1933 Act No. 33-83100
1940 Act No. 811-8716
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 8 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 11 [X]
EVERGREEN VARIABLE ANNUITY TRUST
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices)
(617) 210-3200
(Registrant's Telephone Number)
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name and Address of Agent for Service)
It is proposed that this filing will become effective: [ ] immediately upon
filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [ ] 60
days after filing pursuant to paragraph (a)(i) [ ] on (date) pursuant to
paragraph (a)(i) [X] 75 days after filing pursuant to paragraph (a)(ii) [ ] on
(date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 8
TO
REGISTRATION STATEMENT
This Post-Effective Amendment No. 8 to Registrant's Registration Statement
No. 33-83100/811-8716 consists of the following pages, items of information and
documents:
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
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Prospectus for Evergreen VA Masters Fund is contained herein.
Prospectus for Evergreen VA Fund, Evergreen VA Foundation Fund, Evergreen VA
Growth and Income Fund, Evergreen VA Aggressive Growth Fund, Evergreen VA
Strategic Income Fund, Evergreen VA Small Cap Equity Income Fund and Evergreen
VA International Growth Fund is incorporated by reference to Post-Effective
Amendment No. 7, filed on June 5, 1998.
PART B
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Statement of Additional Information Evergreen VA Fund, Evergreen VA
Foundation Fund, Evergreen VA Growth and Income Fund, Evergreen VA Aggressive
Growth Fund, Evergreen VA Strategic Income Fund, Evergreen VA Small Cap Equity
Income Fund and Evergreen VA International Growth Fund and Evergreen Masters
Fund is contained herein.
PART C
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Financial Statements
Exhibits
Number of Holders of Securities
Indemnification
Business and Other Connections of Investment Adviser
Principal Underwriter
Location of Accounts and Records
Undertakings
Signatures
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
CROSS REFERENCE SHEET
(as required by Rule 481(a))
<TABLE>
<CAPTION>
N-1A Item No.
Part A Location in Prospectus
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis and Fee Table Overview of the Funds
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Description of the Funds; General
Information
Item 5. Management of the Fund Management of the Funds; General Information
Item 6. Capital Stock and Other Securities Dividends, Distributions and Taxes; General
Information
Item 7. Purchase of Securities Being Offered Sale and Redemption of Shares; Participating
Insurance Companies
Item 8. Redemption or Repurchase Sale and Redemption of Shares; Participating
Insurance Companies
Item 9. Pending Legal Proceedings Not Applicable
Part B Location in Statement of Additional Information
Cover Page
Item 10. Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies General Information; Fundamental Policies;
Investment Guidelines
Item 14. Management of the Fund Management of the Trust
Item 15. Control Persons and Principal Holders of Management of the Trust
Securities
Item 16. Investment Advisory and Other Services Investment Advisers; Additional Sale and
Redemption Information
Item 17. Brokerage Allocation Brokerage
Item 18. Capital Stock and Other Securities Additional Sale and Redemption Information
Item 19. Purchase, Redemption and Pricing of Additional Sale and Redemption Information;
Securities Being Offered Net Asset Value
Item 20. Tax Status Additional Tax Information
Item 21. Underwriters Additional Sale and Redemption Information
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
PART A
PROSPECTUS
<PAGE>
PROSPECTUS January 18, 1999
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EVERGREEN VARIABLE ANNUITY TRUST [LOGO OF EVERGREEN FUNDS/SM/ APPEARS HERE]
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EVERGREEN VA MASTERS FUND
(THE "FUND")
The Fund is a series of Evergreen Variable Annuity Trust (the "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 nine investment series. The Trust is an open-end management
investment company. This prospectus sets forth concise information about the
Trust and the Fund that a prospective investor should know before investing.
Shares of the Fund 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 ("SAI") for the Trust dated May 1,
1998, as amended August 10, 1998 and January 18, 1999, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference
herein. The SAI 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 the 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. AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
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 FUND.................................................... 3
FINANCIAL HIGHLIGHTS.................................................... 3
DESCRIPTION OF THE FUND................................................. 4
Investment Objectives and Policies................................... 4
Investment Practices and Restrictions................................ 5
MANAGEMENT OF THE FUND.................................................. 8
Investment Advisors.................................................. 8
Administrator........................................................ 9
Managers............................................................. 9
Sub-Advisor.......................................................... 10
SALE AND REDEMPTION OF SHARES........................................... 10
Participating Insurance Companies.................................... 10
Purchases............................................................ 10
Redemptions.......................................................... 11
Dividends............................................................ 11
Tax Status........................................................... 11
Effect of Banking Laws............................................... 11
GENERAL INFORMATION..................................................... 12
Custodian, and Transfer and Dividend
Paying Agent........................................................ 12
Expenses of the Trust................................................ 12
Shareholder Rights................................................... 12
Description of Shares................................................ 13
Performance.......................................................... 13
General.............................................................. 13
<PAGE>
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OVERVIEW OF THE FUND
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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
Fund" and "Management of the Fund."
The Fund's investment objective is to seek long-term capital appreciation
by investing at least 65% of its assets in equity securities.
The Fund's investment program is based on the Manager of Managers Strategy
of First Union National Bank's ("FUNB") Capital Management Group ("CMG"). CMG
allocates the Fund's portfolio assets on an approximately equal basis among a
number of investment management organizations ("Managers")-currently four in
number--each of which employs a different investment style.
In CMG's opinion, the Manager of Managers strategy may provide advantages
over the use of a single manager because of the following primary factors:
(i) Most equity investment management firms consistently employ a distinct
investment "style" which causes them to emphasize stocks with particular
characteristics;
(ii) because of changing investor preferences, any given investment style
will move into and out of market favor and will result in better investment
performance under certain market conditions but less successful performance
under other conditions; and
(iii) consequently, by allocating the Fund's portfolio on an approximately
equal basis among Managers employing different styles, the impact of any one
such style on investment performance will be diluted, and the investment
performance of the total portfolio will be more consistent and less volatile
over the long term than if a single style were employed throughout the entire
period.
CMG, based on the foregoing principles and on its analysis and evaluation
of information regarding the personnel and investment styles and performance of
numerous professional investment management firms, has selected for appointment
by the Fund a group of Managers representing a blending of different investment
styles which, in its opinion, is appropriate to the Fund's investment objective.
CMG has ultimate responsibility for the investment performance of the Fund.
CMG continuously monitors the performance and investment styles of the Fund's
portfolio Managers and from time to time may recommend changes of Managers based
on factors such as changes in a Manager's investment style or a departure by a
Manager from the investment style for which it had been selected, a
deterioration in a Manager's performance relative to that of other investment
management firms practicing a similar style, or adverse changes in its ownership
or personnel.
<PAGE>
The Fund's current Managers are:
Evergreen Asset Management Corp. ("Evergreen Asset")
MFS Institutional Advisors, Inc. ("MFS")
OppenheimerFunds, Inc. ("Oppenheimer")
Putnam Investment Management, Inc. ("Putnam")
The investment styles described in the section entitled "Description of the
Fund--Investment Objective and Policies" will be those applied by each of the
Managers to the segment of the Fund's portfolio for which that Manager is
responsible.
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FINANCIAL HIGHLIGHTS
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As of the date of this prospectus, the Fund had not commenced operations.
Therefore, no financial highlights are currently available.
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DESCRIPTION OF THE FUND
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INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is nonfundamental; as a result, the Fund
may change its objective without a shareholder vote. The Fund has also adopted
certain fundamental investment policies which are mainly designed to limit the
Fund's exposure to risk. The Fund's fundamental policies cannot be changed
without a shareholder vote. See the SAI for more information regarding the
Fund's fundamental investment policies or other related investment policies.
There can be no assurance that the Fund's investment objective will be achieved.
The Fund's investment objective is to seek long-term capital appreciation
by investing at least 65% of its assets in equity securities.
Evergreen Asset's segment of the portfolio will primarily be invested, in
accordance with its value oriented strategy, in equity securities of U.S. and
foriegn companies with market capitalizations between approximately $500 million
and $5 billion. In accordance with the value style of investing, Evergreen asset
invests in companies it believes the market has temporarily undervalued in
relation to such factors as the company's assets, cash flow and earnings
potential.
<PAGE>
Equity securities include common stocks, preferred stocks, bonds, warrants
or rights that are convertible into stocks, and depostary receipts for those
securities. Investments may also be made to a limited degree in non-convertible
debt securities and preferred stocks which offer an opportunity for capital
appreciation.
MFS manages its segment of the portfolio by primarily investing, in
accordance with its growth oriented investment strategy, in equity securities of
companies with market capitalizations between approximately $500 million and $5
billion. Such companies generally would be expected to show earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation, and would have the products, management and market opportunities
which are usually necessary to continue sustained growth. MFS may invest up to
25% (and generally expects to invest between 0% and 10%) of its segment of the
Fund's assets in foreign securities (not including American Depositary
Receipts), including foreign growth securities, which are not traded on a U.S.
exchange.
Oppenheimer manages its segment of the portfolio in accordance with a
blended growth and value investment strategy. Investments are primarily in
equity securities of those companies with market capitalizations over $5
billion; however, Oppenheimer may, when it deems advisable, invest in the equity
securities of mid-cap and small-cap companies. In purchasing portfolio
securities, Oppenheimer may invest without limit in foreign securities and may,
to a limited degree, invest in non-convertible debt securities and preferred
stocks which have the potential for capital appreciation.
Putman's segment of the portfolio will primarily be invested, in accordance
with its growth oriented investment strategy, in equity securities of U.S. and
foreign issuers with market capitalizations of 5$ billion or more. Putman may
also purchase non-convertible debt securities which offer the opportunity for
capital appreciation.
In the evaluation of a company, more consideration is given to growth
potential than to dividend income. Putman believes that evaluating a company's
probable future earnings, dividends, financial strength, working assets and
competitive position will prove more profitable in the long run than simply
seeking current dividend income.
Each Manager may also invest, for temporary defensive purposes, up to 100%
of the assets allocated to its segment in short-term obligations. Such
obligations may include U.S. government securities, master demand notes,
commercial paper and notes, bank deposits and other financial obligations.
In addition to the investment policies detailed above, the Fund may employ
certain additional investment strategies which are discussed in "Investment
Practice and Restrictions."
<PAGE>
INVESTMENT PRACTICES AND RESTRICTIONS
Repurchase Agreements. The Fund may invest in repurchase agreements. A
repurchase agreement is an agreement by which the Fund purchases a security
(usually U.S. government securities) for cash and obtains a simultaneous
commitment from the seller (usually a bank or broker-dealer) to repurchase the
security at an agreed-upon price and specified future date. The repurchase price
reflects an agreed-upon interest rate for the time period of the agreement. The
Fund's risk is the inability of the seller to pay the agreed-upon price on the
delivery date. However, this risk is tempered by the ability of the Fund to sell
the security in the open market in the case of a default. In such a case, the
Fund may incur costs in disposing of the security which would increase Fund
expenses. The Fund's Managers will monitor the creditworthiness of the firms
with which the Fund enters into repurchase agreements.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement is an agreement by the Fund to sell a
security and repurchase it at a specified time and price. The Fund could lose
money if the market values of the securities it sold decline below their
repurchase prices. Reverse repurchase agreements may be considered a form of
borrowing, and, therefore, a form of leverage. Leverage may magnify gains or
losses of the Fund.
When-Issued, Delayed-Delivery and Forward Commitment Transactions. The Fund may
enter into transactions whereby it commits to buying a security, but does not
pay for or take delivery of the security until some specified date in the
future. The value of these securities is subject to market fluctuation during
this period and no income accrues to the Fund until settlement. At the time of
settlement, a when-issued security may be valued at less than its purchase
price. When entering into these transactions, the Fund relies on the other party
to consummate the transaction; if the other party fails to do so, the Fund may
be disadvantaged. The Fund does not intend to purchase when-issued securities
for speculative purposes, but only in furtherance of its investment objective.
Securities Lending. To generate income and offset expenses, the Fund may lend
securities to broker-dealers and other financial institutions. Loans of
securities by the Fund may not exceed 33 1/3% of the value of the Fund's total
assets. While securities are on loan, the borrower will pay the Fund any income
accruing on the security. Also, the Fund may invest any collateral it receives
in additional securities. Gains or losses in the market value of a lent security
will affect the Fund and its shareholders. When the Fund lends its securities,
it runs the risk that it could not retrieve the securities on a timely basis,
possibly losing the opportunity to sell the securities at a desirable price.
Also, if the borrower files for bankruptcy or becomes insolvent, the Fund's
ability to dispose of the securities may be delayed.
<PAGE>
Investing in Securities of Other Investment Companies. The Fund may invest in
the securities of other 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.
Borrowing. The Fund may borrow from banks in an amount up to 33 1/3% of its
total assets, taken at market value. The Fund may also borrow an additional 5%
of its total assets from banks and others. The Fund may only borrow as a
temporary measure for extraordinary or emergency purposes such as the redemption
of Fund shares. The Fund may not purchase additional securities when borrowings
exceed 5% of total assets.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the Fund's
exposure to capital risk and borrowed funds are subject to interest costs which
will reduce net income.
Illiquid Securities. The Fund may invest up to 15% of its net assets in illiquid
securities and other securities which are not readily marketable. Repurchase
agreements with maturities longer than seven days will be included for the
purpose of the foregoing 15% limit. The inability of the Fund to dispose of
illiquid investments readily or at a reasonable price could impair its ability
to raise cash for redemptions or other purposes.
Restricted Securities. The Fund may invest in restricted securities, including
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933 (the "1933 Act"). Generally, Rule 144A establishes a safe harbor from the
registration requirements of the 1933 Act for resale by large institutional
investors of securities not publicly traded in the U.S. The Fund's Managers
determine the liquidity of Rule 144A securities according to the guidelines and
procedures adopted by the Trust's Board of Trustees. The Board of Trustees
monitors the Managers' application of those guidelines and procedures.
Securities eligible for resale pursuant to Rule 144A, which the Fund's Managers
have determined to be liquid or readily marketable, are not subject to the 15%
limit on illiquid securities.
Options and Futures. The Fund may engage in options and futures transactions.
Options and futures transactions are intended to enable the Fund to manage
market, interest rate or exchange rate risk. The Fund does not use these
transactions for speculation or leverage.
The Fund may attempt to hedge all or a portion of its portfolio through the
purchase of both put and call options on its portfolio securities and listed put
options on financial futures contracts for portfolio securities. The Fund may
also purchase call options on financial futures contracts. The Fund may write
covered call options on its portfolio securities to attempt to increase its
current income. The Fund will maintain its position in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
<PAGE>
The Fund may write (i.e., sell) covered call and put options. By writing a
call option, the Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price. By
writing a put option, the Fund becomes obligated during the term of the option
to purchase the securities underlying the option at the exercise price if the
option is exercised. The Fund also may write straddles (combinations of covered
puts and calls on the same underlying security). The Fund may only write
"covered" options. This means that so long as the Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option or, in the case of call options on U.S. Treasury bills, the Fund might
own substantially similar U.S. Treasury bills. The Fund will be considered
"covered" with respect to a put option it writes if, so long as it is obligated
as the writer of the put option, it deposits and maintains with its custodian in
a segregated account liquid assets having a value equal to or greater than the
exercise price of the option.
The principal reason for writing call or put options is to obtain, through
a receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option which it retains whether or not the option is exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying securities for more than their
current market price upon exercise.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of instrument called for in the
contract ("going short"), and the buyer, who agrees to take delivery of the
instrument ("going long") at a certain time in the future. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government. If the Fund enters into financial futures contracts
directly to hedge its holdings of fixed income securities, it would enter into
contracts to deliver securities at an undetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. The Fund
would agree to purchase securities in the future at a predetermined price (i.e.,
"go long") to hedge against a decline in market interest rates.
The Fund may also enter into currency and other financial futures contracts
and write options on such contracts. The Fund intends to enter into such
contracts and related options for hedging purposes. The Fund will enter into
futures on securities, currencies, or index-based futures contracts in order to
hedge against changes in interest or exchange rates or securities prices. A
futures contract on securities or currencies is an agreement to buy or sell
securities or currencies during a designated month at whatever price exists at
that time. A futures contract on a securities index does not involve the actual
delivery of securities, but merely requires the payment of a cash settlement
based on changes in the securities index. The Fund does not make payment or
deliver securities upon entering into a futures contract. Instead, it puts down
a margin deposit, which is adjusted to reflect changes in the value of the
contract and which remains in effect until the contract is terminated.
The Fund may sell or purchase currency and other financial futures
contracts. When a futures contract is sold by the Fund, the profit on the
contract will tend to rise when the value of the underlying securities or
currencies declines and to fall when the value of such securities or currencies
increases. Thus, the Fund sells futures contracts in order to offset a possible
decline in the value of its securities or currencies. If a futures contract is
purchased by the Fund, the value of the contract will tend to rise when the
value of the underlying securities or currencies increases and to fall when the
value of such securities or currencies declines.
<PAGE>
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may buy or sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
RISK CHARACTERISTICS OF OPTIONS AND FUTURES. Although options and futures
transactions are intended to enable the Fund to manage market, exchange, or
interest rate risks, these investment devices can be highly volatile, and the
Fund's use of them can result in poorer performance (i.e., the Fund's return may
be reduced). The Fund's attempt to use such investment devices for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. When the Fund uses financial futures contracts and
options on financial futures contracts as hedging devices, there is a risk that
the prices of the securities subject to the financial futures contracts and
options on financial futures contracts may not correlate perfectly with the
prices of the securities in the Fund's portfolio. This may cause the financial
futures contracts and any related options to react to market changes differently
than the portfolio securities. In addition, the Fund's Managers could be
incorrect in their expectations and forecasts about the direction or extent of
market factors, such as interest rates, securities price movements, and other
economic factors. Even if the Fund's Managers correctly predict interest rate
movements, a hedge could be unsuccessful if changes in the value of the Fund's
futures position did not correspond to changes in the value of its investments.
In these events, the Fund may lose money on the financial futures contracts or
the options on financial futures contracts. It is not certain that a secondary
market for positions in financial futures contracts or for options on financial
futures contracts will exist at all times. Although the Fund's Managers will
consider liquidity before entering into financial futures contracts or options
on financial futures contracts, there is no assurance that a liquid secondary
market on an exchange will exist for any particular financial futures contract
or option on a financial futures contract at any particular time. The Fund's
ability to establish and close out financial futures contracts and options on
financial futures contract positions depends on this secondary market. If the
Fund is unable to close out its position due to disruptions in the market or
lack of liquidity, the Fund may lose money on the futures contract or option,
and the losses to the Fund could be significant.
DERIVATIVES. Derivatives are financial contracts, such as those described above,
whose value is based on an underlying asset, such as a stock or a bond, or an
underlying economic factor, such as an index or an interest rate. The Fund may
invest in derivatives only if the expected risks and rewards are consistent with
its objectives and policies.
Losses from derivatives can sometimes be substantial. This is true partly
because small price movements in the underlying asset can result in immediate
and substantial gains or losses in the value of the derivative. Derivatives can
also cause the Fund to lose money if the Fund fails to correctly predict the
direction in which the underlying asset or economic factor will move.
<PAGE>
Investment in Small and Mid-Sized Companies. Investments in securities of
little-known, relatively small or mid-sized and special situation companies may
tend to be speculative and volatile. A lack of management depth in such
companies could 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 may be subject to the
consequence 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 companies in which the Fund may 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 may be subject to wide price fluctuations. As a result of
the risk factors described above, to the extent the Fund invests in small and
mid-sized companies, the net asset value of the Fund's shares can be expected to
vary significantly.
Foreign Investments. Foreign securities may involve additional risks.
Specifically, they may be affected by the strength of foreign currencies
relative to the U.S. dollar, or by political or economic developments in
foreign countries. Accounting procedures and government supervision may be
less stringent than those applicable to U.S. companies. There may be less
publicly available information about a foreign company than about a U.S.
company. Foreign markets may be less liquid or more volatile than U.S. markets
and may offer less obligations abroad than would be the case in the U.S.
because of differences in the legal systems. Foreign securities may be subject
to foreign taxes, which may reduce yield, and may be less marketable than
comparable U.S. securities. All these factors are considered by the Fund's
Managers before making any of these types of investments.
Foreign Currency Transactions. As discussed above, the Fund may invest in
securities of foreign issuers. When the Fund invests in foreign securities, they
usually will be denominated in foreign currencies, and the Fund temporarily may
hold funds in foreign currencies. Thus, the value of the Fund's shares will be
affected by changes in exchange rates.
<PAGE>
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell. The
Fund intends to use these contracts to hedge the U.S. dollar value of a security
it already owns, particularly if the Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on the Managers' ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the U.S. dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund. The
Fund does not intend to enter into foreign currency transactions for speculation
or leverage.
Special Risk Considerations Regarding the Multi-Manager Strategy. CMG oversees
the portfolio management services provided to the Fund by each of the four
Managers. CMG does not, however, determine what investments will be purchased or
sold for any segment of the portfolio. Because each Manager will be managing its
segment of the portfolio independently from the other Managers, the same
security may be held in two different segments of the portfolio, or may be
acquired for one segment of the portfolio at a time when the Manager of another
segment deems it appropriate to dispose of the security from that other segment.
Similarly, under some market conditions, one or more of the Managers may believe
that temporary, defensive investments in short-term instruments or cash are
appropriate when another Manager or Managers believe continued exposure to the
equity markets is appropriate for their segments of the portfolio. Because each
Manager directs the trading for its own segment of the portfolio, and does not
aggregate its transactions with those of the other Managers, the Fund may incur
higher brokerage costs than would be the case if a single investment advisor or
Manager were managing the entire portfolio. Also, because each segment of the
portfolio will perform differently from the other segments depending upon the
investments it holds and changing market conditions, one segment may be larger
or smaller at various times than other segments. Net cash inflows or outflows
resulting from sales and redemptions of the Fund's shares will, however,
continue to be allocated on an equal basis among the four segments of the
portfolio without regard to the relative size of the segments. CMG will not
reallocate assets among the segments to reduce these differences in size until
the assets allocated to one Manager either exceeds 35% or is less than 15% of
the Fund's average daily net assets for a period of three consecutive months. In
such event CMG may, but is not obligated to, reallocate assets among Managers to
provide for a more equal distribution of the Fund's assets.
<PAGE>
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MANAGEMENT OF THE FUND
- - -------------------------------------------------------------------------------
BOARD OF TRUSTEES
The Trust is supervised by a Board of Trustees that is responsible for
representing the interests of shareholders. The Trustees meet periodically
throughout the year to oversee the Fund's activities, reviewing among other
things, the Fund's performance and its contractual agreements with various
service providers.
INVESTMENT ADVISORS
The investment advisor of the Fund is the CMG of FUNB which is a
wholly-owned subsidiary of First Union Corporation ("First Union"). First Union
is located at 301 South College Street and FUNB is located at 201
South College Street, Charlotte, North Carolina 28288-0630. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States.
Pursuant to its Investment Advisory and Management Agreement (the "Advisory
Agreement") CMG oversees the administration of all aspects of the business and
affairs of the Fund and selects, contracts with and compensates Managers to
manage the assets of the Fund's portfolio. CMG monitors the Managers for
compliance with the investment objectives and policies of the Fund, reviews the
performance of the Managers, and periodically reports to the Trust. CMG has the
right under the Advisory Agreement to directly manage any or all of the Fund's
assets.
CMG is entitled to receive from the Fund an annual fee equal to 0.95% of
average daily net assets of the Fund.
The Trust and FUNB have submitted an application requesting an exemptive
order from the SEC that would permit the Manager, subject to certain conditions,
and without the approval of shareholders to: (a) employ a new unaffiliated
Manager or Managers for the Fund pursuant to the terms of a new portfolio
management agreement, in each case either as a replacement for an existing
Manager or as an additional Manager; (b) change the terms of any portfolio
management agreement; and (c) continue the employment of an existing Manager on
the same advisory contract terms where a contract has been assigned because of a
change in control of the Manager. In such circumstances, shareholders would
receive notice of such action, including the information concerning the Manager
that normally is provided in a proxy statement. The exemptive order would also
permit disclosure of fees paid to unaffiliated Managers are on aggregate basis
only. There is no assurance that the SEC will grant the Trust's and FUNB's
application.
<PAGE>
Shareholders have the right to terminate arrangements with a Manager by
vote of a majority of the outstanding shares to the Fund. In addition,
shareholders have the right to approve, in accordance with current SEC
interpretations, any new portfolio management agreements with affiliated
Managers.
Manager Oversight. The responsibility for overseeing the Managers rests on
certain officers and employees of FUNB. These officers and employees, including
their business experience for the past five years, are identified below.
[TO BE ADDED]
ADMINISTRATOR
Evergreen Investment Services, Inc. ("EIS") serves as administrator to the
Fund. As administrator, and subject to the supervision and control of the
Trust's Board of Trustees, EIS provides the Fund with facilities, equipment and
personnel. For its services as administrator, EIS is entitled to receive a fee
based on the aggregate average daily net assets of the Fund at a rate based on
the total assets of all mutual funds administered by EIS for which any affiliate
of the FUNB serves as investment advisor. The administration fee is calculated
in accordance with the following schedule.
ADMINISTRATION FEE
0.050% on the first $7 billion 0.035% on the next $3 billion 0.030% on
the next $5 billion 0.020% on the next $10 billion 0.015% on the next $5
billion 0.010% on assets in excess of $30 billion
MANAGERS
Subject to the supervision of CMG, each Manager manages a segment of the
Fund's portfolio in accordance with the Fund's investment objective and
policies, makes investment decisions for the segment, and places orders to
purchase and sell securities for the segment. The Fund pays no direct fees to
any of the Managers.
Set forth below is a brief description of the Fund's Managers.
Evergreen Asset, 2500 Westchester Avenue, Purchase, New York 10577, is a
wholly-owned subsidiary of First Union. Evergreen Asset, with its predecessors,
has served as investment advisor to the Evergreen mutual funds since 1971.
MFS, 500 Boylston Street, Boston, Massachusetts 02116, together with its
parent company, is America's oldest mutual fund organization. MFS and its
predecessor organizations have a history of money management dating from 1924
and the founding of the first mutual fund in the United States. MFS is a
subsidiary of Massachusetts Financial Services Company, which is a subsidiary of
SunLife of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an
indirect wholly-owned subsidiary of SunLife Assurance Company of Canada. As of
July 31, 1998, MFS managed more than $87 billion on behalf of over 3.3 million
investor accounts.
<PAGE>
Oppenheimer, Two World Trade Center, New York, New York 10048, has operated
as an investment advisor since 1959. As of August 31, 1998, Oppenheimer and its
subsidiaries managed investment companies with assets of more than $85 billion
and with more than 4 million shareholder accounts. Oppenheimer is owned by
Oppenheimer Acquisition Corp., a holding company that is owned in part by senior
officers of Oppenheimer and controlled by Massachusetts Mutual Life Insurance
Company.
Putnam, One Post Office Square, Boston, Massachusetts 02109, has been
managing mutual funds since 1937. As of June 30, 1998, Putnam and its affiliates
managed more than $278 billion of assets. Putnam is a subsidiary of Putnam
Investments, Inc., which is owned by Marsh & McLennan Companies, Inc., a
publicly-owned holding company whose principal businesses are international
insurance and reinsurance brokerage, employee benefit consulting and investment
management.
SUB-ADVISOR
Evergreen Asset has entered into a sub-advisory agreement with Lieber &
Company, an indirect wholly-owned subsidiary of First Union, which provides that
Lieber & Company's research department and staff will furnish Evergreen Asset
with information, investment recommendations, advice and assistance, and will
generally be available for consultation on the segment of the Fund's portfolio
managed by Evergreen Asset. 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 Fund for the services provided by Lieber & Company. The address of Lieber &
Company is 2500 Westchester Avenue, Purchase, New York 10577.
<PAGE>
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SALE AND REDEMPTION OF SHARES
- - -------------------------------------------------------------------------------
PARTICIPATING INSURANCE COMPANIES
The Fund is organized to serve as an investment vehicle for (a) 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 established 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 the 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 Fund
(rounded to the nearest 1/1000 of a share). The Trust does not issue share
certificates. Initial and subsequent purchase payments allocated to the 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 Fund Value its Shares. The net asset value of shares of the 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 the 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.
<PAGE>
REDEMPTIONS
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 the 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 the 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 SEC has by order permitted a
suspension of redemptions for the protection of shareholders.
DIVIDENDS
All dividends payable by the Fund are distributed at least annually to the
separate accounts of Participating Insurance Companies and will be automatically
reinvested in additional shares of the Fund. Dividends and other distributions
made by the Fund 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
The 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 the
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. The 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 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.
<PAGE>
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. The 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 Fund is provided in the SAI.
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 Fund. 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 advisor, 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 its 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 Fund by its customers. If FUNB or its affiliates were prevented from
continuing to provide the services called for under the investment advisory
agreements, it is expected that the Trustees would identify, and call upon the
Fund's shareholders to approve, new investment advisors. If this were to occur,
it is not anticipated that the shareholders of the Fund would suffer any adverse
financial consequences.
<PAGE>
- - -------------------------------------------------------------------------------
GENERAL INFORMATION
- - -------------------------------------------------------------------------------
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 the Fund.
EXPENSES OF THE TRUST
The Fund bears all expenses of its operations other than those incurred by
CMG under its respective investment Advisory Agreements, and EIS under its
administration agreement with the Trust. In particular, the Fund pays 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, MFS, Oppenheimer, Putnam 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. The organizational expenses of the Fund have been capitalized and will
be amortized during the first five years of the Fund's 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 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 the 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.
<PAGE>
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 Fund. 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 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.
<PAGE>
PORTFOLIO TURNOVER AND BROKERAGE
The estimated annual portfolio turnover rate for the Fund is not expected
to exceed 100%. A portfolio rate of 100% would occur if all of the Fund's
portfolio securities were replaced in one year. The portfolio turnover rate
experienced by the Fund directly affects the transaction costs relating to the
purchase and sale of securities 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, with respect to assets of the Fund managed by
Evergreen Asset and to the extent practicable, effect substantially all of the
portfolio transactions for the Fund effected on those exchanges. See the SAI for
further information regarding the practices of the Fund affecting portfolio
turnover and brokerage allocation practices.
PERFORMANCE
From time to time, the Trust may advertise the "average annual or
cumulative total return" of the Fund and may compare the performance of the Fund
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 the Fund refers to
the average annual compounded rate of return over the stated period that would
equate an initial investment in the 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
the 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 the Fund for a
specified period (again reflecting changes in the Fund's share price and
assuming reinvestment of Fund distributions).
The performance of the 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, the Fund's performance figures are
historical and should not be considered representative of the performance of the
Fund for any future period.
<PAGE>
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 Fund could be adversely
affected if the computer systems used by the Fund's investment advisors and the
Fund's 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 Fund's investment advisor is
taking steps to address the Year 2000 Problem with respect to the computer
systems that it use and to obtain assurances that comparable steps are being
taken by the Fund's 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 Fund.
Additional Information. This amended prospectus and the SAI, 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 1933
Act. 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 ADVISOR
Capital Management Group of First Union National Bank, 210 South College
Street, Charlotte, North Carolina 28288
MANAGER
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase, New York
10577
MFS Institutional Advisors, Inc., 500 Boylston Street, Boston, Massachusetts
02116
Oppenheimer Funds, Inc., Two World Trade Center, New York, New York 10048
Putnam Investment Management, Inc., One Post Office Square, Boston,
Massachusetts 02109
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Service Company, P.O. Box 2121, Boston, Massachusetts 02116-2121
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
DISTRIBUTOR
Evergreen Distributor, Inc., 125 W. 55th Street, New York, New York 10019
32009 000000RV0
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998, as amended
August 15, 1998 and January 18, 1998
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")
Evergreen VA International Growth Fund ("International Growth").
Evergreen VA Masters Fund ("Masters")
This Statement of Additional Information ("SAI") pertains to the Funds
listed above. It is not a prospectus and should be read in conjunction with the
prospectuses of Evergreen, Growth and Income, Foundation, Global Leaders,
Aggressive, Strategic Income, Small Cap and International Growth dated May 1,
1998, as amended August 15, 1998 and Masters, which is dated January 18, 1998,
as amended from time to time. 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 prospectuses may
be obtained without charge by calling the number listed above.
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<PAGE>
TABLE OF CONTENTS
FUND INVESTMENTS...............................................................3
General Information...................................................3
Fundamental Policies.................................................20
Investment Guidelines................................................21
MANAGEMENT OF THE TRUST.......................................................22
PRINCIPAL HOLDERS OF FUND SHARES..............................................26
INVESTMENT ADVISORY SERVICES..................................................28
ADMINISTRATIVE SERVICE PROVIDERS..............................................30
BROKERAGE.....................................................................30
ADDITIONAL TAX INFORMATION....................................................32
NET ASSET VALUE...............................................................34
ADDITIONAL SALE AND REDEMPTION ...............................................35
INFORMATION..........................................................35
GLASS STEAGALL ACT............................................................35
GENERAL INFORMATION ABOUT THE FUNDS...........................................35
Custodian............................................................35
Transfer Agent.......................................................36
CAPITALIZATION AND ORGANIZATION...............................................36
PERFORMANCE INFORMATION.......................................................37
Yield Calculations...................................................37
Non-Standardized Performance.........................................38
ADDITIONAL INFORMATION........................................................38
Independent Accounts.................................................39
Legal Counsel........................................................39
FINANCIAL STATEMENTS..........................................................39
APPENDIX A...................................................................A-1
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<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 each Fund's 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 Prospectuses regarding certain investments of each Fund.
U.S. Government Securities
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
Securities Issued by the Government National Mortgage Association ("GNMA")
The Fund may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. Government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
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<PAGE>
Unlike conventional bonds, the principal on GNMA certificates is not
paid at maturity but over the life of the security in scheduled monthly
payments. While mortgages pooled in a GNMA certificate may have maturities of up
to 30 years, the certificate itself will have a shorter average maturity and
less principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due
not only to market fluctuations, but also to early prepayments of mortgages
within the pool. Since prepayment rates vary widely, it is impossible to
accurately predict the average maturity of a GNMA pool. In addition to the
guaranteed principal payments, GNMA certificates may also make unscheduled
principal payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. Government securities, they may be less effective as a
means of locking in attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, prepayments are likely to
increase as the holders of the underlying mortgages seek refinancing. As a
result, the value of a GNMA certificate is not likely to rise as much as the
value of a comparable debt security would in response to same decline. In
addition, these prepayments can cause the price of a GNMA certificate originally
purchased at a premium to decline in price compared to its par value, which may
result in a loss.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Funds may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis.
Settlement of such transactions normally occurs within a month or more after the
purchase or sale commitment is made.
The Funds may purchase securities under such conditions only with the
intention of actually acquiring them, but may enter into a separate agreement to
sell the securities before the settlement date. Since the value of securities
purchased may fluctuate prior to settlement, a Fund may be required to pay more
at settlement than the security is worth. In addition, the purchaser is not
entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued,
delayed delivery or forward commitment basis, a Fund will hold liquid assets
worth at least the equivalent of the amount due. The liquid assets will be
monitored on a daily basis and adjusted as necessary to maintain the necessary
value.
Purchases made under such conditions are a form of leveraging and may
involve the risk that yields secured at the time of commitment may be lower than
otherwise available by the time settlement takes place, causing an unrealized
loss to a Fund. Leverage may cause any gains or losses of the Fund to be
magnified. In addition, when a Fund engages in such purchases, it relies on the
other party to consummate the sale. If the other party fails to perform its
obligations, the Fund may miss the opportunity to obtain a security at a
favorable price or yield.
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 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
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(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 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
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Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive, safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for sale
under the Rule. The Funds which invest in Rule 144A securities believe that the
Staff of the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) for determination by
the Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
(I) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace
trades.
Restricted securities would generally be acquired either from
institutional investors who originally acquired the securities in private
placements or directly from the issuers of the securities in private placements.
Restricted securities and securities that are not readily marketable may sell at
a discount from the price they would bring if freely marketable.
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.
Repurchase Agreements
Each Fund may enter into repurchase agreements with entities that are
registered as U.S. Government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. Government securities or other financial institutions believed by the
Advisor or Manager (as defined later) to be creditworthy. In a repurchase
agreement, a Fund obtains a security and simultaneously commits to return the
security to the seller at a set price (including principal and interest) within
a period of time usually not exceeding seven days. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
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The Fund or its custodian will take possession of the securities
subject to repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the securities
from a Fund, a Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for bankruptcy
or became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Each Fund's Advisor or Manager believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the investment Advisor or Manager to be creditworthy pursuant to
guidelines established by the Board of Trustees.
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.
Options and Futures Transactions (All Funds)
To the extent provided in the Prospectuses, 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 Advisor or Manager 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 Advisor or Manager determines
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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 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 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.
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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 Advisor or Manager 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, on the other hand, the Fund's Advisor or
Manager 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
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
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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
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 Advisor or Manager
deems it desirable to do so. Although a Fund will not enter into an option or
futures position unless its Advisor or Manager 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 Advisor or Managers generally expect that options and futures
transactions for the Funds will be conducted on recognized exchanges. In 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
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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 Advisor or Manager 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 Services ("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 Advisor or Manager not to rely exclusively on ratings
issued by credit rating agencies but to supplement such ratings with the Advisor
or Manager'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 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 and 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
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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 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 Advisor or Manager, 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 Advisor or
Manager 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 Advisor or Manager 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 Intern-
ational 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 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.
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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 Advisor or Managers 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 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' Advisor or Managers 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 Advisor or Manager 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
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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 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.
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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 write such options unless and
until, in the opinion of the Advisor or Managers, 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 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
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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 Advisor or Managers, 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
movement in the price of the underlying currency or futures contract.
Derivatives (All Funds)
To the extent provided for elsewhere in this SAI, 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 Advisor or Manager's judgment, this represents an effective
response to current or anticipated market conditions. An Advisor or Manager's
use of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
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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.
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' Advisor or Managers 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 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 Advisor or Manager 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
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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, 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
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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.
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 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.
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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 the Fund 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 Advisor or Manager 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 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.
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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 Advisor or Manager 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 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
Advisor or Manager 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
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order to minimize this risk. The Fund will not enter into any equity swap
contract or reverse equity swap contract unless, at the time of entering into
such transaction, the unsecured senior debt of the counterparty is rated at
least A by Moody's or Standard & Poor's.
FUNDAMENTAL POLICIES
Each Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). Where necessary, an explanation beneath a fundamental policy describes
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
Further Explanation of Diversification Policy:
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 United States ("U.S.") government or its agencies or
instrumentalities.
2. Concentration
Each Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than securities that
are issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:
Each Fund may not invest more than 25% of its total assets, taken at
market value, 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).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
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Further Explanation of Borrowing Policy:
Each Fund may borrow from banks or enter into reverse repurchase
agreements in an amount up to 33 1/3% of its total assets, taken at market
value. Each Fund may also borrow up to an additional 5% of its total assets from
banks or others. A Fund may borrow only as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares. A Fund may not
purchase securities while outstanding borrowings exceed 5% of its total assets.
Each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities. Each Fund may purchase
securities on margin and engage in short sales to the extent permitted by
applicable law
5. Underwriting
Each Fund may not underwrite securities of other issuers, except
insofar as a Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, a Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that a 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.
8. Lending
Each Fund may not make loans to other persons, except that a Fund may
lend its portfolio securities in accordance with applicable law. The acquisition
of investment securities or other investment instruments shall not be deemed to
be the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, a Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay the Fund any income accruing on the security. The
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Gains or losses in
the market value of a security lent will affect the Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
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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 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.
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<PAGE>
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>
Name Position with Trust Principal Occupations for Last Five Years
- - ------------------------------- -------------------------- -------------------------------------------------------------
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant;
(DOB: 2/2/28) and President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) former Director, Executive Vice President and
Treasurer, State Street Research & Management
Company (investment advice); Diector,
The Andover Companies(Insurance);
and Trustee, Arthritis Foundation
of New England.
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance
(DOB: 10/12/38) 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
consulting).
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer,
(DOB: 2/14/39) 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.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc.
(DOB: 7/14/39) (steel producer).
13
<PAGE>
Name Position with Trust Principal Occupations for Last Five Years
- - ------------------------------- -------------------------- -------------------------------------------------------------
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President,
(DOB: 9/14/41) 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. Health Care/Aetna Health
(DOB: 6/2/47) Services; former Managed Health Care Consultant;
and former President, Primary Physician Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc.
(DOB: 8/11/39) (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 Operations Executive,
(DOB:8/30/58) Treasurer BISYS Fund Services.
Nimish S. Bhatt* Vice President and Vice President, Tax, BISYS Fund Services; former
(DOB: 6/6/63) Assistant Treasurer Assistant Vice President, Evergreen Asset
Management Corp./First Union Bank;
former Senior Tax Consulting/Acting
Manager, Investment Companies
Group, Price Waterhouse LLP, NY.
Bryan Haft* Vice President Team Leader, Fund Administration, BISYS Fund
(DOB: 1/23/65) Services
D'Ray Moore* Secretary Vice President, Client Services, BISYS Fund
(DOB: 3/30/59) Services
14
Name Position with Trust Principal Occupation for Last Five
Years
Michael H. Koonce Secretary Senior Vice President and Assistant
(DOB: 4/20/60) General Counsel, First Union
Corporation; former Senior Vice
President and General Counsel,
Colonial Management Associates, Inc.
Maureen E. Towle Assistant Secretary Vice President and Counsel, First
(DOB: 4/2/66) Union Corporation; former Senior
Paralegal, First Union Corporation;
and former Paralegal, Keystone
Investments, Inc.
Sally E. Ganem Assistant Secretary Vice President and Counsel, First
(DOB: 11/19/66) Union Corporation; former Compliance
Officer, State Street Bank; and former
First Line Manager, State Street Bank.
Catherine F. Foley Assistant Secretary Vice President and Counsel, First
(DOB: 3/11/69) Union Corporation; former Associate,
Sullivan And Worcester, LLP; and former
Legal Product Manager, Boston Company Advisors,
Inc.
Beth K. Werths Assistant Secretary Vice President and Counsel, First
(DOB: 10/21/68) Union Corporation; former Associate,
Drinker Biddle & Reath LLP; and
former Counsel, Harrison-Richards,
Inc.
Beth F. Marino Assistant Secretary Senior Legal Product Manager, First
(DOB: 11/27/52) Union Corporation; and former Senior
Paralegal, Putnam Investments, Inc.
*Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
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</TABLE>
<PAGE>
EXPENSES
Trustee Compensation
Listed below is the estimated trustee compensation for the twelve-month
period ended December 31, 1997.
Compensation from Trust Compensation from
Trust and Fund
Trustee Complex
Laurence B. Ashkin $ 0 $ 68,673
Charles A. Austin III $ 0 $ 43,312
K. Dunn Gifford $ 0 $ 38,818
James S. Howell $4,000 $ 107,167
Leroy Keith Jr. $ 0 $ 39,218
Gerald M. McDonnell $ 0 $ 94,014
Thomas L. McVerry $ 0 $ 96,065
William Walt Pettit $ 0 $ 91,709
David M. Richardson $ 0 $ 43,312
Russell A. Salton, III $4,000 $ 93,651
Michael S. Scofield $4,000 $ 90,815
Richard J. Shima $ 0 $ 63,333
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, 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 September 30, 1998.
INFORMATION TO BE INSERTED
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<PAGE>
INVESTMENT ADVISORY SERVICES
The investment advisor 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 "Advisor."). 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 Advisor or Manager to Strategic Income and International
Growth is Evergreen Investment Management Company with offices at 200 Berkeley
Street, Boston, Massachusetts ("EIMC" or the "Advisor"). Evergreen is owned by
FUNB. The Advisor or Manager to Aggressive and Masters is the Capital Management
Group of FUNB ("CMG" or the "Advisor").
On behalf of each of its Funds, the Trust has entered into an
investment advisory agreement with the Advisor or Manager (the "Advisory
Agreements"). Under the Advisory Agreements, with respect to Funds other than
Masters, and subject to the supervision of the Trust's Board of Trustees, the
Advisor or Managers 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 Advisor or Manager pays for all of the expenses incurred in
connection with the provision of its services. The Advisory Agreement with
respect to Masters is similar to the Trust's other Advisory Agreements except
that the Advisor selects sub-advisors (hereinafter referred to as "Managers) for
the Fund and monitors each Managers investment program and results. The Advisor
has primary responsibility under the multi-manager strategy to oversee the
Managers, including making recommendations to the Trust regarding the hiring,
termination and replacement of Managers. Each Fund pays for all charges and
expenses, other than those specifically referred to as being borne by the
Advisor or Manager, 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 Advisor or Manager.
Each Advisory Agreement will terminate automatically upon its "assignment" as
that term is defined in the 1940 Act.
24868
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<PAGE>
Each Advisory Agreement provides in substance that the Advisor or
Manager 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 Advisor or Manager 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 Advisor or Manager may have investment
objectives and policies similar to those of the Funds. Each Advisor or Manager
(including the Sub-Advisor or Manager) 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 Advisor or Manager to allocate
advisory recommendations and the placing of orders in a manner which is deemed
equitable by the Advisor or Manager to the accounts involved, including the
Funds. When two or more of the clients of the Advisor or Manager (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
Advisor or Manager 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:
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<PAGE>
<TABLE>
Advisory Fees Paid Advisory Fees Waived Other Expense
Reimbursements
<S> <C> <C> <C> <C>
FUND 1997 1996* 1997 1996* 1997 1996*
EVERGREEN $104,629 $ 0 $47,624 $48,143 -- $21,541
FOUNDATION $166,385 $8,779 $20,317 $58,681 -- --
GROWTH AND INCOME $158,978 $ 0 $47,995 $61,749 -- $6,384
GLOBAL LEADERS** $ 0 -- $12,787 -- $11,883 --
AGGRESSIVE** $ 0 -- $6,358 -- $14,437 --
STRATEGIC INCOME** $ 0 -- $6,441 -- $11,836 --
* 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.
24868
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</TABLE>
<PAGE>
Managers
Masters investment program is based upon the Advisor's multi-manager
concept. The Advisor allocates the Fund's portfolio assets on an equal basis
among a number of investment management organizations-currently four in number
each of which employs a different investment style, and periodically rebalances
the Fund's portfolio among the Managers so as to maintain an approximate equal
allocation of the portfolio among them throughout allmarket cycles. Each manager
provides these services under a Portfolio Management Agreement. Each Manager has
discretion, subject to oversight by the Trustees and the Advisor, to purchase
and sell portfolio assets consistent with the Fund's investment objectives,
policies and restrictions and specific investment strategies developed by the
Advisor. The Fund's current Managers are: Evergreen Asset Management Corp., MFS
Institutional Advisors, Inc., OppenhheimerFunds, Inc., and Putnam Investment
Management, Inc.
The Trust and FUNB have filed an exemptive application with the SEC
that would permit the Advisor to employ a "manager of managers" strategy in
connection with its management of the Fund. The exemptive order would permit the
Advisor, subject to certain conditions, and without shareholder approval, to:
(a) select new Managers who are unaffiliated with the Advisor with the approval
of the Trust's Board of Trustees; (b) change the material terms of the Portfolio
Management Agreements with the Managers; and (c) continue the employment of a
Manager after the event which would otherwise cause the automatic termination of
a Portfolio Management Agreement. Shareholders would be notified of any Manager
changes. Shareholders have the right to terminate arrangements with a Manager by
vote of a majority of the outstanding shares of the Fund. The order would also
permit the Fund to disclose Manager's fees only in the aggregate. There is no
assurance that the SEC will grant the Trust's and FUNB's application.
With respect to affiliated Managers such as Evergreen Asset,
shareholder approval is required by the employment of an affiliated Managers as
a replacement for an unaffiliated Manager or change in the material terms of the
Portfolio Management Agreement.
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, EIMC or
FUNB act as Advisor or Manager or between the Fund and any advisory clients of
Evergreen Asset, EIMC, 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, EIMC or FUNB also serve as
Advisor or Manager, 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.
24868
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<PAGE>
For the fiscal period ended December 31, 1997, the Funds, other than
Small Cap, International Growth and Masters, 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 Advisor or
Manager, 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 Advisor or Manager, 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 Advisor or Manager. A Fund will not
effect any brokerage transactions with any broker or dealer affiliated directly
or indirectly with the Advisor or Manager unless such transactions are fair and
reasonable, under the circumstances, to the Fund's shareholders. Circumstances
that may indicate that such transactions are fair or reasonable include the
frequency of such transactions, the selection process and the commissions
payable in connection with such transactions.
A substantial portion of the transactions in equity securities for each
Fund will occur on domestic stock exchanges. Transactions on stock exchanges
involve the payment of brokerage commissions. In transactions on stock exchanges
in the United States, these commissions are negotiated, whereas on many foreign
stock exchanges these commissions are fixed. In the case of securities traded in
the foreign and domestic over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter transactions will generally be placed directly with a principal
market maker, although the Fund may place an over-the-counter order with a
broker-dealer if a better price (including commission) and execution are
available.
It is anticipated that most purchase and sale transactions involving
fixed income securities will be with the issuer or an underwriter or with major
dealers in such securities acting as principals. Such transactions are normally
on a net basis and generally do not involve payment of brokerage commissions.
However, the cost of securities purchased from an underwriter usually includes 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 Advisor or Manager shall be prompt execution at the most
favorable price. An Advisor or Manager 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 Advisor or Manager
will also consider the availability of statistical and investment data and
economic facts and opinions helpful to the Advisor or Manager. To the extent
that receipt of these services for which the Advisor or Manager 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.
24868
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<PAGE>
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(for Masters, only with respect tp assets managed bby
Evergreen Asset) with respect to substantially all securities transactions
effected on the New York and American Stock Exchanges. In such transactions, the
Advisor or Manager 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.
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 Advisor or Manager'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>
PERCENT OF
TOTAL TRANSACTIONS
BROKERAGE EFFECTED BY
FUND COMMISSIONS COMMISSIONS PAID TO LIEBER LIEBER
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 $17,682 $16,976 (100%) $16,849 100%
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>
24868
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<PAGE>
ADDITIONAL TAX INFORMATION
(See also "Sale and Redemption of Shares-Tax Status" in the Funds' Prospectuses)
Each Fund other than Small Cap, International Growth and Masters has
qualified and intends to continue to qualify, and each of Small Cap,
International Growth and Masters 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, 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 Advisor or Managers for a more
complete 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.
24868
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<PAGE>
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 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
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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 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.
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GLASS STEAGALL ACT
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
Advisor or Manager, 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 Advisor or Manager 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 Advisor or Managers from continuing to
perform such services for the Trust. If the Advisor or Managers were prohibited
from acting as Advisor or Managers to the Funds, it is expected that the
Trustees would recommend to the shareholders that they approve new Advisor or
Managers elected by the Trustees. It is not expected that the shareholders would
suffer any adverse financial consequences (if another Advisor or Manager with
equivalent abilities to the Advisor or Managers 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
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.
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<PAGE>
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 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 investments at the end of the period. For purposes of computing
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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 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:
6
YIELD = 2[(A- B)+1) -1]
------------------------
cd
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements) c
= The average daily number of shares outstanding during
the period that were entitled to receive dividends
d = The maximum offering price per share on the last day of
the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds.
Gains and losses generally are excluded from the calculation. Income
calculated for purposes of determining a Fund's yield differs from income as
determined for other accounting purposes. Because of the different accounting
methods used, and because of the compounding assumed in yield calculations, the
yields quoted for a Fund may differ from the rate of distributions a Fund paid
over the same period, or the net investment income reported in a Fund's
financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
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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 Advisor or Manager at the address or telephone number shown on the
front cover of this SAI. This SAI does 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.
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.
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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.
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APPENDIX A
APPENDIX A - BOND, NOTE AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Services. 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.
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.
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BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC - debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate 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.
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Moody's Investors Service, Inc. A brief description of the applicable
Moody's rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but 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.
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.
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Fitch IBCA, Inc.: 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.
Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
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:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
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 major importance in
bond risk are of lesser importance over the short run. Rating symbols and their
meanings follow:
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.
MIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
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.
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.
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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 Services: "A" is the highest commercial paper rating
category utilized by Standard & Poor's Services 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 IBCA, Inc.: 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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EVERGREEN VARIABLE ANNUITY TRUST
PART C
OTHER INFORMATION
<PAGE>
Item 24 Financial Statements and Exhibits
Item 24(a). Financial Statements
The financial statements listed below are included in Part A of this
Amendment to the Registration Statement:
- - ------------------------------------------------------------------ ----- -------
EVERGREEN VA FUND
Financial Highlights
For the year ended December 31, 1997;
and for the period from March 1, 1996
(Commencement of Operations) to
December 31, 1996
- - ------------------------------------------------------------------ ----- -------
EVERGREEN VA GROWTH AND INCOME FUND
Financial Highlights
For the year ended December 31, 1997;
and for the period
from March 1, 1996
(Commencement of Operations)
to December 31, 1996
- - ------------------------------------------------------------------ ----- -------
EVERGREEN VA FOUNDATION FUND
Financial Highlights
For the year ended December 31, 1997;
and for the period from March 1, 1996
(Commencement of Operations)
to December 31, 1996
EVERGREEN VA GLOBAL LEADERS FUND
Financial Highlights For the period from March 6, 1997 (Commencement of
Operations) to December 31, 1997
EVERGREEN VA STRATEGIC INCOME FUND
Financial Highlights For the period from March 6, 1997(Commencement of
Operations) to December 31, 1997
EVERGREEN VA AGGRESSIVE GROWTH FUND
Financial Highlights For the period from March 6, 1997 (Commencement of
Operations) to December 31, 1997
The financial statements listed below are incorporated in reference in
Part B of this Amendment to the Registration Statement:
Schedule of Investments December 31, 1997
Statement of Assets and Liabilities December 31, 1997
Statement of Operations Year or period ended December
31, 1997
Statement of Changes in Net Assets
Evergreen VA Fund For the year ended December
Evergreen VA Foundation Fund 31, 1997
Evergreen VA Growth and Income Fund
For the period from March 6,
Evergreen VA Global Leaders Fund 1997 to December 31, 1997
Evergreen VA Aggressive Growth Fund
Evergreen VA Strategic Income Fund
Notes to Financial Statements December 31, 1997
Independent Auditors' Report January 30, 1998
Statement of Assets and Liabilities of Evergreen VA Small Cap Equity Income Fund
As of March 20, 1998
Independent Auditors' Report (Evergreen VA Small Cap Equity Income Fund
March 20, 1998
<PAGE>
<TABLE>
<S>
Item 24(b). Exhibits
Exhibit
Number Description Location
- - ------- ----------- --------
<S> <C> <C>
1 Declaration of Trust Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998
2 By-Laws Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998
3 Not applicable
4 Provisions of instruments defining the Incorporated by reference to Registrant's Post-Effective
rights of holders of the securities being Amendment No. 7 filed on June 5, 1998.
registered are contained in the
Declaration of Trust Articles II, III.(6)(c), VI.(3), IV.(8),
V, VI, VII, VIII and By-laws Articles II, III and VIII
included as part of Exhibits 1 and 2 of this Registration
Statement
5(a) Investment Advisory and Management Incorporated by reference to Registrant's Post-Effective
Agreement between the Registrant and First Amendment No. 5 filed on March 20, 1998
Union National Bank
5(b) Investment Advisory and Management Incorporated by reference to Registrant's Post-Effective
Agreement between the Registrant and Amendment No. 5 filed on March 20, 1998
Evergreen Asset Management Corp.
5(c) Form of Sub-Advisory Agreement between Filed herein
Evergreen Asset Management Corp.and
Lieber & Company
Form of Portfolio Management Agreement Filed herein
5(d) between sub-advisors to Evergreen VA
Masters Fund and First Union National Bank.
5(e) Investment Advisory and Management Incorporated by reference to Registrant's Post-Effective
Agreement between the Registrant and Amendment No. 7 filed on June 5, 1998.
Keystone Investment Management Company, as
supplemented
6 Form of Participation Agreement Incorporated by reference to Registrant's Post-Effective
Amendment No. 6 filed on April 28, 1998
7 Not applicable
8 Custodian Agreement between the Registrant Incorporated by reference to Registrant's Post-Effective
and State Street Bank and Trust Company Amendment No. 6 filed on April 28, 1998
9(a) Administration Agreement between Evergreen Incorporated by reference to Registrant's Post-Effective
Investment Services, Inc. and the Amendment No. 5 filed on March 20, 1998
Registrant
9(b) Transfer Agent Agreement between the Incorporated by reference to Registrant's Post-Effective
Registrant and Evergreen Service Company Amendment No. 6 filed on April 28, 1998
10 Opinion and Consent of Sullivan & Incorporated by reference to Registrant's Post-Effective
Worcester LLP Amendment No. 5 filed on March 20, 1998
11 Consent of KPMG Peat Marwick LLP Incorporated by reference to Registrant's Post-Effective
Amendment No. 6 filed on April 28, 1998
12 Not applicable
13 Not applicable
15 Not applicable
16 Fund Performance Incorporated by reference to Registrant's Post-Effective
Amendment No. 6 filed on April 28, 1998
17 Financial Data Schedules Incorporated by reference to Registrant's Post-Effective
Amendment No. 6 filed on April 28, 1998
18 Not Applicable
19 Powers of Attorney Incorporated by reference to Registrant's Post-Effective
Amendment No. 6 filed on April 28, 1998
</TABLE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
None
Item 26. Number of Holders of Securities (as of May 31, 1998)
Evergreen VA Fund 5
Evergreen VA Growth and Income Fund 4
Evergreen VA Foundation Fund 5
Evergreen VA Global Leaders Fund 3
Evergreen VA Strategic Income Fund 3
Evergreen VA Aggressive Growth Fund 3
Evergreen VA Small Cap Equity Income Fund 0
Evergreen VA International Growth Fund 0
Item 27. Indemnification
Provisions for the indemnification of the Registrant's Trustee and
officers are contained in the Registrant's Declaration of Trust.
Provisions for the indemnification of Registrant's Investment Advisors
are contained in their Investment Advisory and Management Agreements.
Provisions for the indemnification of Evergreen Distributor, Inc., the
Registrant's principal underwriter, are contained in each Principal Underwriting
Agreement between Evergreen Distributor, Inc. and the Registrant.
Item 28. Business or Other Connections of Investment Adviser.
The Directors and principal executive officers of First Union National
Bank are:
Edward E. Crutchfield, Jr. Chairman and Chief Executive Officer, First Union
Corporation; Chief Executive Officer and Chairman,
First Union National Bank
John R. Georgius President, First Union Corporation; Vice Chairman
and President, First Union National Bank
Marion A. Cowell, Jr. Executive Vice President, Secretary & General
Counsel, First Union Corporation; Secretary and
Executive Vice President, First Union National Bank
Robert T. Atwood Executive Vice President and Chief Financial Officer,
First Union Corporation; Chief Financial Officer and
Executive Vice President
All of the above persons are located at the following address: First
Union National Bank, One First Union Center, Charlotte, NC 28288.
The information required by this item with respect to Evergreen Asset
Management Corp. is incorporated by reference to the Form ADV (File No.
801-46522) of Evergreen Asset Management Corp.
The information required by this item with respect to Keystone
Investment Management Company is incorporated by reference to the Form ADV (File
No. 801-8327) of Keystone Investment Management Company.
Item 29. Principal Underwriters.
The Directors and principal executive officers of Evergreen Distributor,
Inc. are:
Lynn C. Mangum Director, Chairman and Chief Executive Officer
J. David Huber President
Kevin J. Dell Vice President, General Counsel and Secretary
All of the above persons are located at the following address:
Evergreen Distributor, Inc., 125 West 55th Street, New York, New York 10019.
Evergreen Distributor, Inc. acts as principal underwriter for each
registered investment company or series thereof that is a part of the Evergreen
"fund complex" as such term is defined in Item 22(a) of Schedule 14A under the
Securities Exchange Act of 1934.
Item 30. Location of Accounts and Records.
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Evergreen Investment Services, Inc., Evergreen Service Company and
Keystone Investment Management Company, all located at 200 Berkeley
Street, Boston, Massachusetts 02110
First Union National Bank, One First Union Center, 301 S. College
Street, Charlotte, North Carolina 28288
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase,
New York 10577
Iron Mountain, 3431 Sharp Slot Road, Swansea, Massachusetts 02777
State Street Bank and Trust Company, 2 Heritage Drive, North Quincy,
Massachusetts 02171
Item 31. Management Services.
Not Applicable
Item 32. Undertakings.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Columbus, and State of Ohio, on the 19th day of
October, 1998.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ William J. Tomko
-------------------------
Name: William J. Tomko
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 19th day of October, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/William J. Tomko /s/Laurence B. Ashkin /s/Charles A. Austin, III
- - ------------------- --------------------- -------------------------
William J. Tomko Laurence B. Ashkin* Charles A. Austin III *
President and Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/K. Dun Gifford /s/James S. Howell /s/William Walt Pettit
- - ------------------ ------------------ ----------------------
K. Dun Gifford* James S. Howell* William Walt Pettit*
Trustee Trustee Trustee
/s/Gerald M. McDonnell /s/Thomas L. McVerry /s/Michael S. Scofield
- - ---------------------- --------------------- ----------------------
Gerald M. McDonnell* Thomas L. McVerry* Michael S. Scofield*
Trustee Trustee Trustee
/s/David M. Richardson /s/Russell A. Salton, III MD
- - ---------------------- ----------------------------
David M. Richardson* Russell A. Salton, III MD *
Trustee Trustee
/s/Richard J. Shima
- - -------------------
Richard J. Shima*
Trustee
*By: /s/William J. Tomko
- - --------------------------------
William J. Tomko
Attorney-in-Fact
</TABLE>
*William J. Tomko, by signing his name hereto, does hereby sign this document on
behalf of each of the above-named individuals pursuant to powers of attorney
duly executed by such persons.
December 23, 1997
Lieber & Company
2500 Westchester Avenue
Purchase, New York 10577
Ladies and Gentlemen:
We have entered into an agreement with Evergreen Variable Annuity
Trust, a Delaware business trust (the "Trust"), pursuant to which we act as
investment adviser to the series under the Trust listed on Schedule A attached
hereto (each a "Fund"). We hereby agree with you as follows:
1. You agree for the duration of this Agreement that you will provide us
with office facilities and, through your research personnel, furnish us with all
such factual information and investment recommendations and such other services
as we shall reasonably request. We shall expect of you, and you shall give us,
the benefit of your best judgment and efforts in rendering these services to us,
and we agree as an inducement to your undertaking these services that you shall
not be liable to us under this paragraph for any mistake of judgment or in any
event whatsoever, except for lack of good faith. However, nothing herein shall
be deemed to protect or purport to protect you against any liability to the Fund
or its shareholders to which you would otherwise be subject by reason of wilful
misfeasance, bad faith, or gross negligence in the performance of your duties,
or by reason of your reckless disregard of your obligations and duties
hereunder.
2. We agree to reimburse you on the basis of your direct and indirect costs
of performing the services set forth in paragraph 1 above. Indirect costs shall
be allocated on a basis mutually satisfactory to you and us.
3. As used in this Agreement, the terms "assignment" and "vote of a
majority of the outstanding voting securities" shall have the meanings given to
them by Sections 2(a) (4) and 2(a) (42), respectively, of the Investment Company
Act of 1940, as amended (the "Act").
This Agreement will terminate automatically in the event of its
assignment, or upon termination of the above-mentioned agreement between the
Trust and the undersigned.
This Agreement may be terminated at any time, without the payment of
any penalty, (a) by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Fund or by the undersigned, on sixty days'
written notice addressed to you at your principal place of business; and (b) by
you, without payment of any penalty, on sixty days' written notice addressed to
the Trust and the undersigned at the Trust's principal place of business.
This Agreement shall be in effect for two years from the date set forth
above. This Agreement shall continue in effect from year to year thereafter so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Trust who are not interested persons (as such
term is defined in the Act) of any party to this Agreement, voting in person at
a meeting called for the purpose of voting on such approval, and by a vote of
the Trustees of the Trust or a majority of the outstanding voting securities of
the Fund.
You agree to advise us of any change in your partnership within a
reasonable time after such a change.
4. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you.
5. It is expected that you will provide brokerage services to the Fund.
Accordingly, you agree to comply with Section 11(a)(1) of the Securities
Exchange Act of 1934 and any rules prescribed by the Securities and Exchange
Commission thereunder, as amended from time to time, with respect to brokerage
transactions effected and/or executed by you on behalf of the Fund. In addition,
you shall furnish at least annually to us a statement setting forth the total
amount of all compensation retained by you in connection with effecting and/or
executing transactions for the account during the period covered by the
statement, as required by Section 11(a)(1).
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart hereof and return the same to us.
Very truly yours,
EVERGREEN ASSET MANAGEMENT CORP.
The foregoing Agreement is By:
hereby accepted as of the Name:
date first above written Title:
LIEBER & COMPANY
By:
Name:
Title:
<PAGE>
SCHEDULE A
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
Evergreen VA Masters Fund
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this ___ day of ______, 1998, by and between First Union
National Bank, a national banking association, (the "Advisor"), and
______________________________ , ___________________corporation (the "Manager").
WHEREAS, the Advisor has been organized to serve as investment manager
of the Evergreen Masters Fund ("Fund"), a series of Evergreen Equity Trust (the
"Trust"), a Delaware business trust which has filed a registration statement
under the Investment Company Act of 1940, as amended (the "1940 Act") and the
Securities Act of 1933 (the "Registration Statement"); and
WHEREAS, the Trust is comprised of several separate investment
portfolios, one of which is the Fund; and
WHEREAS, the Advisor desires to avail itself of the services, advice
and assistance of the Manager to assist the Advisor in providing investment
advisory services to the Fund; and
WHEREAS, the Manager is registered under the Investment Advisers Act of
1940, as amended (the "Advisers Act"), is engaged in the business of rendering
investment advisory services to investment companies and other institutional
clients and desires to provide such services to the Advisor;
NOW, THEREFORE, in consideration of the terms and conditions
hereinafter set forth, it is agreed as follow:
1. Employment of the Adviser. The Advisor hereby employs the Manager to
manage the investment and reinvestment of that portion of the Fund which the
Advisor allocates to the Manager from time to time (the "Account"), subject to
the control and direction of the Trust's Board of Trustees, for the period and
on the terms hereinafter set forth. The Manager hereby accepts such employment
and agrees during such period to render the services and to assume the
obligations herein set forth for the compensation herein provided. The Manager
shall for all purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized (whether herein or otherwise),
have no authority to act for or represent the Advisor, the Fund or the Trust in
any way. The Manager may execute account documentation, agreements, contracts
and other documents requested by brokers, dealers, counterparties and other
persons in connection with its management of the Account.
2. Rebalancing of the Fund. In addition to the Manager, the Advisor
intends to appoint three other sub-advisers to assist in the management of the
Fund's assets, and to allocate to each sub-adviser 25% of all Fund inflows from
share sales and distribution reinvestments and 25% of all Fund outflows from
share redemptions and cash distributions. The Advisor and the Manager
acknowledge that market action may result in each sub-adviser managing more or
less than 25%
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<PAGE>
of the Fund's assets at any point in time. The Advisor agrees that it will not
actively reallocate Fund assets among the sub-advisers unless average daily net
assets allocated to one sub-adviser (i) exceeds 35% or (ii) is less than 15%, in
each case of average daily net assets of the Fund for three consecutive calendar
months. Upon the occurrence of such an event, then Advisor may, but shall not be
obligated to, reallocate Fund assets among the sub-advisers so as to provide for
more equal distribution of Fund assets among sub-advisers. The Advisor shall
provide each subadviser affected by such reallocation with at least 30 days
prior notice thereof.
3. Obligations of Services to be Provided by the Manager. The Manager
undertakes to provide the following services and to assume the following
obligations:
a. The Manager shall manage the investment and reinvestment of the
portfolio assets of the Account, all without prior consultation with the
Advisor, subject to and in accordance with (i) the investment objective and
policies of the Fund set forth in the Fund's Prospectus and Statement of
Additional Information as from time to time in effect (the "Governing
Documents") (ii) the requirements applicable to registered investment companies
under applicable laws, including without limitation the Investment Company Act
of 1940 ("1940 Act") and Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") and (iii) any written instructions which the Advisor or the
Trust's Board of Trustees may issue from time-to-time; provided, however, that
for purposes of determining compliance with the Governing Documents and with
applicable law, the Manager may treat the Account as if it constituted the
entire Fund. The Manager also agrees to conduct its activities hereunder in
accordance with any applicable procedures or policies adopted by the Trust's
Board of Trustees as from time to time in effect (the "Procedures"). The Advisor
has provided to the Manager copies of all Governing Documents and Procedures and
shall promptly provide to the Manager any amendments or supplements thereto.
Subject to and in pursuance of the foregoing, the Manager shall make all
determinations with respect to the purchase and sale of portfolio securities and
shall take such action necessary to implement the same. The Manager shall render
such reports to the Trust's Board of Trustees and the Advisor as they may
reasonably request concerning the investment activities of the Account. Unless
the Advisor gives the Manager written instructions to the contrary, the Manager
shall, in good faith and in a manner which it reasonably believes best serves
the interests of the Account's shareholders, direct the Account's custodian as
to how to vote such proxies as may be necessary or advisable in connection with
any matters submitted to a vote of shareholders of securities held in the
Account.
b. Absent instructions of the Advisor to the contrary, the Manager
shall, in the name of the Fund, place orders for the execution of portfolio
transactions with or through such brokers, dealers or other financial
institutions as it may select. The Manager shall use its best efforts to obtain
"best execution" on all portfolio transactions executed on behalf of the Fund,
provided that, so long as the Manager has complied with Section 28(e) of the
Securities Exchange Act of 1934, the Manager may cause the Fund to pay a
commission on a transaction in excess of the amount of commission another
broker-dealer would have charged.
c. In connection with the placement of orders for the execution of the
portfolio
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<PAGE>
transactions of the Account, the Manager shall create and maintain all necessary
records pertaining to the purchase and sale of securities by the Manager on
behalf of the Account in accordance with all applicable laws, rules and
regulations, including but not limited to records required by Section 31(a) of
the 1940 Act. All records shall be the property of the Trust and shall be
available for inspection and use by the Securities and Exchange Commission
("SEC"), the Trust, the Advisor or any person retained by the Trust at all
reasonable times. Where applicable, such records shall be maintained by the
Manager for the periods and in the places required by Rule 31a-2 under the 1940
Act.
d. The Manager shall bear its expenses of providing services pursuant
to this Agreement.
4. Compensation of the Manager. In full consideration of services
rendered pursuant to this Agreement, the Advisor will pay the Manager a fee at
the annual rate set forth in Schedule A hereto of the value of the Account's
average daily net assets. Such fee shall be accrued daily and paid monthly as
soon as practicable after the end of each month. If the Manager shall serve for
less than the whole of any month, the foregoing compensation shall be prorated.
For the purpose of determining fees payable to the Manager, the value of the
Account's net assets shall be computed at the times and in the manner that the
Fund's net assets are computed, as specified in the Governing Documents.
5. Other Activities of the Manager. The services of the Manager
hereunder are not to be deemed exclusive, and the Manager shall be free to
render similar services to others and to engage in other activities, so long as
the services rendered hereunder are not impaired.
6. Use of Names. The Advisor shall not use the name of the Manager or
any of its affiliates in any prospectus, sales literature or other material
relating to the Trust or the Fund in any manner not approved prior thereto by
the Manager; provided, however, that the Advisor may use the name of the Manager
and its affiliates in any such material that merely refers in accurate terms to
the Manager's appointment hereunder. The Manager shall not use the name of the
Trust or the Advisor in any material relating to the Manager in any manner not
approved prior thereto by the Advisor; provided, however, that the Manager may
use the name of the Advisor or the Trust in any material that merely refers in
accurate terms to the appointment of the Manager hereunder.
7. Liability of the Manager. Absent willful misfeasance, bad faith,
gross negligence, or reckless disregard of obligations or duties hereunder on
the part of the Manager, the Manager shall not be liable for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security.
Subject to the foregoing, nothing herein shall constitute a waiver of any rights
or remedies which the Trust may have under any federal or state securities laws.
8. Limitation of Trust's Liability. The Manager acknowledges that it
has received notice of and accepts the limitations upon the Trust's liability
set forth in its Agreement and Declaration of Trust. The Manager agrees that any
of the Trust's obligations shall be limited to the assets of
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<PAGE>
the Fund and that the Manager shall not seek satisfaction of any such obligation
from the shareholders of the Trust nor from any Trust officer, employee or agent
of the Trust.
9. Renewal, Termination and Amendment. This Agreement shall continue in
effect, unless sooner terminated as hereinafter provided, for a period of two
years from the date hereof and shall continue in full force and effect for
successive periods of one year thereafter, but only so long as each such
continuance is specifically approved at least annually by vote of the holders of
a majority of the outstanding voting securities of the Fund or by vote of a
majority of the Trustees who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. This Agreement may be terminated at any time without
payment of any penalty, by the Trust's Board of Trustees, by the Advisor, or by
a vote of a majority of the outstanding voting securities of the Fund upon 60
days' prior written notice to the Manager or by the Manager upon 90 days' prior
written notice to the Advisor, or upon such shorter notice as may be mutually
agreed upon. This Agreement shall terminate automatically and immediately upon
termination of the Investment Advisory and Management Agreement between the
Advisor and the Trust. This Agreement shall terminate automatically and
immediately in the event of its assignment. The terms "assignment" and "vote of
a majority of the outstanding voting securities" shall have the meaning set
forth for such terms in the 1940 Act. This Agreement may be amended at any time
by the Manager and the Advisor, subject to approval by the Trust's Board of
Trustees and, if required by applicable SEC rules and regulations, a vote of a
majority of the Fund's outstanding voting securities.
10. Confidential Relationship. Any information and advice furnished by
either party to this Agreement to the other shall be treated as condidential and
shall not be disclosed to third parties without the consent of the other party
hereto except as requiredby law, rule or regulation. The Advisor hereby consents
to the disclosure to third parties of investment results and other data of the
Account in connection with providing composite investment results and related
information of the Manager.
11. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statue, rule or otherwsise, the remainder of
this Agreement shall not be affected thereby.
12. Miscellaneous. This Agreement constitutes the full and complete
agreement of the parties hereto with respect to the subject matter hereof. Each
party agrees to perform such further actions and execute such further documents
as are necessary to effectuate the purposes hereof. This Agreement shall be
construed and enforced in accordance with and governed by the laws of the
Commonwealth of Massachusetts. The captions in this Agreement are included for
convience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed in
several counterparts, all of which together shall for all purposes constitute
one Agreement, binding on the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first written above.
FIRST UNION NATIONAL BANK
By: _______________________________
Authorized Officer
[MANAGER]
By: _______________________________
Authorized Officer
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<PAGE>
SCHEDULE A
Evergreen Masters ____% of average daily net assets of the Fund Account
24650
