and Supplemental Data:
Ratios to average net assets:
Total expenses .................................................. 1.01 % 1.00 %+
Total expenses, excluding indirectly paid expenses .............. 1.00 % 1.00 %+
Total expenses, excluding fee waivers and/or reimbursements ..... 1.23 % 2.05 %+
Net investment income ........................................... 0.59 % 1.00 %+
Portfolio turnover rate .......................................... 18% 2%
Average commission rate paid per share ........................... $ 0.0600 $ 0.0579
Net assets end of period (thousands) ............................. $ 31,088 $ 14,484
<PAGE>
</TABLE>
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+ Annualized.
* For the period from March 1, 1996 (commencement of operations) to December 31,
1996. ** Calculated using average shares outstanding throughout the period.
5
<TABLE>
<CAPTION>
Period Ended December 31, 1997*
--------------------------------------------------
Global Aggressive Strategic
Leaders Fund Growth Fund Income Fund
---------------- ----------------- ---------------
<S> <C> <C> <C>
Per Share Data:
Net asset value, beginning of period .................................... $ 10.00 $ 10.00 $ 10.00
-------- ------------ -------
Income from investment operations:
Net investment income (loss)** ......................................... 0.11 ( 0.06) 0.32
Net realized and unrealized gain on investments and foreign currency
related transactions .................................................. 0.77 1.16 0.21
-------- ------------ -------
Total from investment operations ........................................ 0.88 1.10 0.53
-------- ------------ -------
Less distributions from:
Net investment income .................................................. ( 0.06) 0 ( 0.31)
Net realized gain on investments ....................................... ( 0.03) 0 ( 0.02)
-------- ------------ -------
Total distributions ..................................................... ( 0.09) 0 ( 0.33)
-------- ------------ -------
Net asset value, end of period .......................................... $ 10.79 $ 11.10 $ 10.20
======== ============ =======
Total Return ............................................................ 8.80% 11.00% 5.28%
Ratios and Supplemental Data:
Ratios to average net assets:
Total expenses ......................................................... 1.05%+ 1.06 %+ 1.02%+
Total expenses, excluding indirectly paid expenses ..................... 1.00%+ 1.00 %+ 1.00%+
Total expenses, excluding fee waivers and/or reimbursements ............ 2.89%+ 3.02 %+ 2.67%+
Net investment income (loss) ........................................... 1.15%+ (0.74)%+ 5.34%+
Portfolio turnover rate ................................................. 11% 39% 119%
Average commission rate paid per share .................................. $0.0331 $ 0.0569 N/A
Net assets end of period (thousands) .................................... $ 2,899 $ 1,868 $2,204
</TABLE>
--------
+ Annualized.
* For the period from March 6, 1997 (commencement of operations) to December
31, 1997.
** Calculated using average shares outstanding throughout the period.
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DESCRIPTION OF THE FUNDS
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective is nonfundamental and can be changed
without shareholder approval. Shareholders would be given notice prior to the
implementation of any such change. In addition to the investment policies
detailed below, each Fund may employ certain additional investment strategies
which are discussed in "Investment Practices and Restrictions" and may be
subject to certain risks discussed under "Special Risk Considerations." There
can be no assurance that a Fund's investment objective will be achieved.
Evergreen VA Fund
<PAGE>
The Evergreen VA Fund seeks to achieve its investment objective of
capital appreciation principally through investments in common stock and
securities convertible into or exchangeable for common stock of companies which
are little-known, relatively small or represent special situations which, in the
opinion of the Fund's investment adviser, offer potential for capital
appreciation. A "little-known" company means one whose business is limited to a
regional market or whose securities are closely held with only a small
proportion traded publicly. A "relatively small" company means one which has a
small share of the market for its products or services in comparison with other
companies in its field, or which provides goods or services for a limited
market. A "special situation" company is one which offers potential for capital
appreciation because of a recent or anticipated change in structure, management,
products or services. In addition to the securities described above, the Fund
may invest in securities of relatively well-known and large companies with
potential for capital appreciation. Investments may also be made to a limited
degree in non-convertible debt securities and preferred stocks which offer an
opportunity for capital appreciation. Short-term investments may also be made if
the Fund's investment adviser believes that such action will benefit the Fund.
Evergreen VA Growth and Income Fund
The investment objective of the Evergreen VA Growth and Income Fund is
to seek to achieve a return composed of capital appreciation in the value of its
shares and current income.
The Fund seeks to achieve its investment objective by investing in the
securities of companies which are undervalued in the marketplace relative to
those companies' assets, breakup value, earnings or potential earnings growth.
These companies are often found among those which have had a record of financial
success but are currently in disfavor in the marketplace for reasons the Fund's
investment adviser perceives as temporary or erroneous.
Such investments when successfully timed are expected to be the means
for achieving the Fund's investment objective. This inherently contrarian
approach may require greater reliance upon the analytical and research
capabilities of the Fund's investment adviser than an investment in certain
other equity funds. Consequently, an investment in the Fund may involve more
risk than an investment in other equity funds.
The Fund will use the "value timing" approach as a process for
purchasing securities when events indicate that fundamental investment values
are being ignored in the marketplace.
<PAGE>
Fundamental investment value is based on one or more of the following: assets --
tangible and intangible (examples of the latter include brand names or
licenses); capitalization of earnings; cash flow or potential earnings growth. A
discrepancy between market valuation and fundamental value often arises due to
the presence of unrecognized assets or business opportunities, or as a result of
incorrectly perceived or short-term negative factors. Changes in regulations,
basic economic or monetary shifts and legal action (including the initiation of
bankruptcy proceedings) are some of the factors that create these capital
appreciation opportunities. If the securities in which the Fund invests never
reach their perceived potential or the valuation of such securities in the
marketplace does not in fact reflect significant undervaluation, there may be
little or no appreciation or a depreciation in the value of such securities.
The Fund will invest primarily in common stocks and securities
convertible into or exchangeable for common stock. It is anticipated that the
Fund's investments in these securities will contribute to the Fund's return
primarily through capital appreciation. In addition, the Fund will invest in
nonconvertible preferred stocks and debt securities. It is anticipated that the
Fund's investments in these securities will also produce capital appreciation
but the current income component of return will be a more significant factor in
their selection. However, the Fund will invest in nonconvertible preferred stock
and debt securities only if the anticipated capital appreciation plus income
from such investments is equivalent to that anticipated from investments in
equity or equity-related securities. The Fund may invest up to 5% of its total
assets in debt securities which are rated below investment grade, commonly known
as "junk bonds." Investments of this type are subject to greater risk of loss of
principal and interest. The Fund may invest up to 25% of its assets in foreign
securities. See "Special Risk Considerations."
Evergreen VA Foundation Fund
The investment objectives of the Evergreen VA Foundation Fund, in order
of priority, are to seek to provide reasonable income, conservation of capital
and capital appreciation. The Fund seeks to achieve these objectives by
investing in a combination of common stocks, preferred stocks, securities
convertible into or exchangeable for common stocks, corporate and U.S.
Government debt obligations, and short-term debt instruments, such as commercial
paper. The Fund's common stock investments will include those which (at the time
of purchase) pay dividends and in the view of the Fund's investment adviser have
potential for capital enhancement. The Fund may also invest up to 25% of its
assets in foreign securities. See "Special Risk Considerations."
<PAGE>
The Fund may make investments in securities regardless of whether or
not such securities are traded on a national securities exchange. Securities not
traded on a national securities exchange are generally traded on a "net" basis
with dealers acting as principals for their own accounts without stated
commissions, although the price of the securities usually includes profits to
the dealers. While the Fund's investment adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available. Also the market for such securities may
not be as liquid as those traded on a national securities exchange.
While income will be a factor in the selection of equity securities,
the Fund's investment adviser will attempt to identify securities that offer
potential for long term capital appreciation, but that do not exhibit any
speculative characteristics. The Fund will not make equity investments with a
view toward realizing short-term gains. The value of portfolio securities and
their yields are expected to fluctuate over time because of varying general
economic and market conditions. Accordingly, there can be no assurance that the
Fund's investment objectives will be achieved.
The Fund's asset allocation will vary from time to time in accordance
with changing economic and market conditions, including: inflation rates;
business cycle trends; business regulations; and tax law impacts on the
investment markets. The composition of its portfolio will be largely
unrestricted and subject to the discretion of the Fund's investment adviser.
Under normal circumstances, the Fund anticipates that at least 25% of its net
assets will consist of fixed income securities. The balance will be invested in
equity securities (including securities convertible into equity securities).
In selecting fixed income securities for the Fund's portfolio, emphasis
will be placed on issues expected to fluctuate little in value other than as a
result of changes in prevailing interest rates. The market value of the debt
obligations in the Fund's portfolio can be expected to vary inversely to changes
in prevailing interest rates. The Fund may at times emphasize the generation of
interest income by investing in high-yielding debt securities, with short,
medium or long-term maturities. While fixed income investments will generally be
made for the purpose of generating interest income, investments in medium to
long-term debt securities (i.e., those with maturities from five to ten years
and those with maturities over ten years, respectively) may be made with a view
to realizing capital appreciation when the Fund's investment adviser believes
changes in interest rates will lead to an increase in the value of such
<PAGE>
securities. The fixed income portion of the Fund's portfolio may
include:
1. Marketable obligations of, or guaranteed by, the United States
Government, its agencies or instrumentalities, including issues of the United
States Treasury, such as bills, certificates of indebtedness, notes and bonds,
and issues of agencies and instrumentalities established under the authority of
an act of Congress. Some of these securities are supported by the full faith and
credit of the United States Government, and others are supported only by the
credit of the agency or instrumentality. Agencies or instrumentalities whose
securities are supported by the full faith and credit of the United States
include, but are not limited to, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration and Government National Mortgage Association. Agencies or
instrumentalities whose securities are supported only by the credit of the
agency or instrumentality include the Interamerican Development Bank and the
International Bank for Reconstruction and Development. These obligations are
supported by appropriated but unpaid commitments of their member countries.
There are no assurances that the commitments will be fulfilled in the future.
2. Corporate obligations rated no lower than A by Moody's Investors
Service, Inc. ("Moody's") or A-2 by Standard & Poor's
Ratings Group ("S&P").
3. Obligations of banks or banking institutions having total assets of
more than $2 billion which are members of the Federal Deposit Insurance
Corporation.
4. Commercial paper of high quality (rated no lower than A-2 by S&P or
Prime-2 by Moody's or, if not rated, issued by companies which have an
outstanding long-term debt issue rated AAA or AA by S&P or Aaa or Aa by
Moody's).
Certain obligations may be entitled to the benefit of standby letters
of credit or similar commitments issued by banks and, in such instances, the
Fund's investment adviser will take into account the obligation of the bank in
assessing the quality of such security. For a description of the ratings set
forth above, see the Statement of Additional Information.
Evergreen VA Global Leaders Fund
The investment objective of the Evergreen VA Global Leaders Fund is to seek
to provide long-term capital growth. The Fund will attempt to achieve its
objective by investing primarily in a diversified portfolio of U.S. and non-U.S.
equity securities of
<PAGE>
companies located in the world's major industrialized countries. Under normal
conditions at least 65% of the Fund's total assets will consist of global equity
securities. The Fund will make investments in no less than three countries,
which may include the United States. In addition to the United States, the
countries in which the Fund may invest include, but are not limited to,
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong
Kong, Italy, Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore,
Spain, Sweden, Switzerland and the United Kingdom.
Evergreen Asset, the Fund's investment adviser, will attempt to screen
the largest companies in these and other major industrialized countries and
cause the Fund to invest, in the opinion of the Fund's investment adviser, in
the 100 best based on certain qualitative and quantitative criteria. Such
companies may include those with the highest return on equity and consistent
earnings growth. They may also include companies with an established market
presence, or which operate in industries or sectors that have, in the opinion of
the Fund's investment adviser, significant growth prospects. The criteria will
be reviewed and evaluated on an ongoing basis by the Fund's investment adviser.
In determining what constitutes a major industrialized country, the
Fund's investment adviser will look to classifications set forth in the Morgan
Stanley Capital International ("MSCI") Index and the various reports on this
subject disseminated by the World Bank. The Fund's investment adviser will
utilize a series of weighing techniques to insure adequate diversification by
country and industry and attempt to identify the largest companies in each
market, primarily by reference to the market capitalizations published in the
MSCI Index.
Although, as stated above, the Fund expects that investments will be
made in no fewer than three countries including the United States, the Fund may
invest more than 25% of its total assets in one country. To the extent that the
Fund invests more than 25% of its total assets in the securities of issuers
located in one country, the value of the Fund's shares may be subject to greater
fluctuations due to the lesser degree of diversification across countries such a
policy affords, and the fact that the securities markets of certain countries
may be subject to greater risks and volatility than that which exists in the
United States. See "Special Risk Considerations."
Evergreen VA Strategic Income Fund
<PAGE>
Evergreen VA Strategic Income Fund seeks high current income from
interest on debt securities. Secondarily, the Fund considers potential for
growth of capital in selecting securities. The Fund allocates its assets
principally between eligible domestic high yield, high risk bonds and debt
securities of foreign governments and foreign corporations. In addition, the
Fund will, from time to time, allocate a portion of its assets to U.S.
Government securities. This allocation will be made on the basis of the
assessment by the Fund's investment adviser of global opportunities for high
income. From time to time, the Fund may invest 100% of its assets in U.S. or
foreign securities.
The Fund may invest principally in domestic debt obligations, including
zero coupon bonds and payment-in-kind securities ("PIKs"), debentures,
convertible debentures, fixed, increasing and adjustable rate bonds, stripped
bonds, mortgage bonds, mortgage-backed securities, corporate notes (including
convertible notes) with maturities at the date of issue of at least five years
(which may be senior or junior to other bonds), equipment trust certificates,
and units consisting of bonds with stock or warrants to buy stock attached.
The Fund may also invest in debt obligations issued or guaranteed by
foreign corporations, certain supranational entities (such as the World Bank)
and foreign governments, their agencies and instrumentalities, and debt
obligations issued by U.S. corporations denominated in non-U.S. currencies. The
Fund may also invest in debt instruments issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government securities").
Certain of these obligations, including U.S. Treasury notes and bonds and
Government National Mortgage Association debentures, are issued by, or
guaranteed with respect to both principal and interest by, the full faith and
credit of the U.S. Government. Certain other U.S. Government securities, issued
or guaranteed by federal agencies or government-sponsored enterprises, are not
supported by the full faith and credit of the U.S. Government. These latter
securities may include obligations supported by the right of the issuer to
borrow from the U.S. Treasury, such as obligations of the Federal Home Loan
Mortgage Corporation, and obligations supported by the credit of the
instrumentality such as Federal National Mortgage Association bonds. U.S.
Government securities in which the Fund may invest include zero coupon U.S.
Treasury securities, mortgage-backed securities and money market instruments.
While the Fund may invest in securities of any maturity, it is
currently expected that the Fund will not invest in securities with maturities
of more than 30 years.
<PAGE>
The level of income sought by the Fund is ordinarily associated with
high yield, high risk bonds and similar securities in the lower rating
categories of the recognized rating agencies or with securities that are
unrated. Such bonds generally involve greater volatility of price and risk of
principal and income than bonds in the higher rating categories and are, on
balance, considered predominantly speculative. See "Special Risk
Considerations." The Fund's investment adviser considers the ratings of Moody's
and S&P assigned to various securities, but does not rely solely on these
ratings because (1) Moody's and S&P assigned ratings are based largely on
historical financial data and may not accurately reflect the current financial
outlook of companies; and (2) there can be large differences among the current
financial conditions of issuers within the same rating category.
Since the Fund takes an aggressive approach to investing, the Fund's
investment adviser tries to maximize the return by controlling risk through
diversification, credit analysis, review of sector and industry trends, interest
rate forecasts and economic analysis. The analysis by the Fund's investment
adviser of securities focuses on factors such as interest or dividend coverage,
asset values, earnings prospects and the quality of management of the issuer. In
making investment recommendations, the Fund's investment adviser also considers
current income, potential for capital appreciation, maturity structure, quality
guidelines, coupon structure, average yield, percentage of zero coupon bonds and
PIKs, percentage of non-accruing items and yield to maturity.
The Fund may also invest in preferred stocks, including adjustable rate
preferred stocks and convertible preferred stocks, common stocks and other
equity securities, including convertible securities and warrants, which may be
used to create other permissible investments. Such investments must be
consistent with the Fund's primary objective of seeking a high level of current
income or be acquired as part of a unit combining income and equity securities.
In addition, the Fund may invest in limited partnerships, including master
limited partnerships.
The Fund may also invest in the following types of money market
securities: (1) obligations issued or guaranteed by the U.S. Government or by
any agency or instrumentality of the U.S. Government; (2) commercial paper,
including master demand notes, that at the date of investment is rated A-1 by
S&P, Prime-1 by Moody's, or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (3) obligations, including certificates of deposit and
bankers' acceptances, of banks or
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savings and loan associations having at least $1 billion in assets as of the
date of their most recently published financial statements that are members of
the Federal Deposit Insurance Corporation, including U.S. branches of foreign
banks and foreign branches of U.S. banks; and (4) obligations of U.S.
corporations that at the date of investment are rated A or better by S&P or
Moody's. For a description of the ratings set forth above, see the Statement of
Additional Information.
Evergreen VA Aggressive Growth Fund
The investment objective of the Evergreen VA Aggressive Growth Fund is
to seek to achieve long-term capital appreciation by investing primarily in
common stocks of emerging growth companies and larger, more well established
companies, all of which are viewed by the Fund's investment adviser as having
above-average appreciation potential. Under normal circumstances, the Fund
intends to invest at least 65% of its net assets in common stocks or securities
convertible into common stocks. The Fund's investment adviser considers an
emerging growth company to be one which is still in the developmental stage, yet
has demonstrated, or is expected to achieve, growth of earnings over various
major business cycles. Important qualities of any emerging growth company
include sound management and a good product with growing market opportunities.
To the extent that its assets are not invested in common stocks or securities
convertible into common stocks, the Fund also may invest its assets in, or enter
into repurchase agreements with banks or broker-dealers with respect to,
investment grade corporate bonds, U.S. Government securities, commercial paper
and certificates of deposit of domestic banks.
Consistent with its investment objective, the Fund also may invest in
equity securities of seasoned, established companies which its investment
adviser believes have above-average appreciation potential similar to that of
companies in the developmental stage. This may be due, for example, to
management change, new technology, new product or service developments, changes
in demand, or other factors. Investments in stocks of emerging growth companies
may involve special risks. Securities of lesser-known, relatively small and
special situation companies tend to be speculative and volatile. Therefore, the
current net asset value of the Fund's shares may vary significantly.
Accordingly, the Fund should not be considered suitable for investors who are
unable or unwilling to assume the risks of loss inherent in such a program, nor
should investment in the Fund be considered a balanced or complete investment
program.
Evergreen VA Small Cap Equity Income Fund
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The investment objective of Evergreen VA Small Cap Equity Income Fund
is to seek to achieve a return consisting of current income and capital
appreciation in the value of its shares. The emphasis on current income and
capital appreciation will be relatively equal although, over time, changes in
market conditions and the level of interest rates may cause the Fund to vary its
emphasis between these two elements in its search for the optimum return for its
shareholders. The Fund seeks to achieve its investment objective through
investments in common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks and fixed income securities. Under normal
circumstances, the Fund will invest at least 65% of its total assets in equity
securities (including convertible debt securities) of companies that, at the
time of purchase, have "total market capitalization" -- present market value per
share multiplied by the total number of shares outstanding -- of less than $1
billion. The Fund may invest up to 35% of its total assets in equity securities
of companies that at the time of purchase have a total market capitalization of
$1 billion or more, and in excess of that percentage during temporary defensive
periods.
To the extent that the Fund seeks capital appreciation, it expects that
its investments will provide growth over the long-term. Investments, however,
may be made on occasion for the purpose of short-term capital appreciation if
the Fund believes that such investments will benefit its shareholders.
Purchasing securities for short-term trading is subject to certain rules and
involves additional brokerage expenses. The Fund may make investments in
securities regardless of whether or not such securities are traded on a national
securities exchange and may invest up to 5% of its total assets in foreign
securities. The value of portfolio securities and their yields are expected to
fluctuate over time because of varying general economic and market conditions.
The Fund's portfolio will vary over time depending upon the economic
outlook and market conditions. The composition of its portfolio will be subject
to the discretion of the Fund's investment adviser. Ordinarily, the Fund
anticipates that most of its portfolio will consist of equity securities and
convertible debt securities. A significant portion of the equity investments,
however, will be income producing. If in the judgment of the Fund's investment
adviser a defensive position is appropriate, the Fund may take a defensive
position and invest without limit in debt securities or government securities or
hold its assets in cash or cash equivalents. The quality standards for debt
securities include: obligations of banks and commercial paper rated no lower
than P-2 by Moody's, A-2 by S&P or securities having a comparable rating from
another nationally recognized
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statistical rating organization ("SRO"); and non-convertible debt securities
rated no lower than Baa by Moody's) or BBB by S&P. Securities rated Baa or BBB
may have speculative characteristics. Changes in economic conditions are more
likely to weaken the capacity of the issuers of such bonds to make the interest
and principal payments than would be the case with higher rated bonds. However,
like higher rated bonds, these securities may be considered investment grade.
For a description of such ratings see the Statement of Additional Information.
Evergreen VA International Growth Fund
The primary objective of Evergreen VA International Growth Fund is
long-term growth of capital. As a secondary objective, the Fund seeks modest
income.
In pursuing its investment objectives, the Fund invests primarily in
equity securities issued by well-established, quality companies located in
countries with developed markets. The Fund may invest a portion of its assets in
equity securities of companies located in certain emerging markets countries and
the formerly communist countries of Eastern Europe. Countries with emerging
markets are generally those where the per capita income is in the low to middle
ranges, as determined by the World Bank.
Under normal circumstances, the Fund invests at least 65% of its total
assets in the securities of companies in at least three different countries
(other than the U.S.). For this purpose, a company is deemed to be located in a
particular country if (1) it is organized under the laws of that country; (2)
its principal securities trading market is in that country; (3) it derives at
least 50% of its revenues or profits from goods produced or sold, investments
made, or services performed in that country; or (4) it has at least 50% of its
assets located in that country.
Excluding repurchase agreements, the Fund currently follows a policy of
investing solely in securities of non-U.S. issuers.
While the Fund focuses on equity securities, it may invest a portion of its
assets in debt securities issued by public or private issuers with any rating or
that are unrated; provided, however, that the Fund may only invest up to 10% of
its total assets in debt securities rated below investment grade; i.e., BB or
lower by S&P or Ba or lower by Moody's. See "Special Risk Considerations."
The Fund may also invest in payment-in-kind securities issued by public
or private issuers, as well as preferred stocks, convertible securities, and
rights and warrants to purchase
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common stocks, when the Fund's investment adviser determines that such
investment is consistent with the Fund's investment objectives. See "Special
Risk Considerations."
INVESTMENT PRACTICES AND RESTRICTIONS
In addition to making the investments described above, each of the
Funds (except as stated herein) may invest in cash and cash equivalents and
short-term debt securities, write covered put and call options, purchase put and
call options, engage in transactions in futures contracts and related options,
engage in forward foreign currency exchange transactions, enter into repurchase
agreements, lend portfolio securities, enter into transactions on a "when
issued" or delayed settlement basis, enter into forward commitments, invest in
the securities of other investment companies and borrow funds under certain
limited circumstances. These investment strategies and instruments referred to
above and the risks related to them are discussed below and certain of these
strategies and instruments are described in more detail in the Statement of
Additional Information.
Defensive Investments. The Funds may invest without limitation in high quality
money market instruments, such as notes, certificates of deposit or bankers'
acceptances, or U.S. Government securities and, with respect to Evergreen VA
Global Leaders Fund and Evergreen VA International Growth Fund, short-term
obligations of foreign issuers denominated in U.S. dollars and traded in the
United States, if, in the opinion of the Funds' investment advisers, market
conditions warrant a temporary defensive investment strategy.
Portfolio Turnover and Brokerage. It is anticipated that the annual portfolio
turnover rate for Evergreen VA Fund, Evergreen VA Growth and Income Fund,
Evergreen VA Strategic Income Fund, Evergreen VA Aggressive Growth Fund,
Evergreen VA Global Leaders Fund and Evergreen VA Small Cap Equity Income Fund
may exceed 100%. A portfolio turnover rate of 100% would occur if all of a
Fund's portfolio securities were replaced in one year. The annual turnover rate
for the fixed income portion of the Evergreen VA Foundation Fund and the annual
portfolio turnover rate for the Evergreen VA International Growth Fund generally
will not exceed 200%. A 200% turnover rate is greater than that of most other
investment companies. The portfolio turnover rate experienced by a Fund directly
affects brokerage commissions and other transaction costs which the Fund bears
directly. A high rate of portfolio turnover will increase such costs. It is
contemplated that Lieber & Company, an affiliate of Evergreen Asset and a member
of the New York and American Stock Exchanges, will to the extent practicable
effect substantially all of the portfolio
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transactions for the Funds managed by Evergreen Asset effected on those
exchanges. See the Statement of Additional Information for further information
regarding the brokerage allocation practices of the Funds.
Borrowing. Each Fund may borrow money to the extent permitted by applicable law.
This includes borrowings from banks as a temporary measure for extraordinary or
emergency purposes. The proceeds from borrowings may be used to facilitate
redemption requests which might otherwise require the untimely disposition of
portfolio securities. The Funds will not engage in leveraging. The specific
limits and other terms applicable to borrowing by each Fund are set forth in the
Statement of Additional Information.
Lending of Portfolio Securities. In order to generate income and to offset
expenses, the Funds may lend portfolio securities to brokers, dealers and other
financial institutions. Each Fund's investment adviser will monitor the
creditworthiness of such borrowers. Loans of securities by the Funds, if and
when made, must be collateralized by cash or U.S. Government securities that are
maintained at all times in an amount equal to at least 100% of the current
market value of the securities loaned, including accrued interest. While such
securities are on loan, the borrower will pay a Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby increasing its return. Any gain or loss in the market price of the
loaned securities which occurs during the term of the loan would affect a Fund
and its investors. A Fund has the right to call a loan and obtain the securities
loaned at any time on notice of not more than five business days. A Fund may pay
reasonable fees in connection with such loans. Lending portfolio securities
involves risks of delay in recovery of the loaned securities or, in some cases,
loss of rights in the collateral should the borrower fail financially.
Illiquid Securities. The Funds may invest up to 15% of their net assets in
illiquid securities and other securities which are not readily marketable,
including repurchase agreements with maturities longer than seven days.
Securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, which have been determined to be liquid, will not be considered by each
Fund's investment adviser to be illiquid or not readily marketable and,
therefore, are not subject to the aforementioned 15% limit. The inability of a
Fund to dispose of illiquid or not readily marketable investments readily or at
a reasonable price could impair the Fund's ability to raise cash for redemptions
or other purposes. The liquidity of securities purchased by a Fund which are
eligible for resale be monitored by each Fund's investment adviser, on an
ongoing basis, subject to the oversight
<PAGE>
of the Trustees. In the event that such a security is deemed to be no longer
liquid, a Fund's holdings will be reviewed to determine what action, if any, is
required to ensure that the retention of such security does not result in a Fund
having more than 15% of its assets invested in illiquid or not readily
marketable securities.
Repurchase Agreements. Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System, including a Fund's custodian or
primary dealers in U.S. Government securities. A repurchase agreement is an
arrangement pursuant to which a buyer purchases a security and simultaneously
agrees to resell it to the vendor at a price that results in an agreed-upon
market rate of return which is effective for the period of time (which is
normally one to seven days, but may be longer) the buyer's money is invested in
the security. The arrangement results in a fixed rate of return that is not
subject to market fluctuations during the holding period. A Fund requires
continued maintenance of collateral with its custodian in an amount at least
equal to the repurchase price (including accrued interest). In the event a
vendor defaults on its repurchase obligation, a Fund might suffer a loss to the
extent that the proceeds from the sale of the collateral were less than the
repurchase price. If the vendor becomes the subject of bankruptcy proceedings, a
Fund might be delayed in selling the collateral. Each Fund's investment adviser
will review and continually monitor the creditworthiness of each institution
with which a Fund enters into a repurchase agreement to evaluate these risks.
Reverse Repurchase Agreements. Each Fund may borrow money by entering into a
"reverse repurchase agreement" by which it agrees to sell portfolio securities
to financial institutions such as banks and broker-dealers and to repurchase
them at a mutually agreed upon date and price, for temporary or emergency
purposes. At the time a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account cash, U.S. Government securities or
liquid high grade debt obligations having a value at least equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the repurchase price of those securities.
When-Issued Securities. Each Fund may purchase securities on a when-issued
basis. In the event securities are purchased on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield), a Fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a Fund purchases
<PAGE>
securities on a when-issued basis, it assumes the risks of ownership at the time
of purchase, not at the time of receipt. Failure of the issuer to deliver a
security purchased on a when-issued basis may result in the Fund incurring a
loss or missing an opportunity to make an alternative investment. Commitments to
purchase when-issued securities will not exceed 25% (except for Evergreen VA
International Growth where there is no limit) of a Fund's total assets. A Fund
will maintain cash or liquid high grade debt obligations in a segregated account
with its custodian in an amount equal to such commitments. No Fund will purchase
when-issued securities for speculative purposes, but only in furtherance of its
investment objectives. Evergreen VA Strategic Income Fund currently does not
intend to invest more than 5% of its total assets in when-issued transactions.
Securities of Other Investment Companies. Each Fund may invest in the securities
of other open-end investment companies that have investment objectives and
policies similar to its own or which are, in the opinion of each Fund's
investment adviser, suitable short-term investment vehicles. Each Fund's
investment adviser will waive its investment advisory fee on assets invested by
a Fund in securities of other open-end investment companies. In addition, in
order to invest in certain foreign securities, Evergreen VA International Growth
Fund may invest in the securities of closed-end investment companies. As a
shareholder of another investment company, the Fund would pay its portion of the
other investment company's expenses. These expenses would be in addition to the
expenses that the Fund currently bears concerning its own operations and may
result in some duplication of fees. Any investment by a Fund in the securities
of other investment companies will be subject to the limitations on such
investments contained in the Investment Company Act of 1940, as amended ("1940
Act").
American and European Depositary Receipts. All Funds except Evergreen VA Fund
may purchase foreign securities in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") or other securities convertible into securities of corporations in
which the Funds are permitted to invest pursuant to their respective investment
objectives and policies. These securities may not necessarily be denominated in
the same currency into which they may be converted. ADRs are receipts typically
issued by a United States bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe by banks or depositories which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in United
States securities markets and EDRs, in bearer form, are designed for use in
European securities markets.
<PAGE>
Forward Commitments. Each Fund may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account, cash or high-grade debt obligations in an amount sufficient
to meet the purchase price, or if it enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves and involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, which risk is in addition
to the risk of decline in value of the Fund's other assets. Where such purchases
are made through dealers, the Fund relies on the dealer to consummate the sale.
The dealer's failure to do so may result in the loss to the Fund of an
advantageous yield or price.
Hedging Techniques
In addition to making investments directly in securities, the Funds
may, to the extent provided below, write covered put and call options and hedge
their investments by purchasing options and engaging in transactions in futures
contracts and related options. The investment adviser to the Evergreen VA Growth
and Income Fund and Evergreen VA Small Cap Equity Income Fund does not currently
intend to write covered put or call options, purchase options or engage in
transactions in futures contracts and related options, but may do so in the
future. The Funds may engage in foreign currency exchange transactions to
protect against changes in future exchange rates.
Writing Options. Each Fund other than Evergreen VA Foundation Fund may write
covered call options and each Fund other than Evergreen VA Foundation Fund,
Evergreen VA Growth and Income Fund and Evergreen VA Small Cap Equity Income
Fund may write covered put options on certain portfolio securities in an attempt
to earn income and realize a higher return on their portfolios. A call option
gives the purchaser of the option the right to buy a security from the writer at
the exercise price at any time during the option period. With respect to
Evergreen VA Growth and Income Fund and Evergreen VA Small Cap Equity Income
Fund, an option may not be written if, afterwards, securities comprising more
than 5% of the market value of a Fund's equity securities would be subject to
call options. A Fund realizes income from the premium paid to it in exchange for
writing the call option. Once it has written a call option on a portfolio
security and until the expiration of such option, a Fund forgoes the opportunity
to profit from increases in the market price of such security in excess of the
exercise price of the call option. Should the price of the security on which a
call has been written decline, a Fund bears the risk of loss, which would be
offset to the extent the Fund has received premium income. A Fund will only
write
<PAGE>
"covered" options traded on recognized securities exchanges. An option will be
deemed covered when a Fund either owns the security (or securities convertible
into such security) on which the option has been written in an amount sufficient
to satisfy the obligations arising under a call option; or (ii) in the case of
call and put options, the Fund's custodian maintains cash or high-grade liquid
debt securities belonging to the Fund in an amount not less that the amount
needed to satisfy the Fund's obligations with respect to options written on
securities it does not own. A "closing purchase transaction" may be entered into
with respect to a call or put option written by a Fund for the purpose of
closing its position. The Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option may
be offset in whole or in part by unrealized appreciation of the underlying
security owned by the Fund.
Purchasing Put and Call Options on Securities. Each Fund other than Evergreen VA
Foundation Fund may purchase put options to protect its portfolio holdings in an
underlying security against a decline in market value. This protection is
provided during the life of the put option since the Fund, as holder of the put,
is able to sell the underlying security at the exercise price regardless of any
decline in the underlying security's market price. For the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, any profit which the
Fund might otherwise have realized on the underlying security will be reduced by
the premium paid for the put option and by transaction costs.
A Fund other than Evergreen VA Foundation Fund may also purchase a call
option to hedge against an increase in price of a security that it intends to
purchase. This protection is provided during the life of the call option since
the Fund, as holder of the call, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. For the purchase of a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. By using call options in this manner, any
profit which the Fund might have realized had it bought the underlying security
at the time it purchased the call option will be reduced by the premium paid for
the call option and by transaction costs.
<PAGE>
Futures, Options and Other Derivative Instruments. In addition to
writing covered call and put options, a Fund may purchase and sell various
financial instruments ("Derivative Instruments") such as financial futures
contracts (including interest rate, index and foreign currency futures
contracts), options (such as options on securities, indices, foreign currencies
and futures contracts), forward currency contracts and interest rate, equity
index and currency swaps, caps, collars and floors. The index Derivative
Instruments the Fund may use may be based on indices of U.S. or foreign equity
or debt securities. These Derivative Instruments may be used, for example, to
preserve a return or spread, to lock in unrealized market value gains or losses,
to facilitate or substitute for the sale or purchase of securities, to manage
the duration of securities, to alter the exposure of a particular investment or
portion of the Fund's portfolio to fluctuations in interest rates or currency
rates, to uncap a capped security or to convert a fixed rate security into a
variable rate security or a variable rate security into a fixed rate security.
A Fund's ability to use these instruments may be limited by market
conditions, regulatory limits and tax considerations. A Fund might not use any
of these strategies, and there can be no assurance that any strategy that is
used will succeed. See the Statement of Additional Information for more
information regarding these instruments and the risks relating thereto.
Risks of Derivative Instruments. The use of Derivative Instruments, including
written put and call options, involves special risks, including: (1) the lack
of, or imperfect, correlation between price movements of the Fund's current or
proposed portfolio investments that are the subject of the transactions as well
as price movements of the Derivative Instruments involved in the transaction;
(2) possible lack of a liquid secondary market for any particular Derivative
Instrument at a particular time; (3) the need for additional portfolio
management skills and techniques; (4) losses due to unanticipated market price
movements; (5) the fact that, while such strategies can reduce the risk of loss,
they can also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in portfolio investments; (6) incorrect
forecasts by a Fund's investment adviser concerning interest or currency
exchange rates or direction of price fluctuations of the investment that is the
subject of the transaction, which may result in the strategy being ineffective;
(7) loss of premiums paid by the Fund on options it purchases; and (8) the
possible inability of the Fund to purchase or sell a portfolio security at a
time when it would otherwise be favorable for it to do so, or the need to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate
<PAGE>
securities in connection with such transactions and the possible inability of
the Fund to close out or liquidate its positions.
A Fund's investment adviser may use Derivative Instruments, including
written put and call options, for hedging purposes (i.e. by paying a premium or
foregoing the opportunity for profit in return for protection against downturns
in markets generally or the prices of individual securities or currencies) and
also may use Derivative Instruments to try to enhance the return characteristics
of a Fund's portfolio of investments (i.e. by receiving premiums in connection
with the writing of options and thereby accepting the risk of downturns in
markets generally or the prices of individual securities or currencies or by
paying premiums with the hope that the underlying Derivative Instruments will
appreciate). The use of Derivative Instruments for hedging purposes or to
enhance a Fund's return characteristics can increase investment risk. If a
Fund's investment adviser judges market conditions incorrectly or employs a
strategy that does not correlate well with the Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the volatility of
a Fund and may involve a small investment of cash relative to the magnitude of
the risk assumed, resulting in leverage. In addition, these techniques could
result in a loss if the counterparty to the transaction does not perform as
promised or if there is not a liquid secondary market to close out a position
that the Fund has entered into. Options and futures transactions may increase
portfolio turnover rates, which would result in greater commission expenses and
transaction costs.
Foreign Currency Transactions. The Funds may enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange contracts
("forward contracts"). A Fund may also enter into forward foreign currency
exchange contracts to protect Fund assets denominated in a foreign currency
against adverse changes in foreign currency exchange rates or exchange control
regulations. Such changes could unfavorably affect the value of Fund assets
which are denominated in foreign currencies, such as foreign securities or funds
deposited in foreign banks, as measured in U.S. dollars. The use of forward
contracts for hedging purposes may limit any potential gain that might result
from a relative increase in the value of such currencies and might, in certain
cases, result in losses to the Fund.
Forward Foreign Currency Exchange Contracts. A forward contract is an obligation
to purchase or sell an amount of a particular currency at a specific price and
on a future date agreed upon by
<PAGE>
the parties. Generally, no commission charges or deposits are involved. At the
time a Fund enters into a forward contract, Fund assets with a value equal to
the Fund's obligation under the forward contract are segregated and are
maintained until the contract has been settled. The Funds will not enter into a
forward contract with a term of more than one year. In addition to forward
contracts entered into for hedging purposes, the Funds will generally enter into
a forward contract to provide the proper currency to settle a securities
transaction at the time the transaction occurs ("trade date"). The period
between trade date and settlement date will vary between 24 hours and 60 days,
depending upon local custom.
As described above, a Fund may enter into forward contracts in
primarily two circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transaction, the Fund
will be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when a Fund's investment adviser believes that the currency of
a particular foreign country may suffer a decline against the U.S. dollar, the
Fund may enter into a forward contract to sell, for a fixed amount of dollars,
the amount of foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency. The precise
matching of the forward contract amount and the value of such securities
denominated in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The Funds do not intend to enter into
such forward contracts under this second circumstance on a regular or continuous
basis.
In the second circumstance, a Fund's custodian will segregate cash or
liquid high-grade debt securities belonging to the Fund in an amount not less
than the value of the assets committed to forward foreign currency contracts
entered into under such transactions. If the value of the securities segregated
declines, additional cash or debt securities will be added on a daily basis
(i.e. marked to market) so that the segregated amount will not be less than the
amount of the Fund's commitments with respect to such contracts.
<PAGE>
Hedging/Cross Hedging. A cross hedge is accomplished by entering into a forward
contract or other arrangement with respect to one foreign currency for the
purpose of hedging against a possible decline in the value of another foreign
currency in which certain of the Fund's portfolio instruments are denominated.
The Funds' investment advisers may cause a Fund to enter into a cross hedge,
rather than hedge directly, in instances where (i) the rates for forward
contracts, options, futures contract or options on futures contracts relating to
the currency in which the cross hedge is effected are more favorable than rates
for similar instruments denominated in the currency that is to be hedged, and
(ii) there is a high degree of correlation between the two currencies with
respect to their movement against the U.S. dollar. Cross hedges may be effected
using the various hedging instruments described below. A cross hedge cannot
protect against exchange rate risks perfectly, and if a Fund's investment
adviser is incorrect in its judgment of future exchange rate relationships, the
Fund could be in a less advantageous position than if such a hedge had not been
established.
Options on Foreign Currencies. Evergreen VA Global Leaders Fund, Evergreen VA
Strategic Income Fund, Evergreen VA Aggressive Growth Fund, Evergreen VA Small
Cap Equity Income Fund and Evergreen VA International Growth Fund may also
purchase foreign currency put options. A put option gives the holder, upon
payment of a premium, the right to sell a currency at the exercise price until
the expiration of the option and serves to ensure against adverse currency price
movements in the underlying portfolio assets denominated in that currency.
Exchange listed options on seven major currencies are traded in the U.S. In
addition, several major U.S. investment firms make markets in unlisted options
on foreign currencies. Such unlisted options may be available with respect to a
wide range of foreign currencies than listed options and may have more flexible
terms. Unlisted foreign currency options are generally less liquid than listed
options and involve the credit risks associated with the individual issuer. No
more than 5% of a Fund's net assets may be represented by premiums paid by the
Fund with respect to options on foreign currencies outstanding at any one time.
Furthermore, the market value of unlisted options on foreign currencies will be
included with other illiquid assets held by the Fund for purposes of the 15%
limit on such assets.
The Funds may write a call option on a foreign currency only in
conjunction with a purchase of a put option on that currency. A call option
written by a Fund gives the purchaser, upon payment of a premium, the right to
purchase from the Fund a currency at the exercise price until the expiration of
the option. Writing call options in this manner is designed to reduce the cost
of
<PAGE>
downside currency protection but has the effect of limiting currency
appreciation potential.
Mortgage-Backed and Asset-Backed Securities
Mortgage-Backed Securities. Evergreen VA Strategic Income Fund may invest in
mortgage-backed securities, which are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term mortgage-backed securities includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations.
There are currently three basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") (securities issued by GNMA, but not those issued by FNMA
or FHLMC, are backed by the "full-faith and credit" of the U.S.); (ii) those
issued by private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without a government guarantee but usually having
some form of private credit enhancement.
Evergreen VA Strategic Income Fund will invest in mortgage pass-through
securities representing participation interests in pools of residential mortgage
loans originated by governmental or private lenders. Such securities, which are
ownership interests in the underlying mortgage loans, differ from conventional
debt securities, which provide for periodic payment of interest in fixed amounts
(usually semi-annually) with principal payments at maturity or on specified call
dates. Mortgage pass-through securities provide for monthly payments that are a
"pass through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans (net
of any fees paid to the guarantor of such mortgage loans), net of any fees paid
to the guarantor of such securities and the servicers of the underlying mortgage
loans.
Evergreen VA Strategic Income Fund may also invest in fixed rate and
adjustable rate collateralized mortgage obligations ("CMOs"), including CMOs
with rates that move inversely to market rates that are issued by and guaranteed
as to principal and interest by the U.S. Government, its agencies or
instrumentalities. The principal government issuer of CMOs is
<PAGE>
FNMA. In addition, FHLMC issues a significant number of CMOs. The Fund will not
invest in CMOs that are issued by private issuers. CMOs are debt obligations
collateralized by mortgage securities in which the payment of the principal and
interest is supported by the credit of, or guaranteed by, the U.S. Government or
an agency or instrumentality of the U.S. Government. The secondary market for
CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying mortgage securities used as collateral to create
classes with different interest rates, maturities and payment schedules. Instead
of interest and principal payments on the underlying mortgage securities being
passed through or paid pro rata to each holder (e.g., the Fund), each class of a
CMO is paid from and secured by a separate priority payment of the cash flow
generated by the pledged mortgage securities.
In addition to the mortgage-backed securities described above,
Evergreen VA Strategic Income Fund may invest in asset-backed securities
representing underlying interests in loans or other assets such as credit cards,
automobile loans, leases and industrial plant and equipment. These include
equipment trust certificates, which are a mechanism for financing the purchase
of transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.
SPECIAL RISK CONSIDERATIONS
Fixed Income Investments. Investments by the Funds in fixed income securities
are subject to a number of risks. For example, changes in economic conditions
could result in the weakening of the capacity of the issuers of such securities
to make principal and interest payments, particularly in the case of issuers of
non-investment grade fixed income securities. In addition, the market value of
fixed-income securities in a Fund's portfolio can be expected to vary inversely
to changes in prevailing interest rates. In the event there is a downgrading in
the rating of a fixed income security held in a Fund's portfolio, the Fund may
continue to hold the security if such action is deemed to be in the best
interests of the Fund and its shareholders.
Investment in Small Companies. Evergreen VA Fund, Evergreen VA Growth and Income
Fund, Evergreen VA Foundation Fund and Evergreen VA International Growth Fund
may invest from time to time, and Evergreen VA Aggressive Growth Fund and
Evergreen VA Small Cap Equity Income Fund will invest in securities of
little-known, relatively small and special situation companies. Investments in
such companies tend to be speculative and volatile. A lack of management depth
in such companies could
<PAGE>
increase the risks associated with the loss of key personnel. Also, the material
and financial resources of such companies may be limited, with the consequence
that funds or external financing necessary for growth may be unavailable. Such
companies may also be involved in the development or marketing of new products
or services for which there are no established markets. If projected markets do
not materialize or only regional markets develop, such companies may be
adversely affected or be subject to the consequences of local events. Moreover,
such companies may be insignificant factors in their industries and may become
subject to intense competition from larger companies. Securities of small and
special situation companies in which the Funds invest will frequently be traded
only in the over-the-counter market or on regional stock exchanges and will
often be closely held. Securities of this type may have limited liquidity and be
subject to wide price fluctuations. As a result of the risk factors described
above, the net asset value of each Fund's shares can be expected to vary
significantly.
Investment in Foreign Securities. Investing in non-U.S. securities involves
additional risks not normally associated with domestic investments. In an
attempt to reduce some of these risks, each Fund except Evergreen VA Fund may
diversify its investments broadly among foreign countries which may include both
developed and developing countries. With respect to Evergreen VA Global Leaders
Fund and Evergreen VA International Growth Fund at least three different
countries will always be represented.
Foreign securities are denominated or traded in foreign currencies.
Therefore, the value in U.S. dollars of a Fund's assets and income may be
affected by changes in exchange rates and regulations. Although the Funds value
their assets daily in U.S. dollars, they will not convert their holdings of
foreign currencies to U.S. dollars daily. When a Fund converts its holdings to
another currency, it may incur conversion costs. Foreign exchange dealers
realize a profit on the difference between the prices at which such dealers buy
and sell currencies.
Evergreen VA Strategic Income Fund and Evergreen VA International
Growth Fund may also invest in debt obligations issued or guaranteed by foreign
corporations, certain supranational entities (such as the World Bank) and
foreign governments, their agencies and instrumentalities, and Evergreen VA
Strategic Income Fund may invest in debt obligations issued by U.S. corporations
denominated in non-U.S. currencies.
To the extent that securities purchased by the Funds are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Funds' net asset
<PAGE>
values; the value of interest earned; gains and losses realized on the sale of
securities; and net investment income and capital gains, if any, to be
distributed to shareholders by a Fund. If the value of a foreign currency rises
against the U.S. dollar, the value of a Fund's assets denominated in that
currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of a Fund's assets denominated in
that currency will decrease. The performance of the Funds will be measured in
U.S. dollars, the base currency for the Funds.
Securities markets of foreign countries in which the Fund 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 valuations 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) transactions costs, including brokerage charges and custodian charges
associated with holding foreign securities, may be higher; (9) the settlement
period for foreign securities, which are sometimes longer than those for
securities of U.S. issuers, may affect portfolio liquidity. These different
settlement practices may cause missed purchasing opportunities and/or loss of
interest on money market and debt investments; (10) 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.
Lower-Rated Securities. Evergreen VA Growth and Income Fund, Evergreen VA
Strategic Income Fund and Evergreen VA International Growth Fund may invest a
portion of their assets in securities rated below Baa by Moody's or BBB by S&P
(commonly known as "junk
bonds").
<PAGE>
Lower-rated and comparable unrated securities (collectively referred to
in this section as "lower-rated securities") will likely have some quality and
protective characteristics that, in the judgment of the rating organization, are
out-weighed by large uncertainties or major risk exposures to adverse
conditions; and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation.
While the market values of lower-rated securities tend to react less to
fluctuations in interest rate levels than the market values of higher rated
securities, the market values of certain lower-rated securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower-rated securities
generally present a higher degree of credit risk. Issuers of lower- rated
securities are often highly leveraged and may not have more traditional methods
of financing available to them so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater because lower-rated securities generally are unsecured
and frequently are subordinated to the prior payment of senior indebtedness. A
Fund may incur additional expenses to the extent that it is required to seek
recovery upon a default in the payment of principal or interest on its portfolio
holdings. The existence of limited markets for lower-rated securities may
diminish a Fund's ability to obtain accurate market quotations for purposes of
valuing such securities and calculating its net asset value. For additional
information about the possible risks of investing in junk bonds, see "Investment
Objectives and Policies -- Junk Bonds" in the Statement of Additional
Information.
Payment-In-Kind Bonds. Evergreen VA Strategic Income Fund and Evergreen VA
International Growth Fund may invest in payment-in-kind bonds. Payment-in-kind
bonds allow the issuer, at its option, to make current interest payments on the
bonds either in cash or in additional bonds. The value of payment-in-kind bonds
is subject to greater fluctuation in response to changes in market interest
rates than bonds which pay interest in cash currently. Payment-in-kind bonds
allow an issuer to avoid the need to generate cash to meet current interest
payments. Accordingly, such bonds may involve greater credit risks than bonds
paying interest currently. Even though such bonds do not pay current interest
income in cash, a Fund is nonetheless required to accrue interest income on such
investments and to distribute such amounts at least annually to shareholders.
Thus, a Fund could be required, at times, to liquidate other investments in
order to satisfy its distribution requirements.
<PAGE>
Zero-Coupon Bonds. Evergreen VA Strategic Income Fund and Evergreen VA
International Growth Fund may invest in zero-coupon bonds. Zero-coupon bonds are
issued at a significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the security. The
value of zero-coupon bonds is subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in cash
currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash
to meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently. Even though such bonds do not
pay current interest in cash, the Fund is nonetheless required to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders. Thus, the Fund could be required, at times, to
liquidate other investments in order to satisfy its distribution requirements.
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MANAGEMENT OF THE FUNDS
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INVESTMENT ADVISERS
The management of each Fund is supervised by the Trustees of the Trust.
Evergreen Asset has been retained by the Trust to serve as investment adviser to
Evergreen VA Fund, Evergreen VA Growth and Income Fund, Evergreen VA Foundation
Fund, Evergreen VA Global Leaders Fund and Evergreen VA Small Cap Equity Income
Fund. Evergreen Asset, with its predecessors, has served as investment adviser
to the Evergreen mutual funds since 1971. Evergreen Asset is a wholly-owned
subsidiary of FUNB. The address of Evergreen Asset is 2500 Westchester Avenue,
Purchase, New York 10577. FUNB is a subsidiary of First Union Corporation
("First Union"), the sixth largest bank holding company in the United States.
Lieber & Company, as described below, provides certain subadvisory services to
Evergreen Asset in connection with its duties as investment adviser to the
Funds.
Keystone has been retained by the Trust to serve as investment adviser
to Evergreen VA Strategic Income Fund and Evergreen VA International Growth
Fund. Keystone succeeded on December 11, 1996 to the advisory business of a
corporation with the same name, but under different ownership, which has
provided investment advisory and management services to investment companies and
private accounts since it was organized in 1932. Keystone is an indirect,
wholly-owned subsidiary of FUNB.
The Capital Management Group of FUNB ("CMG") serves as investment
adviser to Evergreen VA Aggressive Growth Fund.
<PAGE>
First Union is headquartered in Charlotte, North Carolina, and had
approximately $140 billion in consolidated assets as of December 31, 1997. First
Union and its subsidiaries provide a broad range of financial services to
individuals and businesses throughout the United States. CMG manages or
otherwise oversees the investment of over $45 billion in assets belonging to a
wide range of clients, including many of the Evergreen mutual funds.
Evergreen Asset, Keystone and CMG manage each Fund's investments,
provide various administrative services, and supervise each Fund's daily
business affairs, subject to the authority of the Trustees. Evergreen Asset, as
investment adviser to Evergreen VA Fund, Evergreen VA Growth and Income Fund,
Evergreen VA Global Leaders Fund and Evergreen VA Small Cap Equity Income Fund
is entitled to receive from such Funds an annual fee equal to .95 of 1% of
average daily net assets thereof. For the most recent fiscal year Evergreen VA
Fund, Evergreen VA Growth and Income Fund and Evergreen VA Global Leaders Fund
paid .65%, .73% and .95% of their average daily net assets to Evergreen Asset.
As compensation for its services as investment adviser to Evergreen VA
Foundation Fund, Evergreen Asset is entitled to receive an annual fee equal to
.825 of 1% of average daily net assets of such Fund. For the most recent fiscal
year, Evergreen VA Foundation Fund paid .735% of its average daily net assets to
Evergreen Asset. These fees are higher than the rates paid by most other
investment companies, but are not higher than the fees paid by many funds with
similar investment objectives.
Keystone is entitled to receive a fee for its services as investment
adviser to Evergreen VA Strategic Income Fund as follows: 2.0% of gross dividend
and interest income earned by the Fund during each fiscal period; plus 0.45% of
the first $100 million of average daily net assets; 0.40% of the next $100
million; 0.35% of the next $100 million; 0.30% of the next $100 million; 0.25%
of the next $100 million; and 0.20% of amounts over $500 million. For the most
recent fiscal year Keystone waived the investment advisory fee payable by
Evergreen VA Strategic Income Fund. Keystone is entitled to receive a fee for
its services as investment adviser to Evergreen VA International Growth Fund as
follows: 0.75% of the first $200 million of average daily net assets, plus 0.65%
of the next $200 million, plus 0.55% of the next $200 million, plus 0.45% of
amounts over $600 million.
CMG manages investments and supervises the daily business affairs of
Evergreen VA Aggressive Growth Fund and, as compensation therefor, is entitled
to receive an annual fee equal to .60 of 1% of average daily net assets of the
Fund. For the
<PAGE>
most recent fiscal year, Evergreen VA Aggressive Growth Fund paid to CMG .01% of
its average daily net assets.
Each Fund's investment adviser currently voluntarily waives fees and/or
reimburses expenses to limit the Fund's annual operating expenses to 1.00% of
average daily net assets. These voluntary waivers and reimbursements may be
terminated at any time.
ADMINISTRATOR
Evergreen Investment Services, Inc. ("EIS") also serves as
administrator to each Fund and is entitled to receive a fee based on the average
daily net assets of the Fund at a rate based on the total assets of the mutual
funds administered by EIS for which CMG, or Evergreen Asset or Keystone also
serve as investment adviser, calculated in accordance with the following
schedule: .050% of the first $7 billion; .035% on the next $3 billion; .030% on
the next $5 billion; .020% on the next $10 billion; .015% on the next $5
billion; and .010% on assets in excess of $30 billion.
PORTFOLIO MANAGERS
The portfolio manager for Evergreen VA Fund and Evergreen VA Foundation
Fund is Stephen A. Lieber, who is Chairman and Co-Chief Executive Officer of
Evergreen Asset and has been associated with Evergreen Asset and its predecessor
since 1969. Mr. Lieber has served as the portfolio manager of Evergreen
Foundation Fund since its inception in 1990 and as the portfolio manager of
Evergreen Fund since its inception in 1970. The portfolio managers for Evergreen
VA Growth and Income Fund are Stephen A. Lieber and Gary R. Buesser. Mr. Buesser
joined Lieber & Company in 1996 as an analyst. Previously, he was a portfolio
manager/ analyst with Cowen Asset Management and Shearson Lehman Brothers. The
portfolio of Evergreen VA Global Leaders Fund is managed by a committee composed
of portfolio management and analytical personnel employed by Evergreen Asset.
The members of this committee include Stephen A. Lieber and Edwin A. Miska, who
has been an analyst with Evergreen Asset and its predecessor since 1989. Mr.
Lieber and Mr. Miska are responsible for the day to day operations of the Fund
and the Evergreen Global Leaders Fund which commenced operations in 1995.
The portfolio manager for Evergreen VA Small Cap Equity Income Fund is
Nola Maddox Falcone, C.F.A., who is President and Co-Chief Executive Officer of
Evergreen Asset. Ms. Falcone has served as the principal manager of Evergreen
Income and Growth Fund and Evergreen Small Cap Equity Income Fund since 1985 and
1993, respectively.
<PAGE>
Prescott B. Crocker is the portfolio manager of Evergreen VA Strategic
Income Fund. Mr. Crocker is a Senior Vice President, Senior Portfolio Manager
and Head of the High Yield Bond Team at Keystone. Mr. Crocker joined Keystone in
1997. From 1993 until he joined Keystone, Mr. Crocker held various positions at
Boston Security Counsellors, including President and Chief Investment Officer,
and was Managing Director and Portfolio Manager at Northstar Investment
Management. Prior to 1993, Mr. Crocker held various fund management positions at
Colonial Group, Inc. Mr. Crocker has 25 years of experience in fixed income
investment management.
Gilman C. Gunn is the portfolio manager of Evergreen VA International
Growth Fund. Mr. Gunn joined Keystone in 1991 and is currently Senior Vice
President and Chief Investment Officer - International at Keystone. As head of
the International Team he has 24 years of banking and investment experience. Mr.
Gunn currently manages the Evergreen Emerging Markets Growth Fund and the
Evergreen International Growth Fund.
The portfolio manager for Evergreen VA Aggressive Growth Fund is Harold
J. Ireland, Jr., a Vice President of CMG who has been associated with CMG since
1995. Prior to that, Mr. Ireland was a Vice President of Palm Beach Capital
Management, Inc. and served as portfolio manager of Evergreen Aggressive Growth
Fund and such Fund's predecessor, ABT Emerging Growth Fund, since 1985.
SUB-ADVISER
Evergreen Asset has entered into sub-advisory agreements with Lieber &
Company with respect to Evergreen VA Fund, Evergreen VA Growth and Income Fund,
Evergreen VA Foundation Fund, Evergreen VA Global Leaders Fund and Evergreen VA
Small Cap Equity Income Fund which provide that Lieber & Company's research
department and staff will furnish Evergreen Asset with information, investment
recommendations, advice and assistance, and will be generally available for
consultation on each Fund's portfolio. Lieber & Company will be reimbursed by
Evergreen Asset in connection with the rendering of services on the basis of the
direct and indirect costs of performing such services. There is no additional
charge to the Funds for the services provided by Lieber & Company. It is
contemplated that Lieber & Company will, to the extent practicable, effect
substantially all of the portfolio transactions for these Funds on the New York
and American Stock Exchanges. The address of Lieber & Company is 2500
Westchester Avenue, Purchase, New York 10577. Lieber & Company is an indirect,
wholly-owned, subsidiary of First Union.
- -----------------------------------------------------------------
<PAGE>
SALE AND REDEMPTION OF SHARES
- -----------------------------------------------------------------
PARTICIPATING INSURANCE COMPANIES
The Funds were organized to serve as investment vehicles for separate
accounts funding variable annuity ("VA") and variable life insurance ("VLI")
contracts issued by certain life insurance companies ("Participating Insurance
Companies"). The Trust does not currently foresee any disadvantages to the
holders of VA and VLI contracts arising from the fact that the interests of
holders of VA and VLI contracts may differ due to the difference of tax
treatment and other considerations.
Nevertheless, the Trustees have establish procedures for the purpose of
identifying any irreconcilable material conflicts that may arise and to
determine what action, if any, would be taken in response thereto. The VA and
VLI contracts are described in the separate prospectuses issued by the
Participating Insurance Companies. The Trust assumes no responsibility for such
prospectuses.
PURCHASES
Shares of each Fund are sold at net asset value to the separate
accounts of Participating Insurance Companies. All investments in the Trust are
credited to the shareholder's account in the form of full or fractional shares
of the designated Fund (rounded to the nearest 1/1000 of a share). The Trust
does not issue share certificates. Initial and subsequent purchase payments
allocated to a specific Fund are subject to the limits described in the separate
prospectuses issued by the Participating Insurance Companies or in pension and
retirement plan documents.
How the Funds Value Their Shares. The net asset value of shares of a Fund is
calculated by dividing the value of the amount of the Fund's net assets by the
number of outstanding shares. Shares are valued each day the New York Stock
Exchange (the "Exchange") is open as of the close of regular trading (currently
4:00 p.m. Eastern time). The securities in a Fund are valued at their current
market value determined on the basis of market quotations or, if such quotations
are not readily available, such other methods as the Trustees believe would
accurately reflect fair value. Non-dollar denominated securities will be valued
as of the close of the Exchange at the closing price of such securities in their
principal trading markets.
REDEMPTIONS
<PAGE>
The separate accounts of Participating Insurance Companies redeem
shares to make benefit or surrender payments under the terms of the VA or VLI
contract. Redemptions are processed on any day on which the Trust is open for
business and are effected at net asset value next determined after the
redemption order, in proper form, is received by the Trust or its agent. The net
asset value per share of each Fund is determined once daily, as of 4:00 p.m.
Eastern time on each business day the Exchange is open and on such other days as
the Trustees determine, and on any other day during which there is a sufficient
degree of trading in a Fund's portfolio securities that the net asset value of
the Fund is materially affected by changes in the value of portfolio securities.
The Trust may suspend the right of redemption only under the following
unusual circumstances: (1) when the Exchange is closed (other than weekends and
holidays) or trading is restricted; (2) when an emergency exists, making
disposal of portfolio securities or the valuation of net assets not reasonably
practicable; or (3) during any period when the Securities and Exchange
Commission ("SEC") has by order permitted a suspension of redemptions for the
protection of shareholders.
DIVIDENDS
All dividends payable by a Fund are distributed at least annually to
the separate accounts of Participating Insurance Companies and will be
automatically reinvested in additional shares of such Fund. Dividends and other
distributions made by the Funds to such separate accounts are taxable, if at
all, to the Participating Insurance Companies; they are not currently taxable to
the VA or VLI owners.
TAX STATUS
Each Fund is treated as a separate entity for federal income tax
purposes and is not combined with the Trust's other Funds. It is the intention
of each Fund to qualify as a "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), and meet all
other requirements necessary for it to be relieved of federal income taxes on
that part of its net investment income and net capital gains distributed to its
shareholders. Each Fund intends to distribute all of its net investment income
and net capital gains to its shareholders.
For a discussion of the tax consequences of VA or VLI contracts, refer
to the prospectus of the VA or VLI contract offered by the Participating
Insurance Company. VA or VLI contracts purchased through insurance company
separate accounts
<PAGE>
provide for the accumulation of all earnings from interest, dividends, and
capital appreciation without current federal income tax liability to the owner.
Depending on the VA or VLI contract, distributions from the contract may be
subject to ordinary income tax and, in addition, a 10% penalty tax on
distributions before age 59 1/2. Only the portion of a distribution attributable
to income on the investment in the contract is subject to federal income tax.
Investors should consult with competent tax advisers for a more complete
discussion of possible tax consequences in a particular situation.
Section 817(h) of the Code provides that investments of a separate
account underlying a VA or VLI contract (or the investments of a mutual fund,
the shares of which are owned by the VA or VLI separate account) must be
"adequately diversified" in order for the VA or VLI contract to be treated as an
annuity for tax purposes. The Treasury Department has issued regulations
prescribing these diversification requirements. Each Fund intends to comply with
these requirements. If a separate account underlying a VA or VLI contract were
not adequately diversified, the owner of such VA or VLI contract would be
immediately subject to tax on the earnings allocable to the contract. Additional
information about the tax status of the Funds is provided in the Statement of
Additional Information.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Funds. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of their customer. FUNB and
its affiliates are subject to and in compliance with the aforementioned laws and
regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB or its affiliates being prevented
from continuing to perform the services required under the investment advisory
contracts or from acting as agents in connection with the purchase of shares of
the Funds by their customers. If FUNB or its affiliates were prevented from
continuing to provide the services called for
<PAGE>
under the investment advisory agreements, it is expected that the Trustees would
identify, and call upon each Fund's shareholders to approve, new investment
advisers. If this were to occur, it is not anticipated that the shareholders of
any Fund would suffer any adverse financial consequences.
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GENERAL INFORMATION
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CUSTODIAN, AND TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02109 (the "Custodian"), acts as custodian of the assets of the
Trust. Evergreen Service Company, 200 Berkeley Street, Boston, Massachusetts
02116, acts as the transfer agent and dividend disbursing agent for the Trust
and in doing so performs certain bookkeeping, data processing and administrative
services for the Trust and each Fund.
EXPENSES OF THE TRUST
Each Fund bears all expenses of its operations other than those
incurred by Evergreen Asset, CMG and Keystone under their respective investment
advisory agreements, and EIS under its administration agreement with the Trust.
In particular, the Funds pay investment advisory fees, administrative fees,
custodian fees and expenses, legal, accounting and auditing fees, brokerage
fees, interest and taxes, registration fees and expenses, expenses of the
transfer and dividend disbursing agent, the compensation and expenses of
Trustees who are not otherwise affiliated with the Trust, Evergreen Asset, CMG,
Keystone or any of their affiliates, expenses of printing and mailing reports
and notices and proxy material to beneficial shareholders of the Trust, and any
extraordinary expenses. Expenses incurred jointly by the Funds are allocated
among the Funds in a manner determined by the Trustees to be fair and equitable.
The organizational expenses of each of the Funds have been capitalized and will
be amortized during the first five years of the Funds' operations. Such
amortization will reduce the amount of income available for payment as
dividends.
SHAREHOLDER RIGHTS
The Trust is a Delaware business trust organized on December 23, 1997,
and was originally organized as a Massachusetts business trust in 1996. Pursuant
to current interpretations of the 1940 Act, each Participating Insurance Company
will solicit voting instructions from VA or VLI contract owners with respect to
any matters that are presented to a vote of shareholders. On
<PAGE>
any matter submitted to a vote of shareholders, all the shares of the Trust then
issued and outstanding and entitled to vote shall be voted in the aggregate and
not by Fund except for matters concerning only a specific Fund. Certain matters
approved by a vote of shareholders of one Fund of the Trust may not be binding
on a Fund whose shareholders have not approved such matters. The holder of each
share of the Trust shall be entitled to one vote for each full share and a
fractional vote for each fractional share. Shares of one Fund may not bear the
same economic relationship to the Trust as shares of another Fund.
The Trust is not required to hold annual meetings of shareholders and
does not plan to do so. The Trustees may call special meetings of shareholders
for action by shareholder vote as may be required by the 1940 Act or the Trust's
Declaration of Trust. The Trustees will be a self-perpetuating body until fewer
than 50% of the Trustees, then serving as Trustees, are Trustees who were
elected by shareholders. At that time a meeting of shareholders will be called
to elect additional Trustees.
The Declaration of Trust may be amended by a vote of the Trustees;
provided, if any such amendment materially adversely affects the rights of any
shares of any series or any class with respect to matters to which such
amendment is applicable, such amendment shall be subject to approval by holders
of a majority of the outstanding voting securities, as that term is defined in
the 1940 Act, of such series or class. Shares have no pre-emptive or conversion
rights and are fully paid and nonassessable. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
DESCRIPTION OF SHARES
The Declaration of Trust permits the Trustees to establish and
designate series or classes in addition to the Funds. Each share of any series
or class represents an equal proportionate share in the net assets of that
series or class with each other share of that series or class. The Trustees may
divide or combine the shares of any series or class into a greater or lesser
number of shares of that series or class without thereby changing the
proportionate interests in the assets of that series or class. Upon liquidation
of a particular series or class, the shareholders of that series or class shall
be entitled to share pro rata in the net assets of such series or class
available for distribution to shareholders.
Any inquiries regarding the Trust should be directed to the Trust at
the telephone number or address shown on the cover page
<PAGE>
of this Prospectus. All inquiries regarding the VA or VLI contracts should be
directed to the Participating Insurance Company, as indicated in the VA or VLI
prospectus accompanying this Prospectus.
PERFORMANCE
From time to time, the Trust may advertise the "average annual or
cumulative total return" of the Funds and may compare the performance of the
Funds with that of other mutual funds with similar investment objectives as
listed in rankings prepared by Lipper Analytical Services, Inc., or similar
independent services monitoring mutual fund performance, and with appropriate
securities or other relevant indices. The "average annual total return" of a
Fund refers to the average annual compounded rate of return over the stated
period that would equate an initial investment in that Fund at the beginning of
the period to its ending redeemable value, assuming reinvestment of all
dividends and distributions and deduction of all recurring charges. Figures will
be given for the recent one, five and ten year periods and for the life of the
Fund if it has not been in existence for such periods. When considering "average
annual total return" figures for periods longer than one year it is important to
note that a Fund's annual total return for any given year might have been
greater or less than its average for the entire period. "Cumulative total
return" represents the total change in value of an investment in a Fund for a
specified period (again reflecting changes in a Fund's share price and assuming
reinvestment of Fund distributions).
The performance of each Fund will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the Fund's
investments and expenses. Consequently, a Fund's performance figures are
historical and should not be considered representative of the performance of the
Fund for any future period.
Performance Information on Comparable Funds
Evergreen VA Small Cap Equity Income Fund.
Evergreen Asset is the investment adviser to Evergreen Small Cap Equity
Income Fund which is substantially similar to the Trust's Evergreen VA Small Cap
Equity Income Fund, in that it has the same investment objective, investment
policies and restrictions, and is managed using substantially the same
investment strategies and techniques.
The Evergreen VA Small Cap Equity Income Fund commenced
operations on May 1, 1998. Since the Evergreen VA Small Cap
<PAGE>
Equity Income Fund lacks any substantial operating history, along with actual
Fund performance information, information may be included regarding the
historical performance of Evergreen Small Cap Equity Income Fund. Set forth
below is certain performance information regarding Evergreen Small Cap Equity
Income Fund, which has been obtained from Evergreen Asset . During the first
year of Evergreen VA Small Cap Equity Income Fund's operations, it is
anticipated that the total assets of the Fund will be smaller than the total
assets of Evergreen Small Cap Equity Income Fund. As a result, Evergreen VA
Small Cap Equity Income Fund's annual operating expenses, absent waivers of fees
and reimbursement of expenses (which may be terminated at any time), would be
significantly greater than those of Evergreen Small Cap Equity Income Fund. If
the annual operating expenses (absent fee waivers and expense reimbursements) of
Evergreen VA Small Cap Equity Income Fund were borne by Evergreen Small Cap
Equity Income Fund, the average annual total return information set forth below
would have been lower. Investors should not rely on the following financial
information as an indication of the future performance of Evergreen VA Small Cap
Equity Income Fund. Investment results of Evergreen VA Small Cap Equity Income
Fund and Evergreen Small Cap Equity Income Fund are unlikely to be identical due
to the relative asset sizes of the Funds and differing amounts of cash available
for investment.
Average Annual Total Return of Comparable Fund (1)
<TABLE>
<CAPTION>
1 Year From 10/1/93
Ended (Inception)
to
7/31/98 7/31/98
--------- ------------
<S> <C> <C>
Evergreen Small Cap Equity Income 15.62%
Fund
(Class Y shares) 3.57%
- --------------
</TABLE>
(1) Reflects waiver of all or a portion of the advisory fees and
reimbursements of other expenses. Without such waivers and
reimbursements, the average annual total return during the periods
would have been lower.
Evergreen VA International Growth Fund.
<PAGE>
Keystone is the investment adviser to Evergreen International Growth
Fund which is substantially similar to the Trust's Evergreen VA International
Growth Fund in that it has the same investment objectives, investment policies
and restrictions, and is managed using substantially the same investment
strategies and techniques.
As of the date of this amended Prospectus, Evergreen VA International
Growth Fund had not commenced operations. Since Evergreen VA International
Growth Fund lacks any substantial operating history, along with actual Fund
performance information, if any, information may be included regarding the
historical performance of Evergreen International Growth Fund. Set forth below
is certain performance information regarding Evergreen International Growth
Fund, which has been obtained from Keystone . During the first year of Evergreen
VA International Growth Fund's operations, it is anticipated that the total
assets of the Fund will be smaller than the total assets of Evergreen
International Growth Fund. As a result, Evergreen VA International Growth Fund's
annual operating expenses, absent fee waivers and expense reimbursements (which
may be terminated at any time), would be significantly greater than those of
Evergreen International Growth Fund. If the annual operating expenses (absent
fee waivers and expense reimbursements) of Evergreen VA International Growth
Fund were borne by Evergreen International Growth Fund, the average annual total
return information set forth below would have been lower. Investors should not
rely on the following financial information as an indication of the future
performance of Evergreen VA International Growth Fund. Investment results of
Evergreen VA International Growth Fund and Evergreen International Growth Fund
are unlikely to be identical due to the relative asset sizes of the Funds and
differing amounts of cash available for investment.
Average Annual Total
Return of Comparable Fund
<TABLE>
<CAPTION>
<PAGE>
1 Year 5 Years 10 Years
Ended Ended Ended
10/31/97 10/31/97 10/31/97
-------- -------- --------
<S> <C> <C> <C>
Evergreen International
Growth Fund
Class B shares (with
contingent deferred 12.69% 11.58% 6.48%
sales charge)
Class B shares (without
contingent deferred 15.69% 11.58% 6.48%
sales charge)
---------------------
</TABLE>
The calculations of total return assume the reinvestment of all
dividends and capital gains distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholders accounts. The above tables do not reflect charges and deductions
which are, or may be, imposed at the separate account level under the VA or VLI
contracts. Such charges and deductions would result in performance lower than
that shown above.
GENERAL
Independent Auditors. KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, serves as the independent public accountants of the Trust.
Legal Counsel. Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W.,
Washington, D.C. 20036, acts as counsel for the Trust.
Year 2000 Risks. Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Funds' investment advisers and the
Funds' other service providers do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Funds' investment advisers are
taking steps to address the Year 2000 Problem with respect to the computer
systems that they use and to obtain assurances that comparable steps are being
taken by the Funds' other major service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact on the Funds.
<PAGE>
Additional Information. This amended Prospectus and the Statement of Additional
Information, which has been incorporated by reference herein, do not contain all
the information set forth in the Registration Statement filed by the Trust with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the offices of the SEC in Washington, D.C.
<PAGE>
Investment Advisers
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase,
New York 10577 Evergreen VA Fund Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund Evergreen VA Global Leaders Fund Evergreen
VA Small Cap Equity Income Fund
Capital Management Group of First Union National Bank, 210
South College Street, Charlotte, North Carolina 28288
Evergreen VA Aggressive Growth Fund
Keystone Investment Management Company, 200 Berkeley Street,
Boston, Massachusetts 02116-5034
Evergreen VA Strategic Income Fund
Evergreen VA International Growth Fund
Custodian
State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827
Transfer Agent
Evergreen Service Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
Legal Counsel
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W.,
Washington, D.C. 20036
Independent Auditors
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts
02110
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998, as amended August 10, 1998
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116
800-633-2700
Evergreen VA Fund ("Evergreen"), Evergreen VA Growth and Income Fund
("Growth and Income"), Evergreen VA Foundation Fund ("Foundation"), Evergreen VA
Global Leaders Fund ("Global Leaders"), Evergreen VA Aggressive Growth Fund
("Aggressive") Evergreen VA Strategic Income Fund ("Strategic Income"),
Evergreen VA Small Cap Equity Income Fund ("Small Cap") and Evergreen VA
International Growth Fund ("International Growth").
This Statement of Additional Information pertains to the Funds listed
above. It is not a prospectus and should be read in conjunction with the
Prospectus dated May 1, 1998, as amended August 10, 1998 for the Fund in which
you are making or contemplating an investment. The Funds are offered to separate
accounts funding variable annuity and variable life insurance contracts issued
by life insurance companies ("Participating Insurance Companies"). Copies of the
Prospectus may be obtained without charge by calling the number listed above.
<PAGE>
TABLE OF CONTENTS
FUND INVESTMENTS..........................................................3
GENERAL INFORMATION..............................................3
FUNDAMENTAL POLICIES............................................29
INVESTMENT GUIDELINES...........................................30
MANAGEMENT OF THE TRUST..................................................31
PRINCIPAL HOLDERS OF FUND SHARES.........................................35
INVESTMENT ADVISORY SERVICES.............................................38
ADMINISTRATIVE SERVICE PROVIDERS...................................... 41
BROKERAGE................................................................41
ADDITIONAL TAX INFORMATION............................................ 44
NET ASSET VALUE..........................................................46
ADDITIONAL SALE AND REDEMPTION ....................................... 48
INFORMATION.................................................. 48
GLASS STEAGALL ACT.......................................................48
GENERAL INFORMATION ABOUT THE FUNDS................................... 49
CUSTODIAN.................................................... 49
TRANSFER AGENT..................................................49
CAPITALIZATION AND ORGANIZATION..........................................49
PERFORMANCE INFORMATION............................................... 51
YIELD CALCULATIONS..............................................51
NON-STANDARDIZED PERFORMANCE................................. 53
ADDITIONAL INFORMATION...................................................53
INDEPENDENT ACCOUNTANTS..................................................53
LEGAL COUNSEL......................................................... 54
FINANCIAL STATEMENTS.................................................. 54
APPENDIX A............................................................ 55
<PAGE>
FUND INVESTMENTS
GENERAL INFORMATION
The investment objective of each Fund and a description of the
securities in which each Fund may invest is set forth under "Description of the
Funds - "Investment Objectives and Policies" in the Prospectus. The Funds'
investment objectives are nonfundamental and may be changed without the approval
of shareholders. Shareholders would be notified prior to the implementation of
any such change. The following expands upon the discussion in the Prospectus
regarding certain investments of each Fund.
U.S. Government Securities (All Funds)
The types of U.S. government securities in which the Funds
may invest generally include direct obligations of the U.S.
Treasury such as U. S. Treasury bills, notes and bonds and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
(i) the full faith and credit of the U.S. Treasury;
(ii) the issuer's right to borrow from the U.S. Treasury;
(iii) the discretionary authority of the U.S. government to
purchase certain obligations of agencies or instrumentalities; or
(iv) the credit of the agency or instrumentality issuing
the obligations.
Examples of agencies and instrumentalities that may not always
receive financial support from the U.S. government are:
(i) Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation ("FHLMC");
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association
Brady Bonds (Strategic Income and International Growth).
Each Fund may also invest in Brady Bonds. Brady Bonds are
created through the exchange of existing commercial bank loans to
<PAGE>
foreign entities for new obligations in connection with debt restructurings
under a plan introduced by former U.S. Secretary of the Treasury, Nicholas F.
Brady (the "Brady Plan"). Brady Bonds have been issued only recently, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations that have the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed rate bonds, is equal to at least one
year of rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments, but generally are not collateralized.
Brady Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Zero Coupon "Stripped" and Payment-in-Kind Bonds (Strategic
Income and International Growth)
Both Funds may invest in zero-coupon and pay-in-kind securities. These
securities are debt securities that do not make regular cash interest payments.
Zero-coupon securities are sold at a deep discount to their face value.
Pay-in-kind securities pay interest through the issuance of additional
securities or, at
<PAGE>
the option of the issuer, cash. Because such securities do not pay current cash
income, the price of these securities can be volatile when interest rates
fluctuate. In order to continue to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended, the Fund may be required to
distribute a portion of such discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
In general, owners of zero coupon or payment-in-kind bonds have
substantially all the rights and privileges of owners of the underlying coupon
obligations or principal obligations. Owners of zero coupon or payment-in-kind
bonds have the right upon default on the underlying coupon obligations or
principal obligations to proceed directly and individually against the issuer
and are not required to act in concert with other holders of zero coupon bonds.
Restricted and Illiquid Securities (All Funds)
Each Fund may invest in restricted and illiquid securities. The ability
of the Board of Trustees ("Trustees") to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange Commission
("SEC") Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for sale under the
Rule. The Funds which invest in Rule 144A securities believe that the Staff of
the SEC has left the question of determining the liquidity of all restricted
securities (eligible for resale under the Rule) for determination by the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
(iii) dealer undertakings to make a market in the security;
and
(iv) the nature of the security and the nature of the marketplace
trades.
<PAGE>
Restricted securities would generally be acquired either from
institutional investors who originally acquired the securities in private
placements or directly from the issuers of the securities in private placements.
Restricted securities and securities that are not readily marketable may sell at
a discount from the price they would bring if freely marketable.
Lending of Portfolio Securities (All Funds)
Each Fund may lend its portfolio securities to generate income and to
offset expenses. The collateral received when a Fund lends portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the lending Fund.
During the time portfolio securities are on loan, the borrower pays the Fund any
dividends or interest paid on such securities. Loans are subject to termination
at the option of the Fund or the borrower. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent of
collateral to the borrower or placing broker. A Fund does not have the right to
vote securities on loan, but would terminate the loan and regain the right to
vote if that were considered important with respect to the investment.
Reverse Repurchase Agreements (All Funds)
The Funds may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase agreement, a
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
<PAGE>
Options and Futures Transactions (All Funds)
To the extent provided in the Prospectus, each Fund may seek to
increase the current return on its investments by writing covered call or put
options. In addition, a Fund may at times seek to hedge against either a decline
in the value of its portfolio securities or an increase in the price of
securities which its investment adviser plans to purchase through the writing
and purchase and sale of options including options on stock indices and the
purchase and sale of futures contracts and related options. Expenses and losses
incurred as a result of such hedging strategies will reduce a Fund's current
return.
The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices and
U.S. government securities are relatively new and still developing. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore no assurance can be given that a Fund
will be able to utilize these instruments effectively for the purposes stated
below.
Writing Covered Options on Securities. A Fund may write covered call
options and covered put options on optionable securities of the types in which
it is permitted to invest from time to time as its investment adviser determines
is appropriate in seeking to attain the Fund's investment objective. Call
options written by a Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price; put options give the holder
the right to sell the underlying security to the Fund at a stated price.
A put option would be considered "covered" if the Fund owns an option
to sell the underlying security subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. A call option is covered if the Fund owns
or has the right to acquire the underlying securities subject to the call option
(or comparable securities satisfying the cover requirements of securities
exchanges) at all times during the option period or the Fund maintains in a
segregated account at the Fund's custodian bank cash or short-term U.S.
government securities with a value equal to or greater than the Fund's
obligation under the option. A Fund may also write combinations of covered puts
and covered calls on the same underlying security.
A Fund will receive a premium from writing an option, which increases
the Fund's return in the event the option expires
<PAGE>
unexercised or is terminated at a profit. The amount of the premium will
reflect, among other things, the relationship of the market price of the
underlying security to the exercise price of the option, the term of the option,
and the volatility of the market price of the underlying security. By writing a
call option, a Fund will limit its opportunity to profit from any increase in
the market value of the underlying security above the exercise price of the
option. By writing a put option, a Fund will assume the risk that it may be
required to purchase the underlying security for an exercise price higher than
its then current market price, resulting in a potential capital loss if the
purchase price exceeds the market price plus the amount of the premium received.
A Fund may terminate an option which it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Fund will realize a
profit (or loss) from such transaction if the cost of such transaction is less
(or more) than the premium received from the writing of the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option may be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
Purchasing Put and Call Options on Securities. A Fund may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. This protection is provided during the life of the put
option since the Fund, as holder of the put, is able to sell the underlying
security at the exercise price regardless of any decline in the underlying
security's market price. For the purchase of a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, any profit which the Fund might otherwise have realized on the
underlying security will be reduced by the premium paid for the put option and
by transaction costs.
A Fund may also purchase a call option to hedge against an increase in
price of a security that it intends to purchase. This protection is provided
during the life of the call option since the Fund, as holder of the call, is
able to buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. For the purchase of a call
option to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. By using call options in this manner, any profit which the Fund might
have realized had it
<PAGE>
bought the underlying security at the time it purchased the call option will be
reduced by the premium paid for the call option and by transaction costs.
Purchase and Sale of Options and Futures on Securities and Stock
Indices. A Fund may purchase and sell options on securities, stock indices and
stock index futures contracts as a hedge against movements in the equity
markets. In the future, a Fund may purchase and sell such options for other
investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. Unlike options on specific securities, all settlements of
options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. Currently options traded include the Standard & Poor's 500
Composite Stock Price Index, the NYSE Composite Index, the AMEX Market Value
Index, the National Over-The-Counter Index, the Nikkei 225 Stock Average Index,
the Financial Times Stock Exchange 100 Index and other standard broadly based
stock market indices. Options are also traded in certain industry or market
segment indices such as the Pharmaceutical Index.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If a Fund's investment adviser expects general stock market prices to
rise, it might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy for the Fund. If in fact the stock index
does rise, the price of the particular equity securities intended to be
purchased may also increase, but that increase would be offset in part by the
increase in the value of the Fund's index option or futures contract resulting
from the increase in the index. If,
<PAGE>
on the other hand, the Fund's investment adviser expects general stock market
prices to decline, it might purchase a put option or sell a futures contract on
the index. If that index does in fact decline, the value of some or all of the
equity securities held by the Fund may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the Fund's
position in such put option or futures contract.
Purchase and Sale of Interest Rate Futures. A Fund may purchase and
sell interest rate futures contracts on U.S. Treasury bills, notes and bonds and
Government National Mortgage Association ("GNMA") certificates either for the
purpose of hedging its portfolio securities against the adverse effects of
anticipated movements in interest rates.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by a Fund will fall, thus reducing
the net asset value of the Fund. This interest rate risk can be reduced without
employing futures as a hedge by selling such securities and either reinvesting
the proceeds in securities with shorter maturities or by holding assets in cash.
However, this strategy entails increased transaction costs in the form of dealer
spreads and brokerage commissions and would typically reduce the Fund's average
yield as a result of the shortening of maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of a Fund's short
position in the futures contracts will also tend to increase thus offsetting all
or a portion of the depreciation in the market value of the Fund's investments
that are being hedged. While the Fund will incur commission expenses in selling
and closing out futures positions (which is done by taking an opposite position
in the futures contract), commissions on futures transactions are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
A Fund may purchase interest rate futures contracts in anticipation of
a decline in interest rates when it is not fully invested. As such purchases are
made, it is expected that an equivalent amount of futures contracts will be
closed out.
A Fund will enter into futures contracts which are traded on national
or foreign futures exchanges, and are standardized as to maturity date and the
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). Futures are traded in London at the London
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International Financial Futures Exchange, in Paris, at the MATIF, and in Tokyo
at the Tokyo Stock Exchange.
Options on Futures Contracts. A Fund may purchase and write call and
put options on securities, stock index and interest rate futures contracts. A
Fund may use such options on futures contracts in connection with its hedging
strategies in lieu of purchasing and writing options directly on the underlying
securities or stock indices or purchasing or selling the underlying futures. For
example, a Fund may purchase put options or write call options on stock index
futures or interest rate futures, rather than selling futures contracts, in
anticipation of a decline in general stock market prices or rise in interest
rates, respectively, or purchase call options or write put options on stock
index or interest rate futures, rather than purchasing such futures, to hedge
against possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
In connection with transactions in stock index options, stock index
futures, interest rate futures and related options on such futures, a Fund will
be required to deposit as "initial margin" an amount of cash and short-term U.S.
government securities. The current initial margin requirement per contract is
approximately 2% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract. Brokers may establish deposit
requirements higher than exchange minimums.
Limitations. A Fund will not purchase or sell futures contracts or
options on futures contracts or stock indices for non-hedging purposes if, as a
result, the sum of the initial margin deposits on its existing futures contracts
and related options positions and premiums paid for options on futures contracts
or stock indices would exceed 5% of the net assets of the Fund unless the
transaction meets certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options
and futures strategies depends, among other things, on a Fund's ability to
terminate options and futures positions at times when its investment adviser
deems it desirable to do so. Although a Fund will not enter into an option or
futures position unless its investment adviser believes that a liquid market
exists for such option or future, there can be no assurance that a Fund will be
able to effect closing transactions at any particular time or at an acceptable
price. The investment advisers generally expect that options and futures
transactions for the Funds will be conducted on recognized exchanges. In
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certain instances, however, a Fund may purchase and sell options in the
over-the-counter market. The Staff of the SEC considers over-the-counter options
to be illiquid. A Fund's ability to terminate option positions established in
the over-the-counter market may be more limited than in the case of exchange
traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Fund.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of the securities that are the subject of the hedge. The successful use of
these strategies also depends on the ability of a Fund's investment adviser to
forecast correctly interest rate movements and general stock market price
movements. This risk increases as the composition of the securities held by the
Fund diverges from the composition of the relevant option or futures contract.
Junk Bonds (Growth and Income, Strategic Income and International
Growth)
Growth and Income may invest up to 5% of its total assets,
International Growth may invest up to 10% of its total assets and Strategic
Income may invest without limit in bonds rated below Baa3 by Moody's Investors
Service Inc. ("Moody's") or BBB by Standard & Poor's Ratings Service ("Standard
& Poor's") (commonly known as "junk bonds"). Securities rated less than Baa by
Moody's or BBB by Standard & Poor's are classified as non-investment grade
securities and are considered speculative by those rating agencies. It is the
policy of each Fund's investment adviser not to rely exclusively on ratings
issued by credit rating agencies but to supplement such ratings with the
investment adviser's own independent and ongoing review of credit quality. Junk
bonds may be issued as a consequence of corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events or by smaller or highly leveraged companies. When economic conditions
appear to be deteriorating, junk bonds may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates. Although the growth of the high yield securities market in the
1980s had paralleled a long economic expansion, many issuers could be affected
by adverse economic and market conditions. It should be recognized that an
economic downturn or increase in interest rates is likely to have a negative
effect on (i) the high yield bond market, (ii) the value of high yield
securities and (iii) the ability of the securities' issuers to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. The market for junk bonds, especially
during periods of deteriorating
<PAGE>
economic conditions, may be less liquid than the market for investment grade
bonds. In periods of reduced market liquidity, junk bond prices may become more
volatile and may experience sudden and substantial price declines. Also, there
may be significant disparities in the prices quoted for junk bonds by various
dealers. Under such conditions, a Fund may find it difficult to value its junk
bonds accurately. Under such conditions, a Fund may have to use subjective
rather than objective criteria to value its junk bond investments accurately and
rely more heavily on the judgment of the Trust's Board of Trustees. Prices for
junk bonds also may be affected by legislative and regulatory developments. For
example, recent federal rules require that savings and loans gradually reduce
their holdings of high-yield securities. Also, from time to time, Congress has
considered legislation to restrict or eliminate the corporate tax deduction for
interest payments or to regulate corporate restructurings such as takeovers,
mergers or leveraged buyouts. Such legislation, if enacted, could depress the
prices of outstanding junk bonds.
Variable and Floating Rate Securities (Foundation, Strategic
Income)
Foundation may invest no more than 5% of its total assets, at the time
of the investment in question, and Strategic Income may invest without limit in
variable and floating rate securities. The terms of variable and floating rate
instruments provide for the interest rate to be adjusted according to a formula
on certain predetermined dates. Variable and floating rate instruments that are
repayable on demand at a future date are deemed to have a maturity equal to the
time remaining until the principal will be received on the assumption that the
demand feature is exercised on the earliest possible date. For the purposes of
evaluating the interest-rate sensitivity of the Fund, variable and floating rate
instruments are deemed to have a maturity equal to the period remaining until
the next interest-rate readjustment. For the purposes of evaluating the credit
risks of variable and floating rate instruments, these instruments are deemed to
have a maturity equal to the time remaining until the earliest date the Fund is
entitled to demand repayment of principal.
Convertible Securities -- (All Funds)
Each Fund may invest in convertible securities. Convertible securities
include fixed-income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock at the
option of the holder during a specified period. Convertible securities may take
the form of convertible preferred stock, convertible bonds or
<PAGE>
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The investment characteristics of
each convertible security vary widely, which allow convertible securities to be
employed for a variety of investment strategies.
Each Fund will exchange or convert convertible securities into shares
of underlying common stock when, in the opinion of its investment adviser, the
investment characteristics of the underlying common shares will assist a Fund in
achieving its investment objective. A Fund may also elect to hold or trade
convertible securities. In selecting convertible securities, the investment
adviser evaluates the investment characteristics of the convertible security as
a fixed-income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the investment adviser considers numerous
factors, including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
Warrants (All Funds Except Strategic Income)
Each Fund may invest in warrants. Warrants are options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than one year to twenty years, or
they may be perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, a warrant is worthless if the market price of
the common stock does not exceed the warrant's exercise price during the life of
the warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock.
Sovereign Debt Obligations (Growth and Income, Strategic Income
and International Growth)
Each Fund may purchase sovereign debt instruments issued or guaranteed
by foreign governments or their agencies, including debt of Latin American
nations or other developing countries. Sovereign debt may be in the form of
conventional securities or other types of debt instruments such as loans or loan
participations. Sovereign debt of developing countries may involve a high degree
of risk, and may be in default or present the risk of default. Governmental
entities responsible for
<PAGE>
repayment of the debt may be unable or unwilling to repay principal and interest
when due, and may require renegotiation or rescheduling of debt payments. In
addition, prospects for repayment of principal and interest may depend on
political as well as economic factors.
Closed-End Investment Companies (All Funds)
Each Fund may purchase the equity securities of closed-end investment
companies to facilitate investment in certain foreign countries. Equity
securities of closed-end investment companies generally trade at a discount to
their net asset value. Investments in closed-end investment companies involve
the payment of management fees to the advisers of such investment companies.
Foreign Currency Transactions; Currency Risks (All Funds)
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental intervention, speculation and
other economic and political conditions. Although a Fund values its assets daily
in U.S. dollars, a Fund generally does not convert its holdings to U.S. dollars
or any other currency. Foreign exchange dealers may realize a profit on the
difference between the price at which a Fund buys and sells currencies.
Each Fund will engage in foreign currency exchange transactions in
connection with its portfolio investments. A Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
Each Fund may enter into forward foreign currency exchange contracts in
order to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign currency involved in an
underlying transaction. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (usually less than one year) from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A forward
contract generally has a deposit requirement, and no commissions are charged at
any stage for
<PAGE>
trades. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the spread) between the price
at which they are buying and selling various currencies. However, forward
foreign currency exchange contracts may limit potential gains which could result
from a positive change in such currency relationships. The Funds' investment
advisers believe that it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever they determine that it is
in a Fund's best interest to do so. A Fund will not speculate in foreign
currency exchange.
Except for cross-hedges, a Fund will not enter into forward foreign
currency exchange contracts or maintain a net exposure in such contracts when it
would be obligated to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency
or, in the case of a "cross-hedge" denominated in a currency or currencies that
the investment adviser believes will tend to be closely correlated with that
currency with regard to price movements. At the consummation of such a forward
contract, a Fund may either make delivery of the foreign currency or terminate
its contractual obligation to deliver the foreign currency by purchasing an
offsetting contract obligating it to purchase, at the same maturity date, the
same amount of such foreign currency. If a Fund chooses to make delivery of the
foreign currency, it may be required to obtain such currency through the sale of
portfolio securities denominated in such currency or through conversion of other
assets of the Fund into such currency. If a Fund engages in an offsetting
transaction, the Fund will incur a gain or loss to the extent that there has
been a change in forward contract prices.
Each Fund will place cash or high grade debt securities in a separate
account of the Fund at its custodian bank in an amount equal to the value of the
Fund's total assets committed to forward foreign currency exchange contracts
entered into as a hedge against a substantial decline in the value of a
particular foreign currency. If the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Fund's commitments with respect to such contracts.
It should be realized that this method of protecting the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk
<PAGE>
of loss due to a decline in the value of the hedged currency, at the same time
they tend to limit any potential gain which might result should the value of
such currency increase. Generally, a Fund will not enter into a forward foreign
currency exchange contract with a term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price on a
specified date or during the option period. The owner of a call option has the
right, but not the obligation, to buy the currency. Conversely, the owner of a
put option has the right, but not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the option
is obligated to fulfill the terms of the sold option. However, either the seller
or the buyer may, in the secondary market, close its position during the option
period at any time prior to expiration.
A call option on a foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on a foreign currency
generally rises in value if the underlying currency depreciates in value.
Although purchasing a foreign currency option can protect the Fund against an
adverse movement in the value of a foreign currency, the option will not limit
the movement in the value of such currency. For example, if a Fund was holding
securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, if a
Fund were to enter into a contract to purchase a security denominated in foreign
currency and, in conjunction with that purchase, were to purchase a foreign
currency call option to hedge against a rise in value of the currency, and if
the value of the currency instead depreciated between the date of purchase and
the settlement date, the Fund would not have to exercise its call. Instead, the
Fund could acquire in the spot market the amount of foreign currency needed for
settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain additional
risks associated with foreign currency options. The markets in foreign currency
options are relatively new, and a Fund's ability to establish and close out
positions on such options is subject to the maintenance of a liquid secondary
market. Although the Funds will not purchase or
<PAGE>
write such options unless and until, in the opinion of the investment advisers,
the market for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e, less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. option markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such
contracts, a Fund may be able to achieve many of the same objectives as it would
through the use of forward foreign currency exchange contracts. The Funds may be
able to achieve these objectives possibly more effectively and at a lower cost
by using futures transactions instead of forward foreign currency exchange
contracts.
A foreign currency futures contract sale creates an obligation by the
Fund, as seller, to deliver the amount of currency called for in the contract at
a specified future time
<PAGE>
for a specified price. A currency futures contract purchase creates an
obligation by the Fund, as purchaser, to take delivery of an amount of currency
at a specified future time at a specified price. Although the terms of currency
futures contracts specify actual delivery or receipt, in most instances the
contracts are closed out before the settlement date without the making or taking
of delivery of the currency. Closing out of currency futures contracts is
effected by entering into an offsetting purchase or sale transaction. An
offsetting transaction for a currency futures contract sale is effected by the
Fund entering into a currency futures contract purchase for the same aggregate
amount of currency and same delivery date. If the price of the sale exceeds the
price of the offsetting purchase, the Fund is immediately paid the difference
and realizes a gain. If the offsetting sale price is less than the purchase
price, the Fund realizes a loss. Similarly, the closing out of a currency
futures contract purchase is effected by the Fund entering into a currency
futures contract sale. If the offsetting sale price exceeds the purchase price,
the Fund realizes a gain, and if the offsetting sale price is less than the
purchase price, the Fund realizes a loss.
Special Risks Associated with Foreign Currency Futures Contracts
and Related Options
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on futures currencies,
as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. To reduce this risk,
the Funds will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the investment advisers, the
market for such options has developed sufficiently that the risks in connection
with such options are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts. Compared to the purchase
or sale of foreign currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to the Funds because
the maximum amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss, such as when there is no
<PAGE>
movement in the price of the underlying currency or futures
contract.
Derivatives (All Funds)
To the extent provided for elsewhere in this Statement of Additional
Information, each Fund may use derivatives while seeking to achieve its
investment objective. Derivatives are financial contracts whose value depends
on, or is derived from, the value of an underlying asset, reference rate or
index. These assets, rates, and indices may include bonds, stocks, mortgages,
commodities, interest rates, currency exchange rates, bond indices and stock
indices. Derivatives can be used to earn income or protect against risk, or
both. For example, one party with unwanted risk may agree to pass that risk to
another party who is willing to accept the risk, the second party being
motivated, for example, by the desire either to earn income in the form of a fee
or premium from the first party, or to reduce its own unwanted risk by
attempting to pass all or part of that risk to the first party.
Derivatives can be used by investors such as the Funds to earn income
and enhance returns, to hedge or adjust the risk profile of the portfolio, and
in place of more traditional direct investments to obtain exposure to otherwise
inaccessible markets. The Fund is permitted to use derivatives for one or more
of these purposes. The use of derivatives for non-hedging purposes entails
greater risks. The Funds use futures contracts and related options as well as
forwards for hedging purposes. Derivatives are a valuable tool, which, when used
properly, can provide significant benefit to Fund shareholders. However, the
Fund may take positions in those derivatives that are within its investment
policies if, in the investment adviser's judgment, this represents an effective
response to current or anticipated market conditions. An investment adviser's
use of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -options,
futures, forwards and swaps - from which virtually any type of derivative
transaction can be created. Further information regarding options, futures,
forwards and swaps is provided elsewhere in this section.
<PAGE>
Debt instruments that incorporate one or more of these building blocks
for the purpose of determining the principal amount of and/or rate of interest
payable on the debt instruments are often referred to as "structured
securities". An example of this type of structured security is indexed
commercial paper. The term is also used to describe certain securities issued in
connection with the restructuring of certain foreign obligations.
The term "derivative" is also sometimes used to describe securities
involving rights to a portion of the cash flows from an underlying pool of
mortgages or other assets from which payments are passed through to the owner
of, or that collateralize, the securities. See "Mortgage Backed Securities,"
below.
While the judicious use of derivatives by experienced investment
managers such as the Funds' investment advisers can be beneficial, derivatives
also involve risks different from, and, in certain cases, greater than, the
risks presented by more traditional investments. Following is a general
discussion of important risk factors and issues concerning the use of
derivatives that investors should understand before investing in the Funds.
* Market Risk - This is the general risk attendant to all investments
that the value of a particular investment will decline or otherwise change in a
way which is detrimental to a Fund's interest.
* Management Risk - Derivative products are highly specialized
instruments that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess the risk that a derivative adds
to a Fund's portfolio and the ability to forecast price, interest rate or
currency exchange rate movements correctly.
* Credit Risk - This is the risk that a loss may be sustained by the
Fund as a result of the failure of another party to a derivative (usually
referred to as a "counterparty") to comply with the terms of the derivative
contract. The credit risk for exchange-traded derivatives is generally less than
for privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a guarantee
of performance. This guarantee is supported
<PAGE>
by a daily payment system (i.e., margin requirements) operated by the clearing
house in order to reduce overall credit risk. For privately negotiated
derivatives, there is no similar clearing agency guarantee. Therefore, a Fund's
investment adviser considers the creditworthiness of each counterparty to a
privately negotiated derivative in evaluating potential credit risk.
* Liquidity Risk - Liquidity risk exists when a particular instrument
is difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
* Leverage Risk - Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks - Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to correlate
perfectly with underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a Fund. Derivatives do not
always perfectly or even highly correlate or track the value of the assets,
rates or indices they are designed to closely track. Consequently, a Fund's use
of derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering a Fund's investment objective.
Mortgage-Backed Securities (Strategic Income)
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term mortgage-backed securities includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations.
There are currently three basic types of mortgage-backed
securities: (i) those issued or guaranteed by the U.S. government
or one of its agencies or instrumentalities, such as GNMA,
<PAGE>
Federal National Mortgage Association ("FNMA"), and FHLMC (securities issued by
GNMA, but not those issued by FNMA or FHLMC, are backed by the "full-faith and
credit" of the U.S.); (ii) those issued by private issuers that represent an
interest in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (iii) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or mortgage-backed securities without a
government guarantee but usually having some form of private credit enhancement.
Strategic Income will invest in mortgage pass-through securities
representing participation interests in pools of residential mortgage loans
originated by governmental or private lenders. Such securities, which are
ownership interests in the underlying mortgage loans, differ from conventional
debt securities, which provide for periodic payment of interest in fixed amounts
(usually semi-annually) with principal payments at maturity or on specified call
dates. Mortgage pass-through securities provide for monthly payments that are a
"pass through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such mortgage loans, net of any fees paid
to the guarantor of such securities and the servicers of the underlying mortgage
loans.
Strategic Income may also invest in fixed rate and adjustable rate
collateralized mortgage obligations ("CMOs"), including CMOs with rates that
move inversely to market rates that are issued by and guaranteed as to principal
and interest by the U.S. government, its agencies or instrumentalities. The
principal governmental issuer of CMOs is FNMA. In addition, FHLMC issues a
significant number of CMOs. The Fund will not invest in CMOs that are issued by
private issuers. CMOs are debt obligations collateralized by mortgage securities
in which the payment of the principal and interest is supported by the credit
of, or guaranteed by, the U.S. government or an agency or instrumentality of the
U.S. government. The secondary market for CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying mortgage securities used as collateral to create
classes with different interest rates, maturities and payment schedules. Instead
of interest and principal payments on the underlying mortgage securities being
passed through or paid pro rata to each holder (e.g., the Fund), each class of a
CMO is paid from and secured by a separate priority payment of the cash flow
generated by the pledged mortgage securities.
<PAGE>
Most CMO issues have at least four classes. Classes with an earlier
maturity receive priority on payments to assure the early maturity. After the
first class is redeemed, excess cash flow not necessary to pay interest on the
remaining classes is directed to the repayment of the next maturing classes
until that class is fully redeemed. This process continues until all classes of
the CMO issue have been paid in full. Among the CMO classes available are
floating (adjustable) rate classes, which have characteristics similar to
adjustable rate mortgage securities ("ARMS"), and inverse floating rate classes
whose coupons vary inversely with the rate of some market index. The Fund may
purchase any class of CMO other than the residual (final) class.
Equipment Trust Certificates (Strategic Income)
Equipment Trust Certificates are a mechanism for financing the purchase
of transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.
Under an equipment trust certificate, the equipment is used as the
security for the debt and title to the equipment is vested in a trustee. The
trustee leases the equipment to the user, i.e. the railroad, airline, trucking
or oil company. At the same time equipment trust certificates in an aggregate
amount equal to a certain percentage of the equipment's purchase price are sold
to lenders. The trustee pays the proceeds from the sale of certificates to the
manufacturer. In addition, the company using the equipment makes an initial
payment of rent equal to their balance of the purchase price to the trustee,
which the trustee then pays to the manufacturer. The trustee collects lease
payments from the company and uses the payments to pay interest and principal on
the certificates. At maturity, the certificates are redeemed and paid, the
equipment is sold to the company and the lease is terminated.
Generally, these certificates are regarded as obligations of the
company that is leasing the equipment and are shown as liabilities in its
balance sheet. However, the company does not own the equipment until all the
certificates are redeemed and paid. In the event the company defaults under its
lease, the trustee terminates the lease. If another lessee is available, the
trustee leases the equipment to another user and makes payments on the
certificates from new lease rentals.
Interest-Rate Swap Contracts (Strategic Income)
Interest rate swaps are over-the-counter ("OTC") agreements between
parties and counterparties to make periodic payments to each other for a stated
time, generally entered into for the purpose of changing the nature or amount of
interest being
<PAGE>
received on debt securities held by one or both parties. The calculation of
these payments is based on an agreed-upon amount called the "notional amount."
The notional amount is not typically exchanged in swaps (except in currency
swaps). The periodic payments may be fixed or floating. Floating payments change
(positively or inversely) with fluctuations in interest or currency rates or
equity or commodity prices, depending on the swap contract's terms.
Swaps may be used to hedge against adverse changes in interest rates,
for instance. Thus Strategic Income may have a portfolio of debt instruments
(ARMS, for instance) the floating interest rates of which adjust frequently
because they are tied positively to changes in market interest rates. The Fund
would then be exposed to interest rate risk because a decline in interest rates
would reduce the interest receipts on its portfolio. If the investment adviser
believed interest rates would decline, the Fund, could enter into an interest
rate swap with another financial institution to hedge the interest rate risk. In
the swap contract, the Fund would agree to make payments based on a floating
interest rate in exchange for receiving payments based on a fixed interest rate.
Thereafter, if interest rates declined, the Fund's fixed rate receipts on the
swap would offset the reduction in its portfolio receipts. If interest rates
rose, the higher rates the Fund could obtain from new portfolio investments
(assuming sale of existing investments) would offset the higher rates it paid
under the swap agreement.
Equity Swap Contracts (Aggressive)
The counterparty to an equity swap contract would typically be a bank,
investment banking firm or broker/dealer. For example, the counterparty would
generally agree to pay the Fund the amount, if any, by which the notional amount
of the equity swap contract would have increased in value if such notional
amount had been invested in the stocks comprising the S&P 500 Index in
proportion to the composition of the Index, plus the dividends that would have
been received on those stocks. The Fund would agree to pay to the counterparty a
floating rate of interest (typically the London Inter Bank Offered Rate) on the
notional amount of the equity swap contract plus the amount, if any, by which
that notional amount would have decreased in value had it been invested in such
index stocks. Therefore, the return to the Fund on any equity swap contract
should be the gain comprising the S&P 500 Index less the interest paid by the
Fund on the notional amount. The Fund will only enter into equity swap contracts
on a net basis, i.e., the two parties' obligations are netted out, with the Fund
paying or receiving, as the case may be, only the net amount of any payments.
Payments under equity
<PAGE>
swap contracts may be made at the conclusion of the contract or
periodically during its term.
The Fund may also from time to time enter into the opposite side of
equity swap contracts (i.e., where the Fund is obligated to pay the increase
(net of interest) or receive the decrease (plus interest) on the contract) to
reduce the amount of the Fund's equity market exposure consistent with the
Fund's investment objective and policies. These positions are sometimes referred
to as "reverse equity swap contracts."
Equity swap contracts will not be used to leverage the Fund. Since the
SEC considers equity swap contracts and reverse equity swap contracts to be
illiquid securities, the Fund will not invest in equity swap contracts or
reverse equity swap contracts if the total value of such investments together
with that of all other illiquid securities that the Fund owns would exceed the
Fund's limitations on investment in illiquid securities.
The Fund does not believe that its obligations under equity swap
contracts or reverse equity swap contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of the Fund's
obligations over its respective entitlement with respect to each equity swap
contract and each reverse equity swap contract will be accrued on a daily basis
and an amount of cash , U.S. Government securities or other liquid high quality
debt securities having an aggregate market value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian.
Currency Swaps, Index Swaps and Caps And Floors
(Strategic Income and Aggressive)
A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of reference indices. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds an
agreed-upon interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser to receive payments of interest on
a notional principal amount from the party selling such interest rate floor. A
Fund's investment adviser expects to enter into these types of transactions on
behalf of the Fund primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing at later date
<PAGE>
rather than for speculative purposes. Accordingly, Strategic Income and
Aggressive intend to use these transactions as hedges and not as speculative
investments and will not sell interest rate caps or floors unless the Fund owns
securities or other instruments providing the income stream the Fund may be
obligated to pay. Caps and floors require segregation of assets with a value
equal to the Fund's net obligation, if any.
Special Risks of Swaps, Caps and Floors
As with futures, options, forward contracts, and mortgage backed and
other asset-backed securities, the use of swap, cap and floor contracts exposes
the Funds to additional investment risk and transaction costs. These risks
include operational risk, market risk and credit risk.
Operational risk includes, among others, the risks that a Fund's
investment adviser will incorrectly analyze market conditions or will not employ
appropriate strategies and monitoring with respect to these instruments or will
be forced to defer closing out certain hedged positions to avoid adverse tax
consequences.
Market risk includes, among others, the risks of imperfect correlations
between the expected values of the contracts, or their underlying bases, and
movements in the prices of the securities or currencies being hedged, and the
possible absence of a liquid secondary market for any particular instrument at
any time. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively more liquid. Nevertheless, a secondary market for swaps is
never assured, and caps and floors, which are more recent innovations for which
standardized documentation has not been fully developed, are much less liquid
than swaps.
Credit risk is primarily the risk that counterparties may be
financially unable to fulfill their contracts on a timely basis, if at all. If
there is a default by the counterparty to any such contract, a Fund will be
limited to contractual remedies pursuant to the agreements related to the
transaction. There is no assurance that contract counterparties will be able to
meet contract obligations or that, in the event of default, a Fund will succeed
in pursuing contractual remedies. Each Fund thus assumes the risk that it may be
delayed in or prevented from obtaining payments owed to it pursuant to such
contracts. Each Fund will closely monitor the credit of swap counterparties in
order to minimize this risk. The Fund will not enter into any equity swap
contract or reverse equity swap contract unless, at
<PAGE>
the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or Standard & Poor's.
FUNDAMENTAL POLICIES
The Funds have adopted the fundamental restrictions set forth below
which, as to a Fund, may not be changed without the vote of a majority of a
Fund's outstanding voting securities. As used in this Statement of Additional
Information and in the Prospectus, "a majority of the outstanding voting
securities of a Fund" means the lesser of (1) the holders of more than 50% of
the outstanding shares of beneficial interest of the Fund or (2) 67% of the
shares present if more than 50% of the shares are present at a meeting in person
or by proxy.
Diversification
A Fund may not make any investment inconsistent with the Fund's
classification as a diversified investment company under the Investment Company
Act of 1940 (the "1940 Act").
Concentration
A Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
Borrowing
A Fund may not borrow money, except to the extent permitted by
applicable law.
Underwriting
A Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the disposition of
its portfolio securities.
Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in
<PAGE>
(a) securities directly or indirectly secured by real estate, or (b) securities
issued by companies that invest in real estate.
Commodities
A Fund may not purchase or sell commodities or contracts on commodities
except to the extent that the Fund may engage in financial futures contracts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
Loans to Other Persons
A Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The acquisition
of investment instruments shall not be deemed to be the making of a loan.
INVESTMENT GUIDELINES
Unlike the Fundamental Policies above, the following guidelines may be
changed by the Trust's Board of Trustees without shareholder approval. Unless
otherwise stated, all references to the assets of a Fund are in terms of current
market value.
Diversification
To remain classified as a diversified investment company under the 1940
Act, each Fund must conform with the following: With respect to 75% of its total
assets, a diversified investment company may not invest more than 5% of its
total assets, determined at market or other fair value at the time of purchase,
in the securities of any one issuer, or invest in more than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These limitations do not apply to investments in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Borrowings
Each Fund may borrow money from banks or enter into reverse repurchase
agreements in an amount up to one third of its total assets. Each Fund may also
borrow an additional 5% of its total assets from banks or others. Each Fund may
borrow only as a temporary measure for extraordinary or emergency purposes. Each
Fund will not purchase securities while borrowings are outstanding except to
exercise prior commitments and to exercise subscription rights. Each Fund may
obtain such short-term credit
<PAGE>
as may be necessary for the clearance of purchases and sales of portfolio
securities. Each Fund may purchase securities on margin to the extent permitted
by applicable law.
Investment in Other Investment Companies
Each Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, each Fund may not (1) own more
than 3% of the outstanding voting stock of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, each Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as each Fund.
Short Sales
Each Fund may not make short sales of securities or maintain a short
position unless, at all times when a short position is open, it owns an equal
amount of such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short. Each Fund may
effect a short sale in connection with an underwriting in which a Fund is a
participant.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and the
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of
each of other Trusts in the Evergreen Fund complex.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS FOR
NAME TRUST LAST FIVE YEARS
- ---- ------------- -------------------------
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and
(DOB: 2/2/28) construction consultant;
and President of Centrum
Equities and Centrum
Properties, Inc.
<PAGE>
Charles A. Austin III Trustee Investment Counselor to
(DOB: 10/23/34) Appleton Partners, Inc.;
and former Managing
Director, Seaward
Management Corporation
(investment advice).
K. Dun Gifford Trustee Trustee, Treasurer and
(DOB: 10/12/38) Chairman of the Finance
Committee,
Cambridge
College;
Chairman
Emeritus
and
Director,
American
Institute
of
Food
and
Wine;
Chairman
and
President,
Oldways
Preservation
and
Exchange
Trust
(education);
former
Chairman
of
the
Board,
Director,
and
Executive
Vice
President,
The
London
Harness
Company;
former
Managing
Partner,
Roscommon
Capital
Corp.;
former
Chief
Executive
Officer,
Gifford
Gifts
of
Fine
Foods;
and
former
Chairman,
Gifford,
Drescher
&
Associates
(environmental
consult
ing);
James S. Howell Chairman of the Former Chairman of the
(DOB: 8/13/24) Board of Trustees Distribution Foundation
for the Carolinas; and
former Vice President of
Lance Inc. (food
manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and
(DOB: 2/14/39) 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.
<PAGE>
Gerald M. McDonnell Trustee Sales Representative with
(DOB: 7/14/39) Nucor-Yamoto, Inc. (steel
producer).
Thomas L. McVerry Trustee Former Vice President and
(DOB: 8/2/39) Director of Rexham
Corporation; and former
Director of Carolina
Cooperative Federal
Credit Union.
William Walt Pettit Trustee Partner in the law firm
(DOB: 8/26/55) of William Walt Pettit,
P.A.
David M. Richardson Trustee Vice Chair and former
(DOB: 9/14/41) Executive Vice President,
DHR International, Inc.
(executive recruitment);
former Senior Vice
President, Boyden
International Inc.
(executive recruitment);
and Director, Commerce
and Industry Association
of New Jersey, 411
International, Inc., and
J&M Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S.
(DOB: 6/2/47) Health Care/Aetna Health
Services; former Managed
Health Care Consultant;
and former President,
Primary Physician Care.
Michael S. Scofield Trustee Attorney, Law Offices of
(DOB: 2/20/43) Michael S. Scofield.
<PAGE>
Richard J. Shima Trustee Former Chairman,
(DOB: 8/11/39) Environmental Warranty,
Inc.
(insurance
agency);
Executive
Consultant,
Drake
Beam
Morin,
Inc.
(executive
outplacement);
Director
of
Connecticut
Natural
Gas
Corporation,
Hartford
Hospital,
Old
State
House
Association,
Middlesex
Mutual
Assurance
Company,
and
Enhance
Financial
Services,
Inc.;
Chairman,
Board
of
Trustees,
Hartford
Graduate
Center;
Trustee,
Greater
Hartford
YMCA;
former
Director,
Vice
Chairman
and
Chief
Investment
Officer,
The
Travelers
Corporation;
former
Trustee,
Kingswood-Oxford
School;
and
former
Managing
Director
and
Consultant,
Russell
Miller,
Inc.
William J. Tomko* President and Senior Vice President and
(DOB: 8/30/58) Treasurer Operations Executive,
BISYS Fund Services.
Nimish S. Bhatt* Vice President Vice President, Tax,
(DOB: 6/6/63) and Assistant BISYS Fund Services;
Treasurer former Assistant Vice
President, Evergreen
Asset Management
Corp./First Union
National Bank; former
Senior Tax
Consulting/Acting
Manager, Investment
Companies Group, Price
Waterhouse, LLP, New
York.
Bryan Haft* Vice President Team Leader, Fund
(DOB: 1/23/65) Administration, BISYS
Fund Services.
<PAGE>
D'Ray Moore* Secretary Vice President, Client
(DOB: 3/30/59) Services, BISYS Fund
Services.
</TABLE>
*Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
Trustee Compensation
Listed below is the estimated trustee compensation for the twelve-month
period ended December 31, 1997.
<TABLE>
<CAPTION>
COMPENSATION
FROM TRUST DEFERRED
COMPENSATION AND FUND COMPENSATION
TRUSTEE FROM TRUST COMPLEX OF TRUSTEES
<S> <C> <C> <C>
LAURENCE B. ASHKIN $0 $72,400 $0
CHARLES A. AUSTIN III $0 $41,400 $0
K. DUN GIFFORD $0 $37,500 $0
JAMES S. HOWELL $2,806 $112,000 $67,794
LEROY KEITH JR. $0 $37,800 $0
GERALD M. MCDONNELL $0 $100,050 $100,050
THOMAS L. MCVERRY $0 $99,850 $99,850
WILLIAM WALT PETTIT $0 $97,525 $97,525
DAVID M. RICHARDSON $0 $66,500 $0
<PAGE>
COMPENSATION
FROM TRUST DEFERRED
COMPENSATION AND FUND COMPENSATION
TRUSTEE FROM TRUST COMPLEX OF TRUSTEES
RUSSELL A. SALTON, III $2,790 $100,300 $100,300
MICHAEL S. SCOFIELD $2,790 $102,700 $50,480
RICHARD J. SHIMA $0 $0
$67,700
</TABLE>
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this Statement of Additional Information, the
officers and trustees of the Trust owned as a group less than 1% of the
outstanding shares of any Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a Fund's
outstanding shares as of May 31, 1998.
EVERGREEN VA GROWTH & INCOME FUND
Nationwide Life Insurance Co. 87.2%
Variable Account #6
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Security Equity Life Insurance Co. 9.3%
Registered Share Account
Attn. Richard Leifels
84 Business Park Dr. STE 303
Armock, NY 10504-1738
EVERGREEN VA AGGRESSIVE GROWTH FUND
Nationwide Life Insurance Co. 56.7%
NWVA6
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 43.3%
NWVA6 Seed Account
<PAGE>
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
EVERGREEN VA FOUNDATION FUND
Nationwide Life Insurance Co. 83.1%
Variable Account #6
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Security Equity Life Insurance Co. 8.0%
Unregistered Share Account
Attn. Richard Leifels
84 Business Park Dr. STE 303
Armock, NY 10504-1738
Security Equity Life Insurance Co. 6.2%
Registered Share Account
Attn. Richard Leifels
84 Business Park Dr. STE 303
Armock, NY 10504-1738
EVERGREEN VA GLOBAL LEADERS FUND
Nationwide Life Insurance Co. 78.9%
NWVA6
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 21.1%
NWVA6 Seed Account
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
EVERGREEN VA STRATEGIC INCOME FUND
Nationwide Life Insurance Co. 81.8%
NWVA6
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 18.2%
NWVA6 Seed Account
C/O IPO Portfolio Accounting
P.O. Box 182029
<PAGE>
Columbus, OH 43218-2029
EVERGREEN VA FUND
Nationwide Life Insurance Co. 75.0%
Variable Account #6
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Security Equity Life Insurance Co. 13.5%
Registered Share Account
Attn. Richard Leifels
84 Business Park Dr. STE 303
Armock, NY 10504-1738
Security Equity Life Insurance Co. 6.8%
Unregistered Share Account
Attn. Richard Leifels
84 Business Park Dr. STE 303
Armock, NY 10504-1738
INVESTMENT ADVISORY SERVICES
The investment adviser to Evergreen, Growth and Income, Foundation,
Global Leaders and Small Cap is Evergreen Asset Management Corp., a New York
corporation, with offices at 2500 Westchester Avenue, Purchase, New York
("Evergreen Asset" or the "Adviser."). Evergreen Asset is owned by First Union
National Bank ("FUNB") which, in turn, is a subsidiary of First Union
Corporation ("First Union"), a bank holding company headquartered in Charlotte,
North Carolina. The investment adviser to Strategic Income and International
Growth is Keystone Investment Management Company with offices at 200 Berkeley
Street, Boston, Massachusetts ("Keystone" or the "Adviser"). Keystone is owned
by FUNB. The investment adviser to Aggressive is the Capital Management Group of
FUNB ("CMG" or the "Adviser").
On behalf of each of its Funds, the Trust has entered into an
investment advisory agreement with the Adviser (the "Advisory Agreements").
Under the Advisory Agreements, and subject to the supervision of the Trust's
Board of Trustees, the Advisers furnish to the appropriate 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. The Adviser pays for all of the expenses
incurred in connection with the provision of its
<PAGE>
services. Each Fund pays for all charges and expenses, other than those
specifically referred to as being borne by the Adviser, 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 Trustees; (5) brokerage commissions, brokers' fees and
expenses; (6) issue and transfer taxes; (7) taxes and trust fees payable to
governmental agencies; (8) the cost of share certificates; (9) fees and expenses
of the registrations and qualification of such Fund and its shares with the SEC
or under state or other securities laws; (10) expenses of preparing, printing
and mailing prospectuses, statements of additional information, notices, reports
and proxy materials to shareholders of each Fund; (11) expenses of shareholders'
and Trustees' meetings; (12) charges and expenses of legal counsel for each Fund
and for the Independent Trustees of the Trust on matters relating to such Fund;
(13) charges and expenses of filing annual and other reports with the SEC and
other authorities; and all extraordinary charges and expenses of such Fund. (See
also the section entitled "Financial Information.")
Each Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of
each Fund's outstanding shares. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
the Independent Trustees (Trustees who are not interested persons of a Fund, as
defined in the 1940 Act) cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreements may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees, by a vote
of a majority of outstanding shares or by the respective Adviser. Each Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
Each Advisory Agreement provides in substance that the Adviser shall
not be liable for any action or failure to act in accordance with its duties
thereunder in the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder. The Sub-Advisory Agreements continue in effect from year to year
provided that their continuance is approved annually by a vote of a majority of
the Trustees of the Trust including a majority of the "disinterested Trustees"
cast in person at a meeting duly called for the purpose of voting on such
approval or a majority of the outstanding voting shares of each Fund.
Certain other clients of each Adviser may have investment
objectives and policies similar to those of the Funds. Each
<PAGE>
Adviser (including the Sub-Adviser) may, from time to time, make recommendations
which result in the purchase or sale of a particular security by its other
clients simultaneously with a Fund. If transactions on behalf of more than one
client during the same period increase the demand for securities being purchased
or the supply of securities being sold, there may be an adverse effect on price
or quantity. It is the policy of each Adviser to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Funds. When two or more
of the clients of the Adviser (including one or more of the Funds) are
purchasing or selling the same security on a given day from the same
broker-dealer, such transactions may be averaged as to price.
Although the investment objectives of the Funds are not the same, and
their investment decisions are made independently of each other, they rely upon
the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, each
Adviser attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
The method of computing the investment advisory fee for each Fund is
set forth in the Funds' prospectus. The following table shows the advisory fees
paid by each Fund (other than Small Cap and International Growth) and any fee
waivers or reimbursements during the fiscal years ended December 31, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES OTHER EXPENSE
PAID WAIVED REIMBURSEMENTS
FUND 1997 1996* 1997 1996* 1997 1996*
- ---- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
EVERGREEN $ 0 $47,624 $48,143 --
$21,541
$104,629
<PAGE>
FOUNDATION $8,779 $20,317 $58,681 -- --
$166,385
GROWTH AND INCOME $ 0 $47,995 $61,749 --
$6,384
$158,978
GLOBAL LEADERS ** $ 0 -- -- --
$12,787 $11,883
AGGRESSIVE ** $ 0 -- -- --
$6,358 $14,437
STRATEGIC INCOME $ 0 -- -- --
** $6,441 $11,836
</TABLE>
- -------------------------
* For the period from March 1, 1996 (commencement of
operations) to December 31, 1996.
** For the period from March 6, 1997 (commencement of
operations) to December 31, 1997.
Transactions Among Advisory Affiliates
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which either Evergreen Asset, Keystone
or FUNB act as investment adviser or between the Fund and any advisory clients
of Evergreen Asset, Keystone, FUNB or Lieber & Company ("Lieber"). Each Fund may
from time to time engage in such transactions but only in accordance with these
procedures and if they are equitable to each participant and consistent with
each participant's investment objectives.
ADMINISTRATIVE SERVICE PROVIDERS
Evergreen Investment Services ("EIS") provides administrative services
to each of the Funds for a fee based on the average daily net assets of each
fund administered by EIS for which Evergreen Asset, Keystone or FUNB also serve
as investment adviser, calculated daily and payable monthly at the following
annual rates: .050% on the first $7 billion; .035% on the next $3 billion; .030%
on the next $5 billion; .020% on the next $10 billion; .015% on the next $5
billion; and .010% on assets in excess of $30 billion. BISYS Fund Services
serves as sub-administrator to the Funds and is entitled to receive a fee
<PAGE>
from each Fund calculated on the average daily net assets of each Fund at a rate
based on the total assets of the mutual funds administered by EIS for which
FUNB, Keystone or Evergreen Asset also serve as investment adviser, calculated
in accordance with the following schedule: .0100% of the first $7 billion;
.0075% on the next $3 billion; .0050% on the next $15 billion; and .0040% on
assets in excess of $25 billion.
For the fiscal period ended December 31, 1997, the Funds, other than Small
Cap and International Growth which had not yet commenced operations, incurred,
and paid to EIS the following administrative service costs: Evergreen: $4,994;
Growth and Income: $6,751; Foundation: $7,044; Global Leaders: $385; Strategic
Income: $323; Aggressive Growth: $301. As part of its regular banking
operations, FUNB and its affiliates may make loans to public companies. Thus, it
may be possible, from time to time, for the Funds to hold or acquire the
securities of issuers which are also lending clients of FUNB and its affiliates.
The lending relationship will not be a factor in the selection of securities.
BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of the
Adviser, all of whom, in the case of Evergreen Asset, are associated with
Lieber. In general, the same individuals perform the same functions for the
other funds managed by the Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
A substantial portion of the transactions in equity securities for each
Fund will occur on domestic stock exchanges. Transactions on stock exchanges
involve the payment of brokerage commissions. In transactions on stock exchanges
in the United States, these commissions are negotiated, whereas on many foreign
stock exchanges these commissions are fixed. In the case of securities traded in
the foreign and domestic over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter transactions will generally be placed directly with a principal
market maker, although the Fund may place an
<PAGE>
over-the-counter order with a broker-dealer if a better price (including
commission) and execution are available.
It is anticipated that most purchase and sale transactions involving
fixed income securities will be with the issuer or an underwriter or with major
dealers in such securities acting as principals. Such transactions are normally
on a net basis and generally do not involve payment of brokerage commissions.
However, the cost of securities purchased from an underwriter usually includes a
commission paid by the issuer to the underwriter. Purchases or sales from
dealers will normally reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Adviser shall be prompt execution at the most favorable
price. An Adviser will also consider such factors as the price of the securities
and the size and difficulty of execution of the order. If these objectives may
be met with more than one firm, the Adviser will also consider the availability
of statistical and investment data and economic facts and opinions helpful to
the Adviser. To the extent that receipt of these services for which the Adviser
or its affiliates might otherwise have paid, it would tend to reduce its
expenses.
Under Section 11(a) of the Securities Exchange Act of 1934, as amended,
and the rules adopted thereunder by the SEC, Lieber may be compensated for
effecting transactions in portfolio securities for a Fund on a national
securities exchange provided the conditions of the rules are met. Each Fund
advised by Evergreen Asset has entered into an agreement with Lieber authorizing
Lieber to retain compensation for brokerage services. In accordance with such
agreement, it is contemplated that Lieber, a member of the New York and American
Stock Exchanges, will, to the extent practicable, provide brokerage services to
the Fund with respect to substantially all securities transactions effected on
the New York and American Stock Exchanges. In such transactions, the Adviser
will seek the best execution at the most favorable price while paying a
commission rate no higher than that offered to other clients of Lieber or that
which can be reasonably expected to be offered by an unaffiliated broker-dealer
having comparable execution capability in a similar transaction. However, no
Fund will engage in transactions in which Lieber would be a principal. While no
Fund contemplates any ongoing arrangements with other brokerage firms, brokerage
business may be given from time to time to other firms. In addition, the
Trustees have adopted procedures pursuant to Rule 17e-1 under the 1940 Act to
ensure that all brokerage transactions with Lieber, as an affiliated
broker-dealer are fair and reasonable.
<PAGE>
Any profits from brokerage commissions accruing to Lieber as a result
of portfolio transactions for the Fund will accrue to FUNB and to its ultimate
parent, First Union. The Advisory Agreements do not provide for a reduction of
the Adviser's fee with respect to any Fund by the amount of any profits earned
by Lieber from brokerage commissions generated by portfolio transactions of the
Fund.
The following chart shows: (1) for the years ended December 31, 1997
and 1996 the amount of brokerage commissions paid by each Fund , to all brokers
and the commissions, if any, paid to Lieber; (2) for the year ended December 31,
1997 the percentage of all commissions paid to Lieber; and (3) for the year
ended December 31, 1997 the percentage of the total dollar amount of all
portfolio transactions with respect to which commissions have been paid which
were effected by Lieber:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL TRANSACTIONS
BROKERAGE EFFECTED BY
COMMISSIONS COMMISSIONS PAID TO LIEBER
LIEBER
FUND 1997 1996 1997 1996 1997
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EVERGREEN $19,154 $17,474 $16,810 (87.8%) $16,882
- -------------- ------- ------- --------------- ------- -----------
85.5%
FOUNDATION $16,976 $16,976 $16,849 100%
- ---------- ------- ------- --------------- ------- ----
$17,682
(100%)
GROWTH AND INCOME $20,369 $20,587 $17,413 (85.5%) $17,389
- ----------------- ------- ------- --------------- ------- -----------
79.3%
GLOBAL LEADERS $6,526 -- $1,965 (30.1%) --
- -------------- ------ -- -------------- -- ----------
53.4%
STRATEGIC INCOME 0 -- 0 -- --
- ---------------- --- -- --- -- --
AGGRESSIVE $754 -- 0 -- --
- ---------- ---- -- --- -- --
</TABLE>
ADDITIONAL TAX INFORMATION
(See also "Sale and Redemption of Shares - Tax Status" in the
Funds' Prospectus)
Each Fund other than Small Cap and International Growth has qualified
and intends to continue to qualify, and each of Small Cap and International
Growth intends to qualify as a "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). By following such
policy,
<PAGE>
each Fund expects to eliminate or reduce to a nominal amount the federal income
taxes to which it may be subject.
In order to qualify as a regulated investment company, each Fund must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stock, securities or currencies, and (2)
diversify its holdings so that at the end of each quarter of its taxable year
(i)at least 50% of the market value of the Fund's assets is represented by cash
or cash items, U.S. government securities, securities of other regulated
investment companies, and other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's assets and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses.
These requirements may limit the range of the Fund's investments. If a
Fund qualifies as a regulated investment company, it will not be subject to
federal income tax on the part of its income distributed to shareholders,
provided the Fund distributes during its taxable year at least (a) 90% of its
taxable net investment income (generally, dividends, interest, certain other
income, and the excess, if any, of net short-term capital gain over net
long-term loss), and (b) 90% of the excess of (i) its tax-exempt interest income
less (ii) certain deductions attributable to that income. Each Fund intends to
make sufficient distributions to shareholders to meet this requirement. For a
discussion of the tax consequences of variable annuity or variable life
insurance contracts ("variable insurance contracts"), refer to the prospectus of
the variable insurance contracts offered by the Participating Insurance Company.
Variable annuity contracts purchased through insurance company separate accounts
provide for the accumulation of all earnings from interest, dividends, and
capital appreciation without current federal income tax liability for the owner.
Depending on the variable annuity contract, distributions from the contract may
be subject to ordinary income tax and, in addition, a 10% penalty tax on
distributions before age 59-1/2. Only the portion of a distribution attributable
to income on the investment in the contract is subject to federal income tax.
Investors should consult with competent tax advisers for a more complete
<PAGE>
discussion of possible tax consequences in a particular
situation.
The Funds will not be subject to the 4% federal excise tax imposed on
registered investment companies that do not distribute all of their income and
gains each calendar year because such tax does not apply to a registered
investment company whose only shareholders are segregated asset accounts of
Participating Insurance Companies held in connection with variable insurance
contracts.
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable insurance contracts held in the Funds. The
Code provides that a variable insurance contract shall not be treated as an
annuity contract or life insurance contract for the current or any prior period
for which the investments are not, in accordance with regulations prescribed by
the U.S. Treasury Department, adequately diversified. Disqualification of the
variable insurance contract as an annuity contract or life insurance contract
would result in immediate imposition of federal income tax on variable insurance
contract owners with respect to earnings allocable to the contract (including,
upon disqualification, accumulated earnings), while the liability would
generally arise prior to the receipt of payments under the contract. Section
817(h)(2) of the Code is a safe harbor provision which provides that variable
insurance contracts meet the diversification requirements if, as of the close of
each quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than 55% of the total assets consists
of cash, cash items, U.S. government securities and securities of other
regulated investment companies. The U.S. Treasury Department has issued
Regulations (Treas. Reg. 1.817-5) that establish diversification requirements
for the investment portfolios underlying variable insurance contracts. The
Regulations amplify the diversification requirements for variable annuity
contracts set forth in Section 817(h) of the Code and provide an alternative to
the safe harbor provision described above. Under the Regulations, an investment
portfolio will be deemed adequately diversified if: (1) no more than 55% of the
value of the total assets of the portfolio is represented by any one investment;
(2) no more than 70% of such value is represented by any two investments; (3) no
more than 80% of such value is represented by any three investments; and (4) no
more than 90% of such value is represented by any four investments. For purposes
of these Regulations all securities of the same issuer are treated as a single
investment. The Regulations provide that, in the case of a regulated investment
company whose shares are available to the public only through variable insurance
contracts which meet certain other requirements, the diversification tests
<PAGE>
are applied by reference to the underlying assets owned by the regulated
investment company rather than by reference to the shares of the regulated
investment company owned under the annuity contract. Each Fund intends to meet
the requirements for application of the diversification tests on this
look-through basis. The Code provides that for purposes of determining whether
or not the diversification standards imposed on the underlying assets of
variable insurance contracts by Section 817(h) of the Code have been met, each
United States government agency or instrumentality shall be treated as a
separate issuer.
Each Fund will be managed in such a manner as to comply with the
diversification requirements. It is possible that in order to comply with the
diversification requirements, less desirable investment decisions may be made
which would affect the investment performance of such Fund.
NET ASSET VALUE
The following information supplements that set forth in the Funds
Prospectus under the Section entitled "Sale and Redemption of Shares".
On each Fund business day on which a purchase or redemption order is
received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Trust's
Declaration of Trust and By-Laws as of the next close of regular trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) by
dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic or
foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked prices and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of all assets and liabilities will be translated into
United States dollars at the mean between
<PAGE>
the buying and selling rates of the currency in which such a security is
denominated against United States dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Fund. The Trustees will monitor, on
an ongoing basis, a Fund's method of valuation. Trading in securities on
European and Far Eastern securities exchanges and over-the-counter markets is
normally completed well before the close of business on each business day in New
York. In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not business days in New York and on which the Fund's net asset value is not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the Exchange will
not be reflected in a Fund's calculation of net asset value unless the Trustees
deem that the particular event would materially affect net asset value, in which
case an adjustment will be made. Securities transactions are accounted for on
the trade date, the date the order to buy or sell is executed. Dividend income
and other distributions are recorded on the ex-dividend date, except certain
dividends and distributions from foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date.
ADDITIONAL SALE AND REDEMPTION
INFORMATION
Shares of the Trust are sold continuously to variable annuity and
variable life insurance accounts of Participating Insurance Companies and to
qualified pension and retirement plans. The Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when (1)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC, (2) the Exchange is closed for other than customary weekend and holiday
closings, (3) the SEC has by order permitted such suspension, or (4) an
emergency exists as determined by the SEC.
The Trust may redeem shares involuntarily if redemption appears
appropriate in light of the Trust's responsibilities under the 1940 Act.
GLASS STEAGALL ACT
<PAGE>
The Glass-Steagall Act and other banking laws and regulations presently
prohibit banks or non-bank affiliates of member banks of the Federal Reserve
System from sponsoring, organizing or controlling or acting as the principal
underwriter of the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares. Further, they prohibit banks
from issuing, underwriting, or distributing securities in general. Such laws and
regulations do not prohibit such a holding company or affiliate from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company or from purchasing shares of such a company as agent for and
upon the order of their customer. Each Adviser is subject to and in compliance
with such banking laws and regulations. Changes in federal statutes and
regulations relating to the permissible activities of banks, as well as further
judicial or administrative decisions or interpretations of such statutes and
regulations, could prevent the Advisers from continuing to perform such services
for the Trust. If the Advisers were prohibited from acting as investment
advisers to the Funds, it is expected that the Trustees would recommend to the
shareholders that they approve new investment advisers elected by the Trustees.
It is not expected that the shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to the Advisers is
found) as a result of any of these occurrences.
GENERAL INFORMATION ABOUT THE FUNDS
CUSTODIAN
Cash and securities owned by the Funds of the Trust are held by State
Street Bank and Trust Company, Box 9021, Boston, Massachusetts 02205-9827
("State Street" or the "Custodian") pursuant to a Custodian Agreement with the
Trust (the "Custodian Agreement"), Under the Custodian Agreement, State Street
(1) maintains a separate account or accounts in the name of each Fund; (2) makes
receipts and disbursements of money on behalf of each Fund; (3) collects and
receives all income and other payments and distributions on account of the
Funds' portfolio securities; (4) responds to correspondence from security
brokers and others relating to its duties; and (5) makes periodic reports to the
Trustees concerning the Trust's operations. State Street may, at its own
expense, open and maintain a sub-custody account or accounts on behalf of the
Trust, provided that State Street shall remain liable for the performance of all
of its duties under the Custodian Agreement. Rules adopted under the 1940 Act
permit the Trust to maintain its securities and cash in the custody of certain
eligible banks and securities depositories.
TRANSFER AGENT
<PAGE>
Evergreen Service Company ("ESC"), 200 Berkeley Street, Boston,
Massachusetts 02116, a subsidiary of FUNB, serves as transfer agent and dividend
disbursing agent for each Fund pursuant to a transfer agency agreement with the
Trust (the "Transfer Agency Agreement"). Under the Transfer Agency Agreement,
ESC has agreed (1) to issue and redeem shares of the Trust; (2) to address and
mail all communications by the Trust to its shareholders, including reports to
shareholders, dividend and distribution notices, and proxy material for its
meetings of shareholders; (3) to respond to correspondence or inquiries by
shareholders and others relating to its duties; (4) to maintain shareholder
accounts and certain sub-accounts; and (5) to make periodic reports to the
Trustees concerning the Trust's operations.
CAPITALIZATION AND ORGANIZATION
The Trust is a Delaware business trust organized on December 23, 1997.
It is the successor to a Massachusetts business trust organized in 1994. The
Trust is governed by a board of trustees. References to the "Board of Trustees"
or "Trustees" in this Statement of Additional Information refer to the Trustees
of the Trust. Each Fund may issue an unlimited number of shares of beneficial
interest with a $0.001 par value. Shares of these Funds are fully paid,
nonassessable and fully transferable when issued and have no pre-emptive,
conversion or exchange rights. Fractional shares have proportionally the same
rights, including voting rights, as are provided for a full share.
Under the Trust's Declaration of Trust, each Trustee continues in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Trustees can elect
100% of the Trustees if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any Trustees. The
Trustees are authorized to reclassify and issue any unissued shares to any
number of additional series without shareholder approval. Accordingly, in the
future, for reasons such as the desire to establish one or more additional
portfolios of the Trust with different investment objectives, policies or
restrictions, additional series of shares may be created. Any
<PAGE>
issuance of shares of another series or class would be governed by the 1940 Act
and the law of the State of Delaware. If shares of another series of the Trust
were issued in connection with the creation of additional investment portfolios,
each share of the newly created portfolio would normally be entitled to one vote
for all purposes. Generally, shares of all portfolios would vote as a single
series on matters, such as the election of Trustees, that affected all
portfolios in substantially the same manner. As to matters affecting each
portfolio differently, such as approval of the Advisory Agreement and changes in
investment policy, shares of each portfolio would vote separately.
In addition any Fund may, in the future, divide its shares into or
create additional classes of shares which represent an interest in the same
investment portfolio. Except for the different distribution related and other
specific costs borne by such classes, they will have the same voting and other
rights described for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act, will be available to shareholders of each Fund. The rights of the holders
of shares of a series of the Trust may not be modified except by the vote of a
majority of the outstanding shares of such series.
PERFORMANCE INFORMATION
From time to time a Fund may advertise its "total return". The Fund's
"total return" is its average annual compounded total return for recent one,
five, and ten-year periods (or the period since the Fund's inception). The
Fund's total return for such a period is computed by finding, through the use of
a formula prescribed by the SEC, the average annual compounded rate of return
over the period that would equate an assumed initial amount invested to the
value of such investment at the end of the period. For purposes of computing
total return, income dividends and capital gains distributions paid on shares of
the Fund are assumed to have been reinvested when paid. The information below
does not reflect charges and deductions which are or may be imposed under the
variable insurance contracts issued by Participating Insurance Companies. The
average annual compounded total return for the shares offered by the Funds for,
as applicable, the period from inception (March 1, 1996 for Evergreen, Growth
and Income and Foundation) through December 31, 1996 and for the year ended
December 31, 1997 were, respectively: Evergreen - 1 YR:37.16%; SINCE
INCEPTION:28.05%; Growth and Income - 1 YR:34.66%; SINCE INCEPTION:29.23%;
Foundation - 1 YR:27.80%; SINCE INCEPTION:23.47%. The average annual compounded
total return for the period from inception (March 6, 1997) for
<PAGE>
Global Leaders, Aggressive and Strategic Income through December 31, 1997 was:
Global Leaders - 8.80%; Aggressive - 11.00%; Strategic Income - 5.28%.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the SEC yield formula) for
a given 30-day period, net of expenses, by the average number of shares entitled
to receive distributions during the period, dividing this figure by the Fund's
net asset value per share at the end of the period and annualizing the result
(assuming compounding of income) in order to arrive at an annual percentage
rate. The formula for calculating yield is as follows:
YIELD = 2[(A- B)+1)B-1]
---------------
cd
Where a = Interest earned during the period
b = Expenses accrued for the period (net of
reimbursements)
c = The average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = The maximum offering price per share on the last
day of the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds.
Gains and losses generally are excluded from the calculation. Income
calculated for purposes of determining a Fund's yield differs from income as
determined for other accounting purposes. Because of the different accounting
methods used, and because of the compounding assumed in yield calculations, the
yields quoted for a Fund may differ from the rate of distributions a Fund paid
over the same period, or the net investment income reported in a Fund's
financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or
<PAGE>
guaranteed fixed yield for a stated period of time. Shareholders should remember
that yield is a function of the kind and quality of the instruments in the
Funds' investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
NON-STANDARDIZED PERFORMANCE
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average,
Russell 2000 Index, [benchmark for Strategic Income] or any other commonly
quoted index of common stock or fixed income prices, which are unmanaged indices
of selected common stock or fixed income prices. A Fund's performance may also
be compared to those of other mutual funds having similar objectives. This
comparative performance would be expressed as a ranking prepared by Lipper
Analytical Services, Inc. or similar independent services monitoring mutual fund
performance. A Fund's performance will be calculated by assuming, to the extent
applicable, reinvestment of all capital gains distributions and income dividends
paid. Any such comparisons may be useful to investors who wish to compare a
Fund's past performance with that of its competitors. Of course, past
performance cannot be a guarantee of future results.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to the shareholder's broker
or to each Adviser at the address or telephone number shown on the front cover
of this Statement of Additional Information. This Statement of Additional
Information does not contain all the information set forth in the
<PAGE>
Registration Statement filed by the Trust with the SEC under the Securities Act
of 1933. Copies of the Registration Statement may be obtained at a reasonable
charge from the SEC or may be examined, without charge, at the offices of the
SEC in Washington, D.C.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts, 02110
serve as independent public accountants to the Trust.
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W.,
Washington, D.C. 20036, is counsel to the Trust.
FINANCIAL STATEMENTS
The financial statements of Evergreen, Growth and Income, Foundation,
Global Leaders, Strategic Income and Aggressive Growth appearing in their most
current fiscal year Annual Report to shareholders and the report thereon of KPMG
Peat Marwick LLP are incorporated by reference in this Statement of Additional
Information. The Annual Report to Shareholders, which contains the referenced
statements, is available upon request and without charge.
<PAGE>
APPENDIX A - BOND, NOTE AND COMMERCIAL PAPER RATINGS
APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's corporate bond
rating is a current assessment of the credit worthiness of an obligor with
respect to a specific obligation. This assessment of credit worthiness may take
into consideration obligors such as guarantors, insurers or lessees. The debt
rating is not a recommendation to purchase, sell or hold a security, inasmuch as
it does not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
<PAGE>
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than is higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
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C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC - debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate issues. The ratings measure the credit
worthiness of the obligor but do not take into account currency exchange and
related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the
applicable Moody's rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
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Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible risk
factors; AA -- high credit quality, with strong protection factors and modest
risk, which may vary very slightly from time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service LLP.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A --high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
DESCRIPTION OF NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.) Note rating
symbols are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for short-term
obligations will be designated Moody's Investment Grade (MIG). This distinction
is in recognition of the differences between short-term credit risk and
long-term risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of
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major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries
the smallest degree of investment risk. The modifiers 1, 2, and 3 are used to
denote relative strength within this highest classification.
Standard & Poor's Ratings Group: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service LLP: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
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