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. 17 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 20 [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:
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] 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)(1)
[ ] on (date) pursuant to paragraph (a)(1)
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 17
TO
REGISTRATION STATEMENT
This Post-Effective Amendment No. 17 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
PART A
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Prospectus for Evergreen VA Capital Growth Fund, Evergreen VA
Growth Fund, Evergreen VA High Income Fund and Evergreen VA
Perpetual International Fund is contained herein.
Prospectus for the following funds is contained in Registration
Statement No. No. 33-83100/811-8716 filed on September 28, 1999:
Evergreen VA Equity Index Fund, Evergreen VA Fund, Evergreen VA Foundation
Fund, Evergreen VA Global Leaders Fund, Evergreen VA Growth and Income Fund,
Evergreen VA International Growth Fund, Evergreen VA Masters Fund,
Evergreen VA Omega Fund, Evergreen VA Small Cap Value Fund, Evergreen VA
Special Equity Fund and Evergreen VA Strategic Income Fund.
PART B
------
Statement of Additional Information for Evergreen VA Capital
Growth Fund, Evergreen VA Growth Fund, Evergreen VA High
Income Fund and Evergreen VA Perpetual International Fund
is contained herein.
Statement of Additional Information for the following funds is
contained in Registration Statement No. No. 33-83100/811-8716
filed on September 28, 1999: Evergreen VA Equity Index Fund, Evergreen VA Fund,
Evergreen VA Foundation Fund, Evergreen VA Global Leaders Fund, Evergreen VA
Growth and Income Fund, Evergreen VA International Growth Fund,
Evergreen VA Masters Fund, Evergreen VA Omega Fund, Evergreen VA Small
Cap Value Fund, Evergreen VA Special Equity Fund and Evergreen VA Strategic
Income 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
PART A
PROSPECTUS
<PAGE>
Evergreen Variable Annuity Trust
Evergreen VA Capital Growth Fund
Evergreen VA Growth Fund
Evergreen VA High Income Fund
Evergreen VA Perpetual International Fund
Prospectus, October 1, 1999
The Securities and Exchange Commission has not determined that the information
in this prospectus is accurate or complete, nor has it approved or disapproved
these securities. Anyone who tells you otherwise is committing a crime.
<PAGE>
FUND RISK/RETURN SUMMARIES:
Overview Of Fund Risks 1
Evergreen VA Capital Growth Fund 2
Evergreen VA Growth Fund 4
Evergreen VA High Income Fund 6
Evergreen VA Perpetual International Fund 8
GENERAL INFORMATION:
The Funds' Investment Advisors 10
The Funds' Portfolio Managers 10
Calculating the Share Price 12
Participating Insurance Companies 12
How to Buy and Redeem Shares 13
Other Services 13
The Tax Consequences of
Investing in the Funds 14
Fees and Expenses of the Funds 15
Other Fund Practices 16
In general, Funds included in this prospectus provide investors with a selection
of investment alternatives which seek to provide capital growth, income and
diversification. Shares of the Funds are sold only to separate accounts funding
variable annuity contracts and variable life insurance policies issued by life
insurance companies. For further information about these contracts and policies,
please see the separate prospectuses issued by the participating life insurance
companies.
Fund Summaries Key
Each Fund's summary is organized around the following basic topics and
questions:
Investment Goal
What is the Fund's financial objective? You can find clarification on how the
Fund seeks to achieve its objective by looking at the Fund's strategy and
investment policies. The Fund's Board of Trustees can change the investment
objective without a shareholder vote.
Investment Strategy
How does the Fund go about trying to meet its goals? What types of investments
does it contain? What style of investing and investment philosophy does it
follow? Does it have limits on the amount invested in any particular type of
security?
Risk Factors
What are the specific risks for an investor in the Fund?
Performance
How well has the Fund performed in the past year? The past five years? The past
ten years?
<PAGE>
OVERVIEW OF FUND RISKS
Variable
Annuity Funds
Shares of the Funds are sold only to separate accounts funding variable annuity
contracts and variable life insurance policies issued by life insurance
companies. Shares of the four Funds offered in this prospectus will not be
available for sale until a later date. For more information about these Funds
and the other variable annuity funds offered by Evergreen, please contact
1-800-343-2898. Evergreen Variable Annuity Funds seek to provide investors with
a selection of investment alternatives which seek to provide capital growth,
income and diversification.
Following this overview, you will find information on each Variable Annuity
Fund's specific investment strategies and risks.
Risk Factors For All Mutual Funds
Please remember that mutual fund shares are:
o not guaranteed to achieve their goal
o not insured, endorsed or guaranteed by the FDIC, a bank or any government
agency
o subject to investment risks, including possible loss of your original
investment.
Like most investments, your investment in an Evergreen Variable Annuity Fund
could fluctuate significantly in value over time and could result in a loss of
money.
Here are the most important factors that may affect the value of your
investment:
Stock Market Risk
Your investment in a Fund that invests in stocks will be affected by general
economic conditions such as prevailing economic growth, inflation and interest
rates. When economic growth slows, or interest or inflation rates increase,
securities tend to decline in value. Such events also could cause companies to
decrease the dividends they pay. If these events were to occur, the value of and
dividend yield and total return earned on your investment would likely decline.
Even if general economic conditions do not change, your investment may decline
in value if particular industries, issuers or sectors your Fund invests in do
not perform well.
Interest Rate Risk
When interest rates go up, the value of debt securities tends to fall. If your
Fund invests a significant portion of its portfolio in debt securities or
dividend paying stocks and interest rates rise, then the value of and total
return earned on your investment may decline. When interest rates go down,
interest earned by your Fund on its investments may also decline, which could
cause the Fund to reduce the dividends it pays.
Credit Risk
The value of a debt security is directly affected by the issuer's ability to
repay principal and pay interest on time. If your Fund invests in debt
securities, then the value of and total return earned on your investment may
decline if an issuer fails to pay an obligation on a timely basis.
Small Company Risk
If your Fund invests in small companies, your investment may be subject to
special risks associated with investing in such companies. Smaller, less
established companies tend to be more dependent on individual managers and
limited products and product lines. Additionally, securities issued by small
companies also tend to fluctuate in value more dramatically than those of larger
companies.
Foreign Investment Risk
If your Fund invests in non-U.S. securities it could be exposed to certain
unique risks of foreign investing. For example, political turmoil and economic
instability in the countries in which the Fund invests could adversely affect
the value of your investment. In addition, if the value of any foreign currency
in which the Fund's investments are denominated declines relative to the U.S.
dollar, the value of your investment in the Fund may decline as well. Certain
foreign countries have less developed and less regulated securities markets and
accounting systems than the U.S. This may make it harder to get accurate
information about a security or company, and increase the likelihood that an
investment will not perform as well as expected.
<PAGE>
VA Capital Growth Fund
FUND FACTS:
Goal:
AE Capital Appreciation
Principal Investment:
AE Common Stocks
Investment Advisor:
AE Mentor Investment Advisors LLC
Portfolio Manager:
AE By committee of investment professionals
NASDAQ Symbol:
None
Dividend Payment Schedule:
AE Annually
[GRAPHIC OMITTED] Investment Goal
The Fund seeks to provide long-term appreciation of capital.
[GRAPHIC OMITTED] Investment Strategy
The Fund invests primarily in common stocks. The Fund may also invest in
preferred stocks, investment grade bonds (i.e., rated at the time of purchase at
least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB- by Standard &
Poor's Ratings Services ("S&P") or deemed by the portfolio manager to be of
comparable quality), convertible preferred stocks, convertible debentures, and
any other class or type of security which the portfolio manager believes offers
the potential for capital appreciation. In selecting investments, the advisor
attempts to identify securities it believes will provide capital appreciation
over the intermediate or long term due to changes in the financial condition of
issuers, changes in financial conditions generally, or other factors.
The Fund may invest up to 15% of its total assets in foreign securities.
The Fund intends to sell a portfolio investment when the issuer's investment
fundamentals begin to deteriorate, when the investment no longer appears to meet
the Fund's investment objective, when the Fund must meet redemptions, or for
other investment reasons which the investment advisor deems necessary.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal, and if employed could result in a lower return and loss of
market opportunity.
[GRAPHIC OMITTED] Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview
of Fund Risks" on page 1 under the headings:
o Stock Market Risk
o Interest Rate Risk
o Credit Risk
o Foreign Investment Risk
For further information regarding the Fund's investment strategy and risk
factors see "Other Fund Practices."
Performance
Since the Fund has not yet commenced operations, total return information is not
yet available for a full calendar year.
<PAGE>
VA Growth Fund
FUND FACTS:
Goal:
AE Capital Growth
Principal Investment:
AE Common Stocks
Investment Advisor:
AE Mentor Investment Advisors LLC
Portfolio Manager:
AE By committee of investment professionals
NASDAQ Symbol:
None
Dividend Payment Schedule:
AE Annually
[GRAPHIC OMITTED] Investment Goal
The Fund seeks long-term capital growth.
[GRAPHIC OMITTED] Investment Strategy
The Fund normally invests at least 75% of its assets in common stocks of
companies domiciled or located in the United States. The Fund invests
principally in common stocks of small to mid-sized companies that, in the
opinion of the portfolio manager, have demonstrated earnings, asset values, or
growth potential not yet reflected in their market price. A key indication
considered by the portfolio manager is earnings growth which is above average
compared to the S&P 500 Index. Other important factors in selecting investments
include a strong balance sheet and product leadership in niche markets.
The Fund intends to sell a portfolio investment when the issuer's investment
fundamentals begin to deteriorate, when the investment no longer appears to meet
the Fund's investment objective, when the Fund must meet redemptions, or for
other investment reasons which the investment advisor deems necessary.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal, and if employed could result in a lower return and loss of
market opportunity.
[GRAPHIC OMITTED] Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview
of Fund Risks" on page 1 under the headings:
o Stock Market Risk
o Small Company Risk
For further information regarding the Fund's investment strategy and risk
factors see "Other Fund Practices."
Performance
Since the Fund has not yet commenced operations, total return information is not
yet available for a full calendar year.
<PAGE>
VA High Income Fund
FUND FACTS:
Goals:
AE High Current Income
AE Capital Growth
Principal Investments:
AE Debt Securities
AE Preferred Stocks
Investment Advisor:
AE Mentor Investment Advisors LLC
Portfolio Manager:
AE By committee of investment professionals
NASDAQ Symbol:
None
Dividend Payment Schedule:
AE Annually
[GRAPHIC OMITTED] Investment Goal
The Fund seeks high current income. Capital growth is a secondary objective when
consistent with the objective of seeking high current income.
[GRAPHIC OMITTED] Investment Strategy
The Fund normally invests at least 65% of its assets in securities rated Baa or
lower by Moody's or BBB or lower by S&P and in unrated securities determined by
the portfolio manager to be of comparable quality. The Fund will normally invest
in debt securities and preferred stocks although it may invest in any other
securities the advisor believes will offer high current income. The Fund may
invest in securities of any maturity. The Fund may at times invest up to 10% of
its assets in securities rated in the lowest grades (Ca or C by Moody's and CC,
C or D by S&P) or in unrated securities determined by the portfolio manager to
be of comparable quality if the advisor believes that there are (i) prospects
for an upgrade in the rating or a favorable conversion into other securities or
(ii) significant opportunities for capital appreciation or future rates of high
current income. The Fund may also invest in foreign securities.
The Fund seeks its secondary objective of capital growth, when consistent with
its primary objective of seeking high current income, by investing in securities
which may be expected to appreciate in value as a result of declines in
long-term interest rates or of favorable developments affecting the business or
prospects of the issuer which may improve the issuer's financial condition and
credit rating.
The Fund intends to sell a portfolio investment when the issuer's investment
fundamentals begin to deteriorate, when the investment no longer appears to meet
the Fund's investment objective, when the Fund must meet redemptions, or for
other investment reasons which the investment advisor deems necessary.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal, and if employed could result in a lower return and loss of
market opportunity.
[GRAPHIC OMITTED] Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview
of Fund Risks" on page 1 under the headings:
o Stock Market Risk
o Interest Rate Risk
o Credit Risk
o Foreign Investment Risk
In addition, the Fund is subject to the risks associated with investing in below
investment grade bonds. These bonds are commonly referred to as "junk bonds"
because they are usually backed by issuers of less proven or questionable
financial strength. Such issuers are more vulnerable to financial setbacks and
less certain to pay interest and principal than issuers of bonds offering lower
yields and risk. Markets may react to unfavorable news about issuers of below
investment grade bonds causing sudden and steep declines in value. For further
information regarding the Fund's investment strategy and risk factors see "Other
Fund Practices."
[GRAPHIC OMITTED]Performance
Since the Fund has not yet commenced operations, total return information is not
yet available for a full calendar year.
<PAGE>
VA Perpetual International Fund
FUND FACTS:
Goal:
AE Capital Appreciation
Principal Investment:
AE Equity Securities
Investment Advisor:
AE Mentor Perpetual Advisors LLC
Portfolio Manager:
AE By committee of investment professionals
NASDAQ Symbol:
None
Dividend Payment Schedule:
AE Annually
[GRAPHIC OMITTED] Investment Goal
The Fund seeks long-term capital appreciation.
Investment Strategy
The Fund invests principally in a diversified portfolio of equity securities of
issuers located outside the United States, such as common stocks, preferred
stocks, securities convertible into common stocks, and warrants to purchase
common stocks or preferred stocks. The Fund seeks to invest in companies, large
or small, where earnings are believed to be in a relatively strong growth trend,
or where significant further growth is not anticipated but where the shares are
thought to be undervalued. The Fund may invest a substantial portion of its
assets in securities of smaller companies and will likely at times invest a
substantial portion of its assets in issuers located in emerging markets. The
Fund's portfolio manager considers a variety of factors, including the
likelihood of above average earnings growth, attractive relative valuation, and
whether the company has any proprietary advantages. The portfolio manager may
also conduct discussions with management, visit the premises of issuers, and
analyze industry and market trends in order to select its investments.
The Fund may invest in domestic or foreign investment grade debt securities of
any maturity.
The Fund intends to sell a portfolio investment when the issuer's investment
fundamentals begin to deteriorate, when the investment no longer appears to meet
the Fund's investment objective, when the Fund must meet redemptions, or for
other investment reasons which the investment advisor deems necessary.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal, and if employed could result in a lower return and loss of
market opportunity.
[GRAPHIC OMITTED] Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview
of Fund Risks" on page 1 under the headings:
o Stock Market Risk
o Interest Rate Risk
o Credit Risk
o Small Company Risk
o Foreign Investment Risk
In addition, the Fund may also be subject to an emerging markets risk. An
"emerging market" is any country considered to be emerging or developing, has a
relatively low gross national product, but the potential for rapid growth (which
can lead to instability). Investing in securities of emerging countries has many
risks. Emerging countries are generally small and rely heavily on international
trade and could be adversely effected by the economic conditions in the
countries with which they trade. There is also a possibility of a change in the
political climate, nationalization, diplomatic developments (including war), and
social instability. Such countries may experience high levels of inflation or
deflation and currency devaluation. Investments in emerging markets are
considered to be speculative.
For further information regarding the Fund's investment strategy and risk
factors see "Other Fund Practices."
[GRAPHIC OMITTED]Performance
Since the Fund has not yet commenced operations, total return information is not
yet available for a full calendar year.
<PAGE>
THE FUNDS' INVESTMENT ADVISORS
The investment advisor manages a Fund's investments and supervises its daily
business affairs. There are two investment advisors for the Evergreen Variable
Annuity Funds in this prospectus. All investment advisors for the Evergreen
Funds are subsidiaries of First Union Corporation, the sixth largest bank
holding company in the United States, with over $230 billion in consolidated
assets as of 6/30/1999. First Union Corporation is located at 301 South College
Street, Charlotte, North Carolina 28288-0013.
Mentor Investment Advisors LLC (Mentor Advisors) is the investment advisor to:
o VA Capital Growth Fund
o VA Growth Fund
o VA High Income Fund
Mentor Advisors and its affilitates serve as investment advisors to over 24
funds in the Mentor family of funds, with total assets under management of $13.9
billion. Mentor Advisors is located at 901 East Byrd Street, Richmond, Virginia
23219.
Mentor Perpetual Advisors LLC (Mentor Perpetual) is the investment advisor to:
o VA Perpetual International Fund
Mentor Perpetual, an investment advisory firm organized in 1995, currently
serves as investment advisor for assets of more than $396.7 million. Mentor
Perpetual is located at 901 East Byrd Street, Richmond, Virginia 23219.
Under the terms of the various investment advisory agreements, the respective
investment advisor is entitled to receive a fee as a percentage of each Fund's
average daily net assets. Each Fund's current contractual fee for advisory
services is set forth below.
Current Contractual
Advisory Fee Rate
VA Capital Growth Fund 0.80%
VA Growth Fund 0.70%
VA High Income Fund 0.70%
VA Perpetual International Fund 1.00%
Year 2000 Compliance
The investment advisors and other service providers for the Evergreen Funds are
taking steps to address any potential Year 2000-related computer problems.
However, there is some risk that these problems could disrupt the Funds'
operations or financial markets generally. In addition, issuers of securities,
especially foreign issuers, in which the Funds invest may be adversely affected
by Year 2000 problems. Such problems could negatively impact the value of the
Funds' securities.
European Currency Conversion Risk
Certain countries in Europe converted their different currencies to a single,
common currency on January 1, 1999. In connection with this change, investment
advisors, mutual funds and their service providers have modified their
accounting and recordkeeping systems to handle the new currency. If a Fund
invests in foreign securities, your investment in the Fund may be adversely
affected if these technical modifications have not been implemented properly.
Also the conversion to a single currency may impair the markets for securities
denominated in the currencies being eliminated, which may also adversely impact
your investment.
THE FUNDS' PORTFOLIO MANAGERS
Each Fund is managed by a committee of investment professionals appointed by its
investment advisor.
CALCULATING THE SHARE PRICE
The value of one share of a Fund, also known as the net asset value, or NAV, is
calculated on each day the New York Stock Exchange is open as of the time the
Exchange closes (normally 4:00 p.m. Eastern time). The Fund calculates its share
price for each share by adding up its total assets, subtracting all liabilities,
then dividing the result by the total number of shares outstanding. Each
security held by a Fund is valued using the most recent market data for that
security. If no market data is available for a given security, the Fund will
price that security at fair value according to policies established by the
Fund's Board of Trustees. Short-term securities with maturities of 60 days or
less will be valued on the basis of amortized cost.
The price per share for a Fund purchase or the amount received for a Fund
redemption is based on the next price calculated after the order is received and
all required information is provided.
Certain Funds may invest in foreign securities that are primarily listed on
foreign exchanges that trade on weekends or other days when the Fund does not
price its shares. As a result, the NAV of the Fund may change on days when
investors will not be able to purchase or redeem the Fund's shares.
PARTICIPATING INSURANCE COMPANIES
The Funds were organized to serve as investment vehicles for separate accounts
funding variable annuity contracts and variable life insurance policies issued
by certain life insurance companies. The Funds do not currently foresee any
disadvantages to the holders of the contracts or policies arising from the fact
that the interests of holders of those contracts or policies 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 variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the participating insurance companies. The Evergreen Variable Annuity
Trust assumes no responsibility for such prospectuses.
HOW TO BUY AND REDEEM SHARES
Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity contracts or variable life insurance policies offered
through separate accounts of participating insurance companies. Investors should
refer to the prospectus of the variable annuity contracts or variable life
insurance policies for information on how to purchase such contracts or
policies, how to select specific Evergreen Variable Annuity Funds as investment
options for the contracts or policies and how to redeem funds or change
investment options.
As of the date of this prospectus, shares of the Funds are not yet available for
sale. Please call 1-800-343-2898 for further information.
The separate accounts of the participating insurance companies place orders to
purchase and redeem shares of the Funds based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
or variable life insurance policies issued by the participating insurance
companies) to be effected on that day pursuant to the contracts or policies.
The Funds do not assess any fees upon purchase or redemption. However, surrender
charges, mortality and expense risk fees and other charges may be assessed by
the participating insurance companies under the variable annuity contracts or
variable life insurance policies. Such fees are described in the prospectus of
such contracts or policies.
Timing of Proceeds
Normally, we will send redemption proceeds on the next business day after we
receive a request; however, we reserve the right to wait up to seven business
days to redeem any investments.
OTHER SERVICES
Automatic Reinvestment of Dividends
For the convenience of investors, all dividends and capital gains are
distributed to the separate accounts of participating insurance companies and
are automatically reinvested, unless requested otherwise.
THE TAX CONSEQUENCES OF INVESTING IN THE FUNDS
Fund Distributions
Each Fund passes along the net income or profits it receives from its
investments. The Evergreen Variable Annuity Funds expect that any distributions
to separate accounts will be exempt from current federal income taxation to the
extent that such distributions accumulate in a variable annuity contract or
variable life insurance policy.
o Dividends. The Fund pays a yearly dividend from the dividends, interest
and other income on the securities in which it invests.
o Capital Gains. When a mutual fund sells a security it owns for a profit, the
result is a capital gain. Evergreen Variable Annuity Funds generally
distribute capital gains, if any, at least once a year.
For a discussion of the tax consequences of variable annuity contracts or
variable life insurance policies, refer to the prospectus of the variable
annuity contract or variable life insurance policies offered by the
participating insurance company. Variable annuity contracts or variable life
insurance policies 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 variable annuity contract or variable life insurance policies,
distributions from the contract or policy 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 advisors for a more complete discussion of possible tax
consequences in a particular situation.
FEES AND EXPENSES OF THE FUNDS
Every mutual fund has fees and expenses that are assessed either directly or
indirectly. This section describes each of those fees.
Management Fee
The management fee pays for the normal expenses of managing the Fund, including
portfolio manager salaries, research costs, corporate overhead expenses and
related expenses.
Other Expenses
Other expenses include miscellaneous fees from affiliated and outside service
providers. These may include legal, audit, custodial and safekeeping fees, the
printing and mailing of reports and statements, automatic reinvestment of
distributions and other conveniences for which the shareholder pays no
transaction fees.
Total Fund Operating Expenses
The total cost of running the Fund is called the expense ratio. As a
shareholder, you are not charged these fees directly; instead they are taken out
before the Fund's net asset value is calculated, and are expressed as a
percentage of the Fund's average daily net assets. The effect of these fees is
reflected in the performance results. Because these fees are "invisible,"
investors should examine them closely, especially when comparing one fund with
another fund in the same investment category. There are three things to remember
about expense ratios: 1) your total return in the Fund is reduced in direct
proportion to the fees; 2) expense ratios can vary greatly between funds and
fund families, from under 0.25 % to over 3.0%; and 3) a Fund's advisor may waive
a portion of the Fund's expenses for a period of time, reducing its expense
ratio.
OTHER FUND PRACTICES
The Funds may invest in futures and options. Such practices are used to hedge a
Fund's portfolio to protect against changes in interest rates and to adjust the
portfolio's duration. Although this is intended to increase returns, these
practices may actually reduce returns or increase volatility.
If a Fund invests in foreign securities, which may include foreign currency
transactions, the value of the Fund's shares will be affected by changes in
exchange rates. To manage this risk, the Fund may enter into currency futures
contracts and forward currency exchange contracts. Although the Fund uses these
contracts to hedge the U.S. dollar value of a security it already owns, the Fund
could lose money if it fails to predict accurately the future exchange rates.
The Fund may engage in hedging and cross hedging with respect to foreign
currencies to protect itself against a possible decline in the value of another
foreign currency in which certain of the Fund's investments are denominated. A
cross hedge cannot protect against exchange rate risks perfectly, and if a Fund
is incorrect in its judgement of future exchange rate relationships, the Fund
could be in a less advantageous position than if such a hedge had not been
established.
Please consult the Statement of Additional Information for more information
regarding these and other investment practices used by the Funds, including
risks.
<PAGE>
Notes
Evergreen Funds
Money Market
Florida Municipal Money Market Fund
Money Market Fund
Municipal Money Market Fund
New Jersey Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund
Treasury Money Market Fund
U.S. Government Money Market Fund
Municipal Bond
Connecticut Municipal Bond Fund
Florida High Income Municipal Bond Fund
Florida Municipal Bond Fund
Georgia Municipal Bond Fund
High Grade Municipal Bond Fund
Municipal Bond Fund
New Jersey Municipal Bond Fund
North Carolina Municipal Bond Fund
Pennsylvania Municipal Bond Fund
Short-Intermediate Municipal Fund
South Carolina Municipal Bond Fund
Virginia Municipal Bond Fund
Income
Capital Preservation and Income Fund
Diversified Bond Fund
High Yield Bond Fund
Intermediate Term Bond Fund
Short-Intermediate Bond Fund
Strategic Income Fund
U.S. Government Fund
Balanced
Balanced Fund
Foundation Fund
Tax Strategic Foundation Fund
Growth & Income
Blue Chip Fund
Equity Income Fund
Growth and Income Fund
Income and Growth Fund
Small Cap Value Fund
Utility Fund
Value Fund
Domestic Growth
Aggressive Growth Fund
Evergreen Fund
Masters Fund
Omega Fund
Small Company Growth Fund
Stock Selector Fund
Strategic Growth Fund
Tax Strategic Equity Fund
Global International
Emerging Markets Growth Fund
Global Leaders Fund
Global Opportunities Fund
International Growth Fund
Latin America Fund
Precious Metals Fund
Select Equity
Select Equity Index Fund
Select Special Equity Fund
Variable Annuity
VA Capital Growth Fund
VA Equity Index Fund
VA Fund
VA Foundation Fund
VA Global Leaders Fund
VA Growth and Income Fund
VA Growth Fund
VA High Income Fund
VA International Growth Fund
VA Masters Fund
VA Omega Fund
VA Perpetual International Fund
VA Small Cap Value Fund
VA Special Equity Fund
VA Strategic Income Fund
www.evergreen-funds.com
Information Line for Hearing and Speech Impaired (TTY/TDD)
Call 1-800-343-2888
Each business day, 8 a.m. to 6 p.m. Eastern time
Write us a letter
Evergreen Service Company
P.O. Box 2121
Boston, MA 02106-2121
o for general correspondence
For express, registered or certified mail:
Evergreen Service Company
200 Berkeley Street
Boston, MA 02116-5039
Visit us on-line:
www.evergreen-funds.com
<PAGE>
For More Information About the Evergreen Variable Annuity Funds, Ask for:
The Funds' most recent Annual or Semi-annual Report, which contains a
complete financial accounting for each Fund and a complete list of the
Fund's holdings as of a specific date, as well as commentary from the
Fund's portfolio manager. This Report discusses the market conditions and
investment strategies that significantly affected the Fund's performance
during the most recent fiscal year or period.
The Statement of Additional Information (SAI), which contains more detailed
information about the policies and procedures of the Funds. The SAI has
been filed with the Securities and Exchange Commission (SEC) and its
contents are legally considered to be part of this prospectus.
For questions, other information, or to request a copy, without charge, of
any of the documents, call 1-800-343-2898 or ask your investment
representative. We will mail material within three business days.
Information about these Funds (including the SAI) is also available on the
SEC's Internet web site at http://www.sec.gov, or, for a duplication fee,
by writing the SEC Public Reference Section, Washington DC 20549-6009. This
material can also be reviewed and copied at the SEC's Public Reference Room
in Washington, DC. For more information, call the SEC at 1-800-SEC-0330.
Sec File No.: 811-8716
[LOGO OF EVERGREEN FUNDS APPEARS HERE]
<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
October 1, 1999
Evergreen VA Capital Growth Fund ("Capital Growth Fund")
Evergreen VA Growth Fund ("Growth Fund")
Evergreen VA High Income Fund ("High Income Fund ") and
Evergreen VA Perpetual International Fund ("Perpetual International Fund")
Each Fund is a series of Evergreen Variable
Annuity Trust (the "Trust").
This Statement of Additional Information ("SAI") pertains to the Funds
listed above. It is not a prospectus but should be read in conjunction with the
prospectus dated October 1, 1999, for the Fund in which you are interested. The
Funds are offered to separate accounts funding variable annuity and variable
life insurance contracts issued by life insurance companies ("Participating
Insurance Companies"). Copies of the prospectus may be obtained without charge
by calling (800) 343-2898.
O/evt-de/n-1a/vasai-pt1-spec'equity.doc
<PAGE>
TABLE OF CONTENTS
PART 1
FUND HISTORY...........................................................1-1
INVESTMENT POLICIES....................................................1-1
OTHER SECURITIES AND PRACTICES.........................................1-3
PRINCIPAL HOLDERS OF FUND SHARES.......................................1-3
EXPENSES...............................................................1-4
PERFORMANCE............................................................1-8
SERVICE PROVIDERS......................................................1-9
FINANCIAL STATEMENTS..................................................1-10
PART 2
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES..........2-1
PURCHASE, REDEMPTION AND PRICING OF SHARES............................2-16
PERFORMANCE CALCULATIONS..............................................2-17
TAX INFORMATION.......................................................2-19
BROKERAGE.............................................................2-20
ORGANIZATION..........................................................2-22
INVESTMENT ADVISORY AGREEMENT.........................................2-23
MANAGEMENT OF THE TRUST...............................................2-24
CORPORATE BOND RATINGS...............................................2-26
ADDITIONAL INFORMATION................................................2-31
<PAGE>
1-5
PART 1
FUND HISTORY
The Evergreen Variable Annuity Trust is an open-end management
investment company, which was organized as a Delaware business trust on December
23, 1997. Each Fund is a diversified series of Evergreen Variable Annuity Trust.
A copy of the Declaration of Trust is on file as an exhibit to the Trust's
Registration Statement, of which this SAI is a part. The foregoing is qualified
in its entirety by reference to the Declaration of Trust.
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT RESTRICTIONS
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
The 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, the 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.
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks and 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. Each Fund may borrow only as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. Each
Fund may purchase additional securities as long as outstanding borrowings do not
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.
OTHER SECURITIES AND PRACTICES
For information regarding certain securities the Funds may purchase and
certain investment practices the Funds may use, see "Additional Information on
Securities and Investment Practices" in Part 2 of this SAI.
PRINCIPAL HOLDERS OF FUND SHARES
As of August 31, 1999, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding shares of any class of each Fund.
As of August 31, 1999, no person, to each Fund's knowledge, owned
beneficially or of record more than 5% of the outstanding shares each Fund.
EXPENSES
Advisory Fees
Each Fund has its own investment advisor. For more information, see
"Investment Advisory Agreements" in Part 2 of this SAI.
Mentor Investment Advisors, LLC ("Mentor Advisors") is the investment
advisor to Capital Growth Fund, Growth Fund and High Income Fund. Mentor
Advisors is entitled to receive from Capital Growth Fund an annual fee equal to
0.80% of its average daily net assets, from Growth Fund an annual fee equal to
0.70% of its average daily net assets, and from VA High Income an annual fee
equal to 0.70% of its average daily net assets.
Mentor Perpetual Advisors, LLC ("Mentor Perpetual") is the investment
advisor to Perpetual International Fund. Mentor Perpetual is entitled to receive
from Perpetual International Fund an annual fee equal to 1.00% of the average
daily net assets of the Fund.
Advisory Fees Paid
The amounts paid in advisory fees by each Fund for prior fiscal periods
is not available since the Funds had not yet commenced operations as of the date
of this statement of additional information.
Brokerage Commissions
The amount paid in brokerage fees by each Fund for the prior fiscal
periods is not yet available since the Funds had not yet commenced operations as
of the date of this statement of additional information.
Trustee Compensation
Listed below is the Trustee compensation paid by the Trust individually
and by the Trust and the eight other trusts in the Evergreen Fund complex for
the twelve months ended December 31, 1998. The Trustees do not receive pension
or retirement benefits from the Funds. For more information, see "Management of
the Trust" in Part 2 of this SAI.
- ------------------------- -------------------------- ---------------------------
Aggregate Compensation Total Compensation from
Trustee from Trust Trust and Fund Complex Paid
to Trustees*
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Laurence B. Ashkin $39 $75,500
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Charles A. Austin, III $27 $75,500
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
K. Dun Gifford $24 $73,000
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
James S. Howell $36 $84,900
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Leroy Keith Jr. $24 $73,000
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Gerald M. McDonnell $27 $75,500
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Thomas L. McVerry $32 $86,500
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
William Walt Pettit $25 $68,000
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
David M. Richardson $27 $73,300
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Russell A. Salton, III $27 $79,000
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Michael S. Scofield $24 $79,500
- ------------------------- -------------------------- --------------------------
- ------------------------- -------------------------- --------------------------
Richard J. Shima $24 $73,000
- ------------------------- -------------------------- --------------------------
*Certain Trustees have elected to defer all or part of their
total compensation for the twelve months ended December 31,
1998. The amounts listed below will be payable in later years
to the respective Trustees:
Austin $11,325
Howell $65,000
McDonnell $75,000
McVerry $86,500
Pettit $68,000
Salton $79,000
PERFORMANCE
Total Return
The total return for each class of shares of the Funds for the prior
fiscal periods is not available since the Funds had not yet commenced operations
as of the date of this statement of additional information.
For more information, see "Total Return" under "Performance
Calculations" in Part 2 of this SAI.
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
the Funds, subject to the supervision and control of the Trust's Board of
Trustees. EIS provides the Funds with facilities, equipment and personnel and is
entitled to receive a fee from the Funds based on the total assets of all mutual
funds for which EIS serves as administrator and a First Union Corporation
subsidiary serves as advisor. The fee paid to EIS is calculated in accordance
with the following schedule:
---------------------- -----------------
Assets Fee
---------------------- -----------------
---------------------- -----------------
first $7 billion 0.050%
---------------------- -----------------
---------------------- -----------------
next $3 billion 0.035%
---------------------- -----------------
---------------------- -----------------
next $5 billion 0.030%
---------------------- -----------------
---------------------- -----------------
next $10 billion 0.020%
---------------------- -----------------
---------------------- -----------------
next $5 billion 0.015%
---------------------- -----------------
---------------------- -----------------
over $30 billion 0.010%
---------------------- -----------------
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union
Corporation, is the Funds' transfer agent. ESC issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is P.O. Box 2121, Boston,
Massachusetts 02106-2121. The Funds pay ESC annual fees as follows:
- -------------------------------- -------------------- --------------------
Fund Type Annual Fee Per Annual Fee
Open Account* Per
Closed Account**
- -------------------------------- -------------------- --------------------
- -------------------------------- -------------------- --------------------
$25.50
Monthly Dividend Funds $9.00
- -------------------------------- -------------------- --------------------
- -------------------------------- -------------------- --------------------
$24.50
Quarterly Dividend Funds $9.00
- -------------------------------- -------------------- --------------------
- -------------------------------- -------------------- --------------------
$23.50
Semiannual Dividend Funds $9.00
- -------------------------------- -------------------- --------------------
- -------------------------------- -------------------- --------------------
$23.50
Annual Dividend Funds $9.00
- -------------------------------- -------------------- --------------------
- -------------------------------- -------------------- --------------------
$25.50
Money Market Funds $9.00
- -------------------------------- -------------------- --------------------
* For shareholder accounts only. The Fund pays ESC cost plus 15% for broker
accounts.
** Closed accounts are maintained on the system in order to facilitate
historical and tax information.
Independent Auditors
KPMG LLP, 99 High Street, Boston, Massachusetts 02110, audits the
financial statements of each Fund.
Custodian
State Street Bank and Trust Company keeps custody of each Fund's
securities and cash and performs other related duties. The custodian's address
is 225 Franklin Street, Boston, Massachusetts 02110.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Funds. Its
address is 1025 Connecticut Avenue, NW, Washington, D.C. 20036.
<PAGE>
2-1
EVERGREEN FUNDS
Statement of Additional Information ("SAI")
PART 2
ADDITIONAL INFORMATION ON SECURITIES
AND INVESTMENT PRACTICES
The prospectus describes the Fund's investment objective and the
securities in which it primarily invests. The following describes other
securities the Fund may purchase and investment strategies it may use. Some of
the information below will not apply to the Fund in which you are interested.
Unless specifically stated, each Fund may invest in or use the strategies listed
below.
Defensive Investments
The Fund may invest up to 100% of its assets in high quality short-term
obligations, such as notes, commercial paper, certificates of deposit, banker's
acceptances, bank deposits or U.S. government securities if, in the opinion of
the investment advisor, market conditions warrant a temporary defensive
investment strategy.
U.S. Government Securities
The Fund may invest in securities issued or guaranteed by U.S.
government agencies or instrumentalities.
These securities are backed by (1) the discretionary authority of the
U.S. government to purchase certain obligations of agencies or instrumentalities
or (2) the credit of the agency or instrumentality issuing the obligations.
Some government agencies and instrumentalities may not receive
financial support from the U.S. government. Examples of such agencies are:
(i) Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks and Banks for
Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; 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.
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 Fund 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 Fund 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, the 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 the 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 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 the Fund. In
addition, when the 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.
Repurchase Agreements
The 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
investment advisor to be creditworthy. In a repurchase agreement the Fund
obtains a security and simultaneously commits to return the security to the
seller at a set price (including principal and interest) within 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.
The Fund's custodian or a third party will take possession of the
securities subject to repurchase agreements, and these securities will be marked
to market daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund's investment advisor 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 Fund will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker-dealers, which
are deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
Reverse Repurchase Agreements
As described herein, the Fund may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, the 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 the 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 the
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
An option is a right to buy or sell a security for a specified price
within a limited time period. The option buyer pays the option seller (known as
the "writer") for the right to buy, which is a "call" option, or the right to
sell, which is a "put" option. Unless the option is terminated, the option
seller must then buy or sell the security at the agreed-upon price when asked to
do so by the option buyer.
The Fund may buy or sell (i.e., write) put and call options on
securities it holds or intends to acquire and may also purchase put and call
options for the purpose of offsetting previously written put and call options of
the same series. The Fund may also buy and sell options on financial futures
contracts. The Fund will use options as a hedge against decreases or increases
in the value of securities it holds or intends to acquire.
The Fund may write only covered options. With regard to a call option,
this means that the Fund will own, for the life of the option, the securities
subject to the call option. The Fund will cover put options by holding, in a
segregated account, liquid assets having a value equal to or greater than the
price of securities subject to the put option. If the Fund is unable to effect a
closing purchase transaction with respect to the covered options it has sold, it
will not be able to sell the underlying securities or dispose of assets held in
a segregated account until the options expire or are exercised resulting in a
potential loss of value to the Fund.
Futures Transactions
The Fund may enter into 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 or
index-based futures contracts in order to hedge against changes in interest or
exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities at a specified price during a designated
month. 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 continues until the contract is terminated.
The Fund may sell or purchase futures contracts. When a futures contract
is sold by the Fund, the value of the contract will tend to rise when the value
of the underlying securities declines and to fall when the value of such
securities increases. Thus, the Fund sells futures contracts in order to offset
a possible decline in the value of its securities. 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 increases and fall when the value of such
securities declines. The Fund intends to purchase futures contracts in order to
establish what is believed by the investment advisor to be a favorable price or
rate of return for securities the Fund intends to purchase.
The Fund also intends to purchase put and call options on futures
contracts for hedging purposes. A put option purchased by the Fund would give it
the right to assume a position as the seller of a futures contract. A call
option purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order
to terminate a futures contract and may 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.
Although futures and options transactions are intended to enable the
Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates or market prices could result in poorer performance
than if it had not entered into these transactions. Even if the investment
advisor correctly predicts 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. This lack of correlation
between the Fund's futures and securities positions may be caused by differences
between the futures and securities markets or by differences between the
securities underlying the Fund's futures position and the securities held by or
to be purchased for the Fund. The Fund's investment advisor will attempt to
minimize these risks through careful selection and monitoring of the Fund's
futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but currently
intends to write such options only to close out options purchased by the Fund.
The Fund will not change these policies without supplementing the information in
the prospectus and SAI.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather the Fund
is required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that of margin in
securities transactions in that futures contract initial margin does not involve
the borrowing of funds by the Fund to finance the transactions. Initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value the Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Foreign Securities
The Fund may invest in foreign securities or U.S. securities traded in
foreign markets. In addition to securities issued by foreign companies,
permissible investments may also consist of obligations of foreign branches of
U.S. banks and of foreign banks, including European certificates of deposit,
European time deposits, Canadian time deposits and Yankee certificates of
deposit. The Fund may also invest in Canadian commercial paper and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. issuers. Such
risks include the possibility of adverse political and economic developments;
imposition of withholding taxes on interest or other income; seizure,
nationalization, or expropriation of foreign deposits; establishment of exchange
controls or taxation at the source; greater fluctuations in value due to changes
in exchange rates, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
obligations. Such investments may also entail higher custodial fees and sales
commissions than domestic investments. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks.
Foreign Currency Transactions
As one way of managing exchange rate risk, 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 and 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 investment
advisor's 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 strengths of those
currencies and the U.S. dollar, and the Fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates also may affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders by the Fund. The Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
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.
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 immediately paid
the difference and realizes a gain. If the offsetting sale price is less than
the purchase price, the Fund realizes a loss. Similarly, the closing out of a
currency futures contract purchase is effected by the Fund entering into a
currency futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the offsetting sale price is
less than the purchase price, the Fund realizes a loss.
Special Risks Associated with Foreign Currency Futures Contracts and
Related Options
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on futures currencies,
as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. To reduce this risk,
the Funds will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the investment advisors, 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.
High Yield, High Risk Bonds (High Income Fund only)
The Fund may invest a portion of its assets in lower rated bonds. Bonds
rated below BBB by Standard & Poor's Ratings Services ("S&P")or Fitch IBCA, Inc.
("Fitch") or below Baa by Moody's Investors Service, Inc. ("Moody's"), commonly
known as "junk bonds," offer high yields, but also high risk. While investment
in junk bonds provides opportunities to maximize return over time, they are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments. Investors should be aware of the
following risks:
(1) The lower ratings of junk bonds reflect a greater possibility that
adverse changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates may impair the
ability of the issuer to make payments of interest and principal, especially if
the issuer is highly leveraged. Such issuer's ability to meet its debt
obligations may also be adversely affected by the issuer's inability to meet
specific forecasts or the unavailability of additional financing. Also, an
economic downturn or an increase in interest rates may increase the potential
for default by the issuers of these securities.
(2) The value of junk bonds may be more susceptible to real or perceived
adverse economic or political events than is the case for higher quality bonds.
(3) The value of junk bonds, like those of other fixed income
securities, fluctuates in response to changes in interest rates, generally
rising when interest rates decline and falling when interest rates rise. For
example, if interest rates increase after a fixed income security is purchased,
the security, if sold prior to maturity, may return less than its cost. The
prices of junk bonds, however, are generally less sensitive to interest rate
changes than the prices of higher-rated bonds, but are more sensitive to news
about an issuer or the economy which is, or investors perceive as, negative.
(4) The secondary market for junk bonds may be less liquid at certain
times than the secondary market for higher quality bonds, which may adversely
effect (a) the bond's market price, (b) the Fund's ability to sell the bond and
the Fund's ability to obtain accurate market quotations for purposes of valuing
its assets.
For bond ratings descriptions, see "Corporate and Municipal Bond
Ratings" below.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in securities
that are illiquid. A security is illiquid when the Fund cannot dispose of it in
the ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books. The Fund may invest in
"restricted" securities, i.e., securities subject to restrictions on resale
under federal securities laws. Rule 144A under the Securities Act of 1933 ("Rule
144A") allows certain restricted securities to trade freely among qualified
institutional investors. Since Rule 144A securities may have limited markets,
the Board of Trustees will determine whether such securities should be
considered illiquid for the purpose of determining the Fund's compliance with
the limit on illiquid securities indicated above. In determining the liquidity
of Rule 144A securities, the Trustees will consider: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades.
Investment in Other Investment Companies
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stocks 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, the 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 the Fund.
Short Sales
A short sale is the sale of a security the Fund has borrowed. The Fund
expects to profit from a short sale by selling the borrowed security for more
than the cost of buying it to repay the lender. After a short sale is completed,
the value of the security sold short may rise. If that happens, the cost of
buying it to repay the lender may exceed the amount originally received for the
sale by the Fund.
The 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. The Fund may effect
a short sale in connection with an underwriting in which the Fund is a
participant.
Payment-in-kind Securities
Payment-in-kind ("PIK") securities pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
issuer's option to pay in additional securities typically ranges from one to six
years, compared to an average maturity for all PIK securities of eleven years.
Call protection and sinking fund features are comparable to those offered on
traditional debt issues.
PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Several PIKs are senior debt. In other cases,
where PIKs are subordinated, most senior lenders view them as equity
equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities
- -- is that interest payments are automatically compounded (reinvested) at the
stated coupon rate, which is not the case with cash-paying securities. However,
PIKs are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest).
Their price is expected to reflect an amount representing accredit interest
since the last payment. PIKs generally trade at higher yields than comparable
cash-paying securities of the same issuer. Their premium yield is the result of
the lesser desirability of non-cash interest, the more limited audience for
non-cash paying securities, and the fact that many PIKs have been issued to
equity investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital.
Zero Coupon "Stripped" Bonds
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Interest zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond. Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon 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.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or interest zero coupon bonds (either initially or in the secondary
market) is treated as if the buyer had purchased a corporate obligation issued
on the purchase date with an original issue discount equal to the excess of the
amount payable at maturity over the purchase price. The purchaser is required to
take into income each year as ordinary income an allocable portion of such
discounts determined on a "constant yield" method. Any such income increases the
holder's tax basis for the zero coupon bond, and any gain or loss on a sale of
the zero coupon bonds relative to the holder's basis, as so adjusted, is a
capital gain or loss. If the holder owns both principal zero coupon bonds and
interest zero coupon bonds representing interest in the same underlying issue of
securities, a special basis allocation rule (requiring the aggregate basis to be
allocated among the items sold and retained based on their relative fair market
value at the time of sale) may apply to determine the gain or loss on a sale of
any such zero coupon bonds.
Master Demand Notes
The Fund may invest in master demand notes. These are unsecured
obligations that permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the issuer, as borrower. Master demand notes may permit daily
fluctuations in the interest rate and daily changes in the amounts borrowed. The
Fund has the right to increase the amount under the note at any time up to the
full amount provided by the note agreement, or to decrease the amount. The
borrower may repay up to the full amount of the note without penalty. Master
demand notes permit the Fund to demand payment of principal and accrued interest
at any time (on not more than seven days' notice). Notes acquired by the Fund
may have maturities of more than one year, provided that (1) the Fund is
entitled to payment of principal and accrued interest upon not more than seven
days' notice, and (2) the rate of interest on such notes is adjusted
automatically at periodic intervals, which normally will not exceed 31 days, but
may extend up to one year. The notes are deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, the Fund`s investment advisor
considers, under standards established by the Board of Trustees, earning power,
cash flow and other liquidity ratios of the borrower and will monitor the
ability of the borrower to pay principal and interest on demand. These notes are
not typically rated by credit rating agencies. Unless rated, the Fund may invest
in them only if at the time of an investment the issuer meets the criteria
established for high quality commercial paper, i.e., rated A-1 by S&P, Prime-1
by Moody's or F-1 by Fitch.
Mortgage-Backed or Asset-Backed Securities (High Income Fund only)
The Fund may invest in mortgage-backed securities and asset-backed
securities. Two principal types of mortgage-backed securities are collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
In addition to mortgage-backed securities, the Fund may invest in
securities secured by other assets including company receivables, truck and auto
loans, leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short-intermediate maturity structure
depending on the pay down characteristics of the underlying financial assets
which are passed through to the security holder.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
services were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the investment advisor considers
the financial strength of the guarantor or other provider of credit support, the
type and extent of credit enhancement provided as well as the documentation and
structure of the issue itself and the credit support.
Variable or Floating Rate Instruments
The Fund may invest in variable or floating rate instruments which may
involve a demand feature and may include variable amount master demand notes
which may or may not be backed by bank letters of credit. Variable or floating
rate instruments bear interest at a rate which varies with changes in market
rates. The holder of an instrument with a demand feature may tender the
instrument back to the issuer at par prior to maturity. A variable amount master
demand note is issued pursuant to a written agreement between the issuer and the
holder, its amount may be increased by the holder or decreased by the holder or
issuer, it is payable on demand, and the rate of interest varies based upon an
agreed formula. The quality of the underlying credit must, in the opinion of the
investment advisor, be equivalent to the long-term bond or commercial paper
ratings applicable to permitted investments for each Fund. The investment
advisor will monitor, on an ongoing basis, the earning power, cash flow, and
liquidity ratios of the issuers of such instruments and will similarly monitor
the ability of an issuer of a demand instrument to pay principal and interest on
demand.
Brady Bonds
The Fund may 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 (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.
Convertible Securities
The 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.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of its investment adviser, the
investment characteristics of the underlying common shares will assist the Fund
in achieving its investment objective. The Fund may also elect to hold or trade
convertible securities. In selecting convertible securities, the investment
adviser evaluates the investment characteristics of the convertible security as
a fixed-income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the investment adviser considers numerous
factors, including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
Warrants
The 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
The 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.
Derivatives
To the extent provided for elsewhere in this Statement of Additional
Information, the 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 Fund 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 Fund uses futures contracts and related options as well as
forwards for hedging purposes. Derivatives are a valuable tool, which, when used
properly, can provide significant benefit to Fund shareholders. However, the
Fund may take positions in those derivatives that are within its investment
policies if, in the investment advisor's judgment, this represents an effective
response to current or anticipated market conditions. An investment advisor's
use of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments - options,
futures, forwards and swaps - from which virtually any type of derivative
transaction can be created. Further information regarding options, futures,
forwards and swaps is provided elsewhere in this section.
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 and
Asset-Backed Securities," above.
While the judicious use of derivatives by experienced investment
managers such as the Fund's investment advisors 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 the 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, the Fund's investment advisor considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk - Liquidity risk exists when a particular instrument
is difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
* Leverage Risk - Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks - Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to correlate
perfectly with underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to the Fund. Derivatives do
not always perfectly or even highly correlate or track the value of the assets,
rates or indices they are designed to closely track. Consequently, the Fund's
use of derivatives may not always be an effective means of, and sometimes could
be counterproductive to, furthering the Fund's investment objective.
Equipment Trust Certificates
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.
PURCHASE, REDEMPTION AND PRICING OF SHARES
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.
Calculation of Net Asset Value
The Fund calculates its Net Asset Value ("NAV") once daily on Monday
through Friday, as described in the prospectus. The Fund will not compute its
NAV on the days the New York Stock Exchange is closed: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The NAV of the Fund is calculated by dividing the value of the Fund's
net assets attributable to that class by all of the shares issued for that
class.
Valuation of Portfolio Securities
Current values for the Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on an established securities exchange or
the over-the-counter National Market System ("NMS") are valued on the
basis of the last sales price on the exchange where primarily traded or
on the NMS prior to the time of the valuation, provided that a sale has
occurred.
(2) Securities traded on an established securities exchange or in the
over-the-counter market for which there has been no sale and other
securities traded in the over-the-counter market are valued at the mean
of the bid and asked prices at the time of valuation.
(3) Short-term investments maturing in more than sixty days, for which
market quotations are readily available, are valued at current market
value.
(4) Short-term investments maturing in sixty days or less are valued at
amortized cost, which approximates market.
(5) Securities, including restricted securities, for which market
quotations are not readily available; listed securities or those on NMS
if, in the investment advisor's opinion, the last
sales price does not reflect an accurate current market value; and
other assets are valued at prices deemed in good faith to be fair under
procedures established by the Board of Trustees.
PERFORMANCE CALCULATIONS
Total Return
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods. The following
is the formula used to calculate average annual total return:
n
P(1+T) =ERV
P= initial payment of $1,000
T= average total return
n= number of years
ERV= ending redeemable value of the initial $1,000
Yield
Described below are yield calculations the Fund may use. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis. Yields based on these calculations do not represent the Fund's yield for
any future period.
30-Day Yield
If the Fund invests primarily in bonds, it may quote its 30-day yield
in advertisements or in reports or other communications to shareholders. It is
calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
[OBJECT OMITTED]
Where: a = Dividends and 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
7-Day Current and Effective Yields
If the Fund invests primarily in money market instruments, it may quote
its 7-day current yield or effective yield in advertisements or in reports or
other communications to shareholders.
The current yield is calculated by determining the net change,
excluding capital changes and income other than investment income, in the value
of a hypothetical, pre-existing account having a balance of one share at the
beginning of the 7-day base period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7).
The effective yield is based on a compounding of the current yield,
according to the following formula:
[OBJECT OMITTED]
Non-Standardized Performance
From time to time, the 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 or any other commonly quoted index of common stock or fixed
income prices. The 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. The 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.
TAX INFORMATION
Requirements for Qualifications as a Regulated Investment Company
The Fund intends to qualify for and elect the tax treatment applicable
to regulated investment companies ("RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). (Such qualification does not
involve supervision of management or investment practices or policies by the
Internal Revenue Service.) In order to qualify as a RIC, the Fund must, among
other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to proceeds from securities loans, gains from
the sale or other disposition of securities or foreign currencies and other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities; and (ii) diversify its
holdings so that, at the end of each quarter of its taxable year, (a) at least
50% of the market value of the Fund's total assets is represented by cash, U.S.
government securities and other securities limited in respect of any one issuer,
to an amount not greater than 5% of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. government securities and securities of other regulated investment
companies). By so qualifying, the Fund is not subject to federal income tax if
it timely distributes its investment company taxable income and any net realized
capital gains. For a discussion of the tax consequences of variable annuity
contracts or variable life insurance policies, refer to the prospectus of the
variable annuity contracts and variable life insurance policies offered by the
participating insurance company. Variable annuity contracts and variable life
insurance policies 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 an individual
owner. Different rules apply to corporations, taxable trusts, or other entities
which own variable annuity contracts. Depending on the variable annuity contract
or variable life insurance policy, distributions from the contract or policy 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 or policy is subject to federal
income tax. Investors should consult with competent tax advisors for a more
complete discussion of possible tax consequences in a particular situation.
The Fund 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 the variable annuity
contracts and/or variable life insurance policies.
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts and variable life insurance
policies. The Code provides that variable annuity contracts and/or variable life
insurance policies shall not be treated as an annuity contract or life insurance
policy 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 contract or policy as an annuity
contract or life insurance policy would result in immediate imposition of
federal income tax on variable annuity contracts and variable life insurance
policy owners with respect to earnings allocable to the contract or policy
(including, upon disqualification, accumulated earnings), and the tax 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 annuity contracts and variable life insurance policies 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. section
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 and variable life
insurance policies 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. The 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
U.S. government agency or instrumentality shall be treated as a separate issuer.
The 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 the Fund.
Other Tax Considerations
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisors regarding specific questions
relating to federal, state and local tax consequences of investing in shares of
the Fund. Each shareholder who is not a U.S. person should consult his or her
tax advisor regarding the U.S. and foreign tax consequences of ownership of
shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under a
tax treaty) on amounts treated as income from U.S. sources under the Code.
BROKERAGE
Brokerage Commissions
If the Fund invests in equity securities, it expects to buy and sell
them through brokerage transactions for which commissions are payable. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
If the Fund invests in fixed income securities, it expects to buy and
sell them directly from the issuer or an underwriter or market maker for the
securities. Generally, the Fund will not pay brokerage commissions for such
purchases. When the Fund buys a security from an underwriter, the purchase price
will usually include an underwriting commission or concession. The purchase
price for securities bought from dealers serving as market makers will similarly
include the dealer's mark up or reflect a dealer's mark down. When the Fund
executes transactions in the over-the-counter market, it will deal with primary
market makers unless more favorable prices are otherwise obtainable.
Selection of Brokers
When buying and selling portfolio securities, the investment advisor
seeks brokers who can provide the most benefit to the Fund. When selecting a
broker, an investment advisor will primarily look for the best price at the
lowest commission, but in the context of the broker's:
1. ability to provide the best net financial result to the Fund;
2. efficiency in handling trades;
3. ability to trade large blocks of securities;
4. readiness to handle difficult trades;
5. financial strength and stability; and
6. provision of "research services," defined as (a) reports and
analyses concerning issuers, industries, securities and
economic factors and (b) other information useful in making
investment decisions.
The Fund may pay higher brokerage commissions to a broker providing it
with research services, as defined in item 6, above. Pursuant to Section 28(e)
of the Securities Exchange Act of 1934, this practice is permitted if the
commission is reasonable in relation to the brokerage and research services
provided. Research services provided by a broker to the investment advisor do
not replace, but supplement, the services the investment advisor is required to
deliver to the Fund. It is impracticable for the investment advisor to allocate
the cost, value and specific application of such research services among its
clients because research services intended for one client may indirectly benefit
another.
When selecting a broker for portfolio trades, the investment advisor
may also consider the amount of Fund shares a broker has sold, subject to the
other requirements described above.
If the Fund is advised by Evergreen Asset Management Corp. ("EAMC"),
Lieber & Company, an affiliate of EAMC and a member of the New York and American
Stock Exchanges, will to the extent practicable effect substantially all of the
portfolio transactions effected on those exchanges for the Fund.
Simultaneous Transactions
The investment advisor makes investment decisions for the Fund
independently of decisions made for its other clients. When a security is
suitable for the investment objective of more than one client, it may be prudent
for an investment advisor to engage in a simultaneous transaction, that is, buy
or sell the same security for more than one client. The investment advisor
strives for an equitable result in such transactions by using an allocation
formula. The high volume involved in some simultaneous transactions can result
in greater value to the Fund, but the ideal price or trading volume may not
always be achieved for the Fund.
ORGANIZATION
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
Voting Rights
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. At meetings called for the initial election of Trustees
or to consider other matters, each share is entitled to one vote for each dollar
of net asset value applicable to such share. Shares generally vote together as
one class on all matters. Classes of shares of the Fund have equal voting
rights. No amendment may be made to the Declaration of Trust that adversely
affects any class of shares without the approval of a majority of the votes
applicable to the shares of that class. Shares have non-cumulative voting
rights, which means that the holders of more than 50% of the votes applicable to
shares voting for the election of Trustees can elect 100% of the Trustees to be
elected at a meeting and, in such event, the holders of the remaining shares
voting will not be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law (for such reasons as electing or removing Trustees, changing fundamental
policies, and approving advisory agreements or 12b-1 plans), unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
Limitation of Trustees' Liability
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
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 Trust. 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 and its affiliates being prevented
from continuing to perform the services required under the investment advisory
contract or from acting as agent in connection with the purchase of shares of
the Fund by its customers. If FUNB and its affiliates were prevented from
continuing to provide for services called for under the investment advisory
agreement, it is expected that the Trustees would identify, and call upon the
Fund's shareholders to approve a new investment advisor. If this were to occur,
it is not anticipated that the shareholders of the Fund would suffer any adverse
financial consequences.
INVESTMENT ADVISORY AGREEMENT
On behalf of the Fund, the Trust has entered into an investment
advisory agreement with the Fund's investment advisor (the "Advisory
Agreement"). Under the Advisory Agreement, and subject to the supervision of the
Trust's Board of Trustees, the investment advisor furnishes to the Fund
investment advisory, management and administrative services, office facilities,
and equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. The investment advisor pays for all of the
expenses incurred in connection with the provision of its services. The Fund
pays for all charges and expenses, other than those specifically referred to as
being borne by the investment advisor, 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 (Trustees who are not "interested" persons of the Trust as
defined in the 1940 Act); (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
registration and qualification of the Fund and its shares with the SEC or under
state or other securities laws; (10) expenses of preparing, printing and mailing
prospectuses, SAIs, notices, reports and proxy materials to shareholders of the
Fund; (11) expenses of shareholders' and Trustees' meetings; (12) charges and
expenses of legal counsel for the Fund and for the Independent Trustees on
matters relating to the Fund; (13) charges and expenses of filing annual and
other reports with the SEC and other authorities; and (14) all extraordinary
charges and expenses of the Fund. For information on advisory fees paid by the
Fund, see "Expenses" in Part 1 of this SAI.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of the
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 cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment advisor. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment advisor. The Fund may
engage in such transaction if it is equitable to each participant and consistent
with each participant's investment objective.
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interest of the 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 arrangements with various
service providers. Each Trustee is paid a fee for his or her services. See
"Expenses-Trustee Compensation" in Part 1 of this SAI.
The Trust has an Executive Committee which consists of the Chairman of
the Board, James Howell, the Vice Chairman of the Board, Michael Scofield, and
Russell Salton, each of whom is an Independent Trustee. The Executive Committee
recommends Trustees to fill vacancies, prepares the agenda for Board Meetings
and acts on routine matters between scheduled Board meetings.
Set forth below are the Trustees and officers of the Trust and their
principal occupations and 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
the other Trusts in the Evergreen Fund complex.
<TABLE>
<CAPTION>
Name Position with Trust Principal Occupations for Last Five Years
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant; and
(DOB: 2/2/28) President of Centrum Equities and Centrum Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.; former
(DOB: 10/23/34) Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice);
Director, The Andover Companies (Insurance); and Trustee,
Arthritis Foundation of New England
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/38) 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 Board Former Chairman of the Distribution Foundation for the
(DOB: 8/13/24) of Trustees Carolinas; and former Vice President of Lance Inc. (food
manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/39) 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. (steel
(DOB: 7/14/39) producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham Corporation
(DOB: 8/2/39) (manufacturing); 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, DHR
(DOB: 9/14/41) 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 Services;
(DOB: 6/2/47) former Managed Health Care Consultant; and former
President, Primary Physician Care.
Michael S. Scofield Vice Chairman of the Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43) Board of Trustees
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) 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.
Anthony J. Fischer* President and Treasurer Vice President/Clients Services, BISYS Fund Services.
(DOB: 2/10/59)
Nimish S. Bhatt** Vice President and Vice President, Tax, BISYS Fund Services; former Assistant
(DOB: 6/6/63) Assistant Treasurer Vice President, EAMC/First Union Bank; former Senior Tax
Consulting/Acting Manager, Investment Companies Group,
Pricewaterhouse-Coopers LLP, New York.
Bryan Haft** Vice President Team Leader, Fund Administration, BISYS Fund Services.
(DOB: 1/23/65)
Michael H. Koonce Secretary Senior Vice President and Assistant General Counsel, First
(DOB: 4/20/60) Union Corporation; former Senior Vice President and General
Counsel, Colonial Management Associates, Inc.
*Address: BISYS, 90 Park Avenue, New York, New York 10016
**Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
</TABLE>
CORPORATE BOND RATINGS
The Fund relies on ratings provided by independent rating services to
help determine the credit quality of bonds and other obligations the Fund
intends to purchase or already owns. A rating is an opinion of an issuer's
ability to pay interest and/or principal when due. Ratings reflect an issuer's
overall financial strength and whether it can meet its financial commitments
under various economic conditions.
If a security held by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are S&P and Moody's. The Fund may also rely on ratings provided by
Fitch. Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The `Credit Quality'
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
COMPARISON OF LONG-TERM BOND RATINGS
----------- --------- ----------- ========================================
MOODY`S S&P FITCH Credit Quality
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
Aaa AAA AAA Excellent Quality (lowest risk)
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
Aa AA AA Almost Excellent Quality (very low risk)
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
A A A Good Quality (low risk)
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
Baa BBB BBB Satisfactory Quality (some risk)
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
Ba BB BB Questionable Quality (definite risk)
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
B B B Low Quality (high risk)
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
----------- --------- ----------- ========================================
----------- --------- ----------- ========================================
D DDD/DD/D In Default
----------- --------- ----------- ========================================
LONG-TERM RATINGS
Moody's Corporate Long-Term Bond Ratings
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
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e.
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are 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 both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to Caa. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Corporate Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC,
CC, and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
- - On the day an interest and/or principal payment is due and is not
paid. An exception is made if there is a grace period and S&P believes
that a payment will be made, in which case the rating can be
maintained; or
- - Upon voluntary bankruptcy filing or similar action. An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Plus (+) or minus (-) 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.
Fitch Corporate Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category. Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitment is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e. below 50%.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
SHORT-TERM RATINGS
Moody's Corporate Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P Corporate Short-Term Obligation Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment
on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
- - On the day an interest and/or principal payment is due and is not
paid. An exception is made if there is a grace period and S&P believes
that a payment will be made, in which case the rating can be
maintained; or
- - Upon voluntary bankruptcy filing or similar action, An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Fitch Corporate Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added `+' to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
S&P Commercial Paper Ratings
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments of principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, SAI or in supplemental sales literature issued by the Fund or the
Distributor, and no person is entitled to rely on any information or
representation not contained therein.
The Fund's prospectus and SAI omit certain information contained in the
Trust's registration statement, which you may obtain for a fee from the SEC in
Washington, D.C.
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
PART C
OTHER INFORMATION
Item 23. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Location
- ------- ----------- --------
<S> <C> <C>
(a) Declaration of Trust Incorporated by reference to
Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998.
(b) By-Laws Incorporated by reference to
Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998.
(c) Provisions of instruments Incorporated by reference to
defining the rights of holders Registrant's Post-Effective
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
(d)(1) Investment Advisory and Incorporated by reference to
Management Agreement between Registrant's Post-Effective
the Registrant and First Amendment No. 16 filed on September 28, 1999.
Union National Bank
(d)(2) Investment Advisory and Incorporated by reference to
Management Agreement between the Registrant's Post-Effective
Registrant and Evergreen Asset Amendment No. 5 filed on March 20, 1998.
Management Corp.
(d)(3) Sub-Advisory Agreement between Incorporated by reference to
Evergreen Asset Management Corp. Registrant's Post-Effective
and Lieber & Company Amendment No. 8 filed on October 19, 1998.
(d)(4) Portfolio Management Incorporated by reference to
Agreement between sub-advisors Registrant's Post-Effective
to Evergreen VA Masters Fund and Amendment No. 9 filed on February 26, 1999.
First Union National Bank.
(d)(5) Investment Advisory and Incorporated by reference to
Management Agreement between the Registrant's Post-Effective
Registrant and Evergreen Amendment No. 16 filed on September 28, 1999.
Investment Management Company
(formerly Keystone Investment
Management Company)
(d)(6) Investment Advisory and Incorporated by reference to
Management Agreement between Registrant's Post-Effective
the Registrant and Meridian Amendment No. 16 filed on September 28, 1999.
Investment Company
(d)(7) Investment Advisory and Filed herewith.
Management Agreement between the
Registrant and Mentor Investment
Advisors LLC
(d)(8) Investment Advisory and Filed herewith.
Management Agreement between the
Registrant and Mentor Perpetual
Advisors LLC
(e) Not applicable
(f) Not applicable
(g)(1) Custodian Agreement between the Incorporated by reference to
Registrant and State Street Bank Registrant's Post-Effective
and Trust Company Amendment No. 6 filed on April 28, 1998.
(g)(2) Letter Amendment to Custodian Incorporated by reference to
Agreement between Registrant and Registrant's Post-Effective
State Street Bank and Trust Amendment No. 16 filed on September 28, 1999.
Company (VA Equity Index Fund
and VA Special Equity Fund)
(g)(3) Letter Amendment to Custodian Filed herewith.
Agreement between Registrant and
State Street Bank and Trust
Company (VA Capital Growth Fund,
VA Growth Fund, VA High Income
Fund and VA Perpetual
International Fund)
(h)(1) Administration Services Agreement Filed herewith.
between Evergreen Investment
Services, Inc. and the
Registrant
(h)(2) Transfer Agent Agreement Incorporated by reference to
between the Registrant and Registrant's Post-Effective
Evergreen Service Company Amendment No. 6 filed on April 28, 1998.
(h)(3) Letter Amendment to Transfer Incorporated by reference to
Agent Agreement between the Registrant's Post-Effective
Registrant and Evergreen Service Amendment No. 16 filed on September 28, 1999.
Company (VA Equity Index Fund
and VA Special Equity Fund)
(h)(4) Letter Amendment to Transfer Filed herewith.
Agent Agreement between the
Registrant and Evergreen Service
Company (VA Capital Growth Fund,
and VA Growth Fund, VA High Income
Fund and VA Perpetual International
Fund)
(i) Opinion and Consent of Sullivan Incorporated by reference to
& Worcester LLP Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998.
(j) Consent of KPMG LLP Incorporated by reference to
Registrant's Post-Effective
Amendment No. 9 filed on February 26, 1999
(k) Not applicable
(l) Not applicable
(m) Not applicable
(n) Not applicable
(o) Not applicable
</TABLE>
Item 24. Persons Controlled by or Under Common Control with
Registrant.
None
Item 25. Indemnification
Registrant has obtained from a major insurance carrier and trustees and
officers liability policy covering certain types of errors and omissions.
Provisions for the indemnification of the Registrant's Trustee and
officers are also contained in the Registrant's Declaration of Trust.
Provisions for the indemnification of Registrant's Investment Advisors
are contained in their respective 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.
Provisions for the indemnification of Evergreen Service Company, the
Registrant's transfer agent, are contained in the Master Transfer and
Recordkeeping Agreement between Evergreen Service Company and the Registrant.
Provisions for the indemnification of State Street Bank and Trust
Company, the Registrant's custodian, are contained in the Custodian Agreement
between State Street Bank and Trust Company and the Registrant.
Item 26. 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
Anthony P. Terracciano President, First Union Corporation; President
First Union National Bank
John R. Georgius Vice Chairman, First Union Corporation;
Vice Chairman, First Union National Bank
Mark C. Treanor 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 Evergreen
Investment Management Company (formerly Keystone Investment Management Company)
is incorporated by reference to the Form ADV (File No. 801-8327) of Evergreen
Investment Management Company.
Item 27. Principal Underwriters.
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.
The Directors and principal executive officers of Evergreen
Distributor, Inc. are:
Lynn C. Mangum Director, Chairman and Chief Executive Officer
Dennis Sheehan Director, Chief Financial 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., 90 Park Avenue, New York, New York, 10016.
The Registrant has not paid, directly or indirectly, any commissions or
other compensation to the Prinicipal Underwriter in the last fiscal year.
Item 28. 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
Evergreen Investment Management Company (formerly 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
Meridian Investment Company, 55 Valley Stream Parkway, Malvern,
Pennsylvania 19355
Mentor Investment Advisors LLC, 901 East Byrd Street, Richmond,
Virginia 23219.
Mentor Perpetual Advisors LLC, 901 East Byrd Street, Richmond, Virginia
23219.
Iron Mountain, 3431 Sharp Slot Road, Swansea, Massachusetts 02777
State Street Bank and Trust Company, 2 Heritage Drive, North Quincy,
Massachusetts 02171
Item 29. Management Services.
Not Applicable
Item 30. 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 New York, and State of New York, on the 29th day of
September, 1999.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ Anthony J. Fischer
---------------------------
Name: Anthony J. Fischer
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 29th day of September, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Anthony J. Fischer /s/ Laurence B. Ashkin /s/ Charles A. Austin, III
- ---------------------- --------------------- -------------------------
Anthony J. Fischer Laurence B. Ashkin* Charles A. Austin III *
President and Treasurer Trustee Trustee
(Principal 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 Chairman of the Board Trustee
and Trustee
/s/ Gerald M. McDonnell /s/ Thomas L. McVerry /s/ Michael S. Scofield
- ---------------------- --------------------- ----------------------
Gerald M. McDonnell* Thomas L. McVerry* Michael S. Scofield*
Trustee Trustee Vice Chairman of the Board
and Trustee
/s/ David M. Richardson /s/ Russell A. Salton, III MD /s/ Leroy Keith, Jr.
- ---------------------- ---------------------------- ----------------------
David M. Richardson* Russell A. Salton, III MD* Leroy Keith, Jr.*
Trustee Trustee Trustee
/s/ Richard J. Shima
- -------------------
Richard J. Shima*
Trustee
</TABLE>
*By: /s/ Beth Werths
- --------------------------------
Beth Werths
Attorney-in-Fact
*Beth Werths, by signing her 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.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
(d)(7) Investment Advisory and Management Agreement between the
Registrant and Mentor Investment Advisors, LLC
(d)(8) Investment Advisory and Management Agreement between the
Registrant and Mentor Perpetual Advisors, LLC
(g)(3) Letter Amendment to Custodian Agreement between Registrant
and State Street Bank and Trust Company
(h)(1) Administration Services Agreement between Evergreen Investment
Services, Inc. and the Registrant
(h)(4) Letter Amendment to Transfer Agent Agreement between the
Registrant and Evergreen Service Company (VA Capital Growth
Fund, VA Growth Fund, VA High Income Fund and VA Perpetual
International Fund)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
AGREEMENT made the 27th day of September 1999, by and between EVERGREEN
VARIABLE ANNUITY TRUST, a Delaware business trust (the "Trust") and MENTOR
INVESTMENT ADVISORS LLC, a Virginia limited liability company (the "Adviser").
WHEREAS, the Trust and the Adviser wish to enter into an Agreement
setting forth the terms on which the Adviser will perform certain services for
the Trust, its series of shares as listed on Schedule 1 to this agreement and
each series of shares subsequently issued by the Trust (each singly a "Fund" or
collectively the "Funds").
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Trust and the Adviser agree as follows:
1. (a) The Trust hereby employs the Adviser to manage and administer
the operation of the Trust and each of its Funds, to supervise the provision of
the services to the Trust and each of its Funds by others, and to manage the
investment and reinvestment of the assets of each Fund of the Trust in
conformity with such Fund's investment objectives and restrictions as may be set
forth from time to time in the Fund's then current prospectus and statement of
additional information, if any, and other governing documents, all subject to
the supervision of the Board of Trustees of the Trust, for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
and agrees during such period, at its own expense, to render the services and to
assume the obligations set forth herein, for the compensation provided herein.
The Adviser shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
(b) In the event that the Trust establishes one or more Funds, in
addition to the Funds listed on Schedule 1, for which it wishes the Adviser to
perform services hereunder, it shall notify the Adviser in writing. If the
Adviser is willing to render such services, it shall notify the Trust in writing
and such Fund shall become a Fund hereunder and the compensation payable to the
Adviser by the new Fund will be as agreed in writing at the time.
2. The Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of each Fund with broker-dealers selected
by the Adviser. In executing portfolio transactions and selecting
broker-dealers, the Adviser will use its best efforts to seek best execution on
behalf of each Fund. In assessing the best execution available for any
transaction, the Adviser shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (all for the specific transaction and
on a continuing basis). In evaluating the best execution available, and in
selecting the broker-dealer to execute a particular transaction, the Adviser may
also consider the brokerage and research services (as those terms are used in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act")) provided
to a Fund and/or other accounts over which the Adviser or an affiliate of the
Adviser exercises investment discretion.
The Adviser is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction if, but only if,
the Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer viewed in terms of that particular transaction or in terms of all
of the accounts over which investment discretion is so exercised.
3. The Adviser, at its own expense, shall furnish to the Trust office
space in the offices of the Adviser or in such other place as may be agreed upon
by the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Trust, for members of the Adviser's organization to serve without
salaries from the Trust as officers or, as may be agreed from time to time, as
agents of the Trust. The Adviser assumes and shall pay or reimburse the Trust
for:
(a) the compensation (if any) of the Trustees of the Trust who are
affiliated with the Adviser or with its affiliates, or with any adviser retained
by the Adviser, and of all officers of the Trust as such; and
(b) all expenses of the Adviser incurred in connection with its
services hereunder.
The Trust assumes and shall pay all other expenses of the Trust and its
Funds, including, without limitation: (a) all charges and expenses of
any custodian or depository appointed by the Trust for the safekeeping
of the cash,
securities and other property of any of its Funds;
(b) all charges and expenses for bookkeeping and auditors;
(c) all charges and expenses of any transfer agents and registrars
appointed by the Trust;
(d) all fees of all Trustees of the Trust who are not affiliated with
the Adviser or any of its affiliates, or with any adviser retained by the
Adviser;
(e) all brokers' fees, expenses, and commissions and issue and transfer
taxes chargeable to a Fund in connection with transactions involving securities
and other property to which the Fund is a party;
(f) all costs and expenses of distribution of shares of its Funds
incurred pursuant to Plans of Distribution adopted under Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act");
(g) all taxes and trust fees payable by the Trust or its Funds to
Federal, state, or other governmental agencies; (h) all costs of
certificates representing shares of the Trust or its Funds; (i) all
fees and expenses involved in registering and maintaining registrations
of the Trust, its Funds and of their shares
with the Securities and Exchange Commission (the "Commission") and registering
or qualifying the Funds' shares under state or other securities laws, including,
without limitation, the preparation and printing of registration statements,
prospectuses, and statements of additional information for filing with the
Commission and other authorities;
(j) expenses of preparing, printing, and mailing prospectuses and
statements of additional information to shareholders of each Fund of the Trust;
(k) all expenses of shareholders' and Trustees' meetings and of
preparing, printing, and mailing notices, reports, and proxy materials to
shareholders of the Funds;
(l) all charges and expenses of legal counsel for the Trust and its
Funds and for Trustees of the Trust in connection with legal matters relating to
the Trust and its Funds, including, without limitation, legal services rendered
in connection with the Trust and its Funds' existence, trust, and financial
structure and relations with its shareholders, registrations and qualifications
of securities under Federal, state, and other laws, issues of securities,
expenses which the Trust and its Funds has herein assumed, whether customary or
not, and extraordinary matters, including, without limitation, any litigation
involving the Trust and its Funds, its Trustees, officers, employees, or agents;
(m) all charges and expenses of filing annual and other reports with
the Commission and other authorities; and (n) all extraordinary
expenses and charges of the Trust and its Funds.
In the event that the Adviser provides any of these services or pays
any of these expenses, the Trust and any affected Fund will promptly reimburse
the Adviser therefor.
The services of the Adviser to the Trust and its Funds hereunder are
not to be deemed exclusive, and the Adviser shall be free to render similar
services to others.
4. As compensation for the Adviser's services to the Trust with respect
to each Fund during the period of this Agreement, the Trust will pay to the
Adviser a fee at the annual rate set forth on Schedule 2 for such Fund.
The Adviser's fee is computed as of the close of business on each
business day.
A pro rata portion of the Trust's fee with respect to a Fund shall be
payable in arrears at the end of each day or calendar month as the Adviser may
from time to time specify to the Trust. If and when this Agreement terminates,
any compensation payable hereunder for the period ending with the date of such
termination shall be payable upon such termination. Amounts payable hereunder
shall be promptly paid when due.
5. The Adviser may enter into an agreement to retain, at its own
expense, a firm or firms ("SubAdviser") to provide the Trust with respect to all
or any of its Funds all of the services to be provided by the Adviser hereunder,
if such agreement is approved as required by law. Such agreement may delegate to
such SubAdviser all of Adviser's rights, obligations, and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Trust or any of its Funds in connection
with the performance of this Agreement, except a loss resulting from the
Adviser's willful misfeasance, bad faith, gross negligence, or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, Director, partner, employee, or agent of the
Adviser, who may be or become an officer, Trustee, employee, or agent of the
Trust, shall be deemed, when rendering services to the Trust or any of its Funds
or acting on any business of the Trust or any of its Funds (other than services
or business in connection with the Adviser's duties hereunder), to be rendering
such services to or acting solely for the Trust or any of its Funds and not as
an officer, Director, partner, employee, or agent or one under the control or
direction of the Adviser even though paid by it.
7. The Trust shall cause the books and accounts of each of its Funds to
be audited at least once each year by a reputable independent public accountant
or organization of public accountant or organization of public accountants who
shall render a report to the Trust.
8. Subject to and in accordance with the Declaration of Trust of the
Trust, the governing documents of the Adviser and the governing documents of any
SubAdviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Trust or any Adviser are or may be interested in the Adviser
(or any successor thereof) as Directors and officers of the Adviser or its
affiliates, as stockholders of First Union Corporation or otherwise; that
Directors, officers and agents of the Adviser and its affiliates or stockholders
of First Union Corporation are or may be interested in the Trust or any Adviser
as Trustees, Directors, officers, shareholders or otherwise; that the Adviser
(or any such successor) is or may be interested in the Trust or any SubAdviser
as shareholder, or otherwise; and that the effect of any such adverse interests
shall be governed by the Declaration of Trust of the Trust, governing documents
of the Adviser and governing documents of any SubAdviser.
9. This Agreement shall continue in effect for two years from the date
set forth above and after such date (a) such continuance is specifically
approved at least annually by the Board of Trustees of the Trust or by a vote of
a majority of the outstanding voting securities of the Trust, and (b) such
renewal has been approved by the vote of the majority of Trustees of the Trust
who are not interested persons, as that term is defined in the 1940 Act, of the
Adviser or of the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
10. On sixty days written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Trust or by vote of the holders of a majority of the outstanding
voting securities of the unaffected Funds; and on sixty days written notice to
the Trust, this Agreement may be terminated at any time without the payment of
any penalty by the Adviser. This Agreement shall automatically terminate upon
its assignment (as that term is defined in the 1940 Act). Any notice under this
Agreement shall be given in writing, addressed and delivered, or mailed postage
prepaid, to the other party at the main office of such party.
11. This Agreement may be amended at any time by an instrument in
writing executed by both parties hereto or their respective successors, provided
that with regard to amendments of substance such execution by the Trust shall
have been first approved by the vote of the holders of a majority of the
outstanding voting securities of the affected Funds and by the vote of a
majority of Trustees of the Trust who are not interested persons (as that term
is defined in the 1940 Act) of the Adviser, any predecessor of the Adviser, or
of the Trust, cast in person at a meeting called for the purpose of voting on
such approval. A "majority of the outstanding voting securities" of the Trust or
the affected Funds shall have, for all purposes of this Agreement, the meaning
provided therefor in the 1940 Act.
12. Any compensation payable to the Adviser hereunder for any period
other than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed, and
enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ Michael H. Koonce
-------------------------
Name: Michael H. Koonce
Title: Secretary
MENTOR INVESTMENT ADVISORS LLC
By: /s/ Karen Wimbish
---------------------------
Name: Karen Wimbish
Title: Chief Operating Officer
<PAGE>
Schedule 1
Date: September 29, 1999
Evergreen VA Capital Growth Fund
Evergreen VA Growth Fund
Evergreen VA High Income Fund
<PAGE>
Schedule 2
Date: September 29, 1999
As compensation for the Adviser's services to the Funds during the
period of this Agreement, the Funds will pay to the Adviser a fee at the annual
rate of:
I. Evergreen VA Capital Growth Fund
0.80% of the Average Daily Net Assets of the Fund
II. Evergreen VA Growth Fund and Evergreen VA High Income Fund
0.70% of the Average Daily Net Assets of the Fund
p:/ssdocs/contract/advisory/mentor/evat va cap gro'va gro'va high inc.doc
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
AGREEMENT made the 27th day of September 1999, by and between EVERGREEN
VARIABLE ANNUITY TRUST, a Delaware business trust (the "Trust") and MENTOR
PERPETUAL ADVISORS LLC, a Virginia limited liability company (the "Adviser").
WHEREAS, the Trust and the Adviser wish to enter into an Agreement
setting forth the terms on which the Adviser will perform certain services for
the Trust, its series of shares as listed on Schedule 1 to this agreement and
each series of shares subsequently issued by the Trust (each singly a "Fund" or
collectively the "Funds").
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Trust and the Adviser agree as follows:
1. (a) The Trust hereby employs the Adviser to manage and administer
the operation of the Trust and each of its Funds, to supervise the provision of
the services to the Trust and each of its Funds by others, and to manage the
investment and reinvestment of the assets of each Fund of the Trust in
conformity with such Fund's investment objectives and restrictions as may be set
forth from time to time in the Fund's then current prospectus and statement of
additional information, if any, and other governing documents, all subject to
the supervision of the Board of Trustees of the Trust, for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
and agrees during such period, at its own expense, to render the services and to
assume the obligations set forth herein, for the compensation provided herein.
The Adviser shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
(b) In the event that the Trust establishes one or more Funds, in
addition to the Funds listed on Schedule 1, for which it wishes the Adviser to
perform services hereunder, it shall notify the Adviser in writing. If the
Adviser is willing to render such services, it shall notify the Trust in writing
and such Fund shall become a Fund hereunder and the compensation payable to the
Adviser by the new Fund will be as agreed in writing at the time.
2. The Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of each Fund with broker-dealers selected
by the Adviser. In executing portfolio transactions and selecting
broker-dealers, the Adviser will use its best efforts to seek best execution on
behalf of each Fund. In assessing the best execution available for any
transaction, the Adviser shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (all for the specific transaction and
on a continuing basis). In evaluating the best execution available, and in
selecting the broker-dealer to execute a particular transaction, the Adviser may
also consider the brokerage and research services (as those terms are used in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act")) provided
to a Fund and/or other accounts over which the Adviser or an affiliate of the
Adviser exercises investment discretion.
The Adviser is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction if, but only if,
the Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer viewed in terms of that particular transaction or in terms of all
of the accounts over which investment discretion is so exercised.
3. The Adviser, at its own expense, shall furnish to the Trust office
space in the offices of the Adviser or in such other place as may be agreed upon
by the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Trust, for members of the Adviser's organization to serve without
salaries from the Trust as officers or, as may be agreed from time to time, as
agents of the Trust. The Adviser assumes and shall pay or reimburse the Trust
for:
(a) the compensation (if any) of the Trustees of the Trust who are
affiliated with the Adviser or with its affiliates, or with any adviser retained
by the Adviser, and of all officers of the Trust as such; and
(b) all expenses of the Adviser incurred in connection with its
services hereunder.
The Trust assumes and shall pay all other expenses of the Trust and its
Funds, including, without limitation:
(a) all charges and expenses of any custodian or depository appointed
by the Trust for the safekeeping of the cash, securities and other property of
any of its Funds;
(b) all charges and expenses for bookkeeping and auditors;
(c) all charges and expenses of any transfer agents and registrars
appointed by the Trust; (d) all fees of all Trustees of the Trust who
are not affiliated with the Adviser or any of its
affiliates, or with any adviser retained by the Adviser;
(e) all brokers' fees, expenses, and commissions and issue and transfer
taxes chargeable to a Fund in connection with transactions involving securities
and other property to which the Fund is a party;
(f) all costs and expenses of distribution of shares of its Funds
incurred pursuant to Plans of Distribution adopted under Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act");
(g) all taxes and trust fees payable by the Trust or its Funds to
Federal, state, or other governmental agencies;
(h) all costs of certificates representing shares of the Trust or its
Funds;
(i) all fees and expenses involved in registering and maintaining
registrations of the Trust, its Funds and of their shares with the Securities
and Exchange Commission (the "Commission") and registering or qualifying the
Funds' shares under state or other securities laws, including, without
limitation, the preparation and printing of registration statements,
prospectuses, and statements of additional information for filing with the
Commission and other authorities;
(j) expenses of preparing, printing, and mailing prospectuses and
statements of additional information to shareholders of each Fund of the Trust;
(k) all expenses of shareholders' and Trustees' meetings and of
preparing, printing, and mailing notices, reports, and proxy materials to
shareholders of the Funds;
(l) all charges and expenses of legal counsel for the Trust and its
Funds and for Trustees of the Trust in connection with legal matters relating to
the Trust and its Funds, including, without limitation, legal services rendered
in connection with the Trust and its Funds' existence, trust, and financial
structure and relations with its shareholders, registrations and qualifications
of securities under Federal, state, and other laws, issues of securities,
expenses which the Trust and its Funds has herein assumed, whether customary or
not, and extraordinary matters, including, without limitation, any litigation
involving the Trust and its Funds, its Trustees, officers, employees, or agents;
(m) all charges and expenses of filing annual and other reports with
the Commission and other authorities; and
(n) all extraordinary expenses and charges of the Trust and its Funds.
In the event that the Adviser provides any of these services or pays
any of these expenses, the Trust and any affected Fund will promptly reimburse
the Adviser therefor.
The services of the Adviser to the Trust and its Funds hereunder are
not to be deemed exclusive, and the Adviser shall be free to render similar
services to others.
4. As compensation for the Adviser's services to the Trust with respect
to each Fund during the period of this Agreement, the Trust will pay to the
Adviser a fee at the annual rate set forth on Schedule 2 for such Fund.
The Adviser's fee is computed as of the close of business on each
business day.
A pro rata portion of the Trust's fee with respect to a Fund shall be
payable in arrears at the end of each day or calendar month as the Adviser may
from time to time specify to the Trust. If and when this Agreement terminates,
any compensation payable hereunder for the period ending with the date of such
termination shall be payable upon such termination. Amounts payable hereunder
shall be promptly paid when due.
5. The Adviser may enter into an agreement to retain, at its own
expense, a firm or firms ("SubAdviser") to provide the Trust with respect to all
or any of its Funds all of the services to be provided by the Adviser hereunder,
if such agreement is approved as required by law. Such agreement may delegate to
such SubAdviser all of Adviser's rights, obligations, and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Trust or any of its Funds in connection
with the performance of this Agreement, except a loss resulting from the
Adviser's willful misfeasance, bad faith, gross negligence, or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, Director, partner, employee, or agent of the
Adviser, who may be or become an officer, Trustee, employee, or agent of the
Trust, shall be deemed, when rendering services to the Trust or any of its Funds
or acting on any business of the Trust or any of its Funds (other than services
or business in connection with the Adviser's duties hereunder), to be rendering
such services to or acting solely for the Trust or any of its Funds and not as
an officer, Director, partner, employee, or agent or one under the control or
direction of the Adviser even though paid by it.
7. The Trust shall cause the books and accounts of each of its Funds to
be audited at least once each year by a reputable independent public accountant
or organization of public accountant or organization of public accountants who
shall render a report to the Trust.
8. Subject to and in accordance with the Declaration of Trust of the
Trust, the governing documents of the Adviser and the governing documents of any
SubAdviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Trust or any Adviser are or may be interested in the Adviser
(or any successor thereof) as Directors and officers of the Adviser or its
affiliates, as stockholders of First Union Corporation or otherwise; that
Directors, officers and agents of the Adviser and its affiliates or stockholders
of First Union Corporation are or may be interested in the Trust or any Adviser
as Trustees, Directors, officers, shareholders or otherwise; that the Adviser
(or any such successor) is or may be interested in the Trust or any SubAdviser
as shareholder, or otherwise; and that the effect of any such adverse interests
shall be governed by the Declaration of Trust of the Trust, governing documents
of the Adviser and governing documents of any SubAdviser.
9. This Agreement shall continue in effect for two years from the date
set forth above and after such date (a) such continuance is specifically
approved at least annually by the Board of Trustees of the Trust or by a vote of
a majority of the outstanding voting securities of the Trust, and (b) such
renewal has been approved by the vote of the majority of Trustees of the Trust
who are not interested persons, as that term is defined in the 1940 Act, of the
Adviser or of the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
10. On sixty days written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Trust or by vote of the holders of a majority of the outstanding
voting securities of the unaffected Funds; and on sixty days written notice to
the Trust, this Agreement may be terminated at any time without the payment of
any penalty by the Adviser. This Agreement shall automatically terminate upon
its assignment (as that term is defined in the 1940 Act). Any notice under this
Agreement shall be given in writing, addressed and delivered, or mailed postage
prepaid, to the other party at the main office of such party.
11. This Agreement may be amended at any time by an instrument in
writing executed by both parties hereto or their respective successors, provided
that with regard to amendments of substance such execution by the Trust shall
have been first approved by the vote of the holders of a majority of the
outstanding voting securities of the affected Funds and by the vote of a
majority of Trustees of the Trust who are not interested persons (as that term
is defined in the 1940 Act) of the Adviser, any predecessor of the Adviser, or
of the Trust, cast in person at a meeting called for the purpose of voting on
such approval. A "majority of the outstanding voting securities" of the Trust or
the affected Funds shall have, for all purposes of this Agreement, the meaning
provided therefor in the 1940 Act.
12. Any compensation payable to the Adviser hereunder for any period
other than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed, and
enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ Michael H. Koonce
-------------------------
Name: Michael H. Koonce
Title: Secretary
MENTOR PERPETUAL ADVISORS LLC
By: /s/ Roderick Smyth
----------------------------
Name: Roderick Smyth
Title: Managing Director
<PAGE>
Schedule 1
Date: September 29, 1999
Evergreen VA Perpetual International Fund
<PAGE>
Schedule 2
Date: September 29, 1999
As compensation for the Adviser's services to the Fund during the
period of this Agreement, the Fund will pay to the Adviser a fee at the annual
rate of:
Evergreen VA Perpetual International Fund
1.00% of the Average Daily Net Assets of the Fund
p:/ssdocs/contract/advisory/evat-va perp intl.doc
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Re: EVERGREEN VA CAPITAL GROWTH FUND
EVERGREEN VA GROWTH FUND
EVERGREEN VA HIGH INCOME FUND
EVERGREEN VA PERPETUAL INTERNATIONAL FUND
To: Elizabeth B. Solomon
This is to advise you that Evergreen Variable Annuity Trust ("the Trust") has
established two new series of shares to be known as EVERGREEN VA CAPITAL GROWTH
FUND, EVERGREEN VA GROWTH FUND, EVERGREEN VA HIGH INCOME FUND and EVERGREEN VA
PERPETUAL INTERNATIONAL FUND. In accordance with the Additional Funds provision
of Section 18 of the Custodian Contract dated 9/18/97 between the Evergreen
Funds and State Street Bank and Trust Company, the Trust hereby requests that
you act as Custodian for the two new series under the terms of the contract.
Please indicate your acceptance of the foregoing by executing two copies of this
Letter Agreement, returning one to the Funds and retaining one copy for your
records.
Evergreen Variable Annuity Trust
By: /s/ Elizabeth A. Boisvert
--------------------------
Elizabeth A. Boisvert
Title: Assistant Secretary
-----------------------
Assistant Secretary
Agreed to this 29th day of September, 1999.
State Street Bank and Trust Company
By: /s/ Ronald E. Logue
---------------------------
Title: Executive Vice President
-------------------------
ADMINISTRATIVE SERVICES AGREEMENT
EVERGREEN VARIABLE ANNUITY TRUST
This Administrative Services Agreement is made as of this 23rd day of
December, 1997 between Evergreen Variable Annuity Trust, a Delaware business
trust (herein called the ATrust@), and Evergreen Investment Services, Inc., a
Delaware corporation (herein called AEIS@).
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust consisting of one or
more portfolios which operates as an open-end management investment company and
is so registered under the Investment Company Act of 1940; and
WHEREAS, the Trust desires to retain EIS as its Administrator to
provide it with administrative services, and EIS is willing to render such
services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. APPOINTMENT OF ADMINISTRATOR. The Trust hereby appoints EIS as
administrator of the Trust and each of its portfolios listed on SCHEDULE A
attached hereto on the terms and conditions set forth in this Agreement; and EIS
hereby accepts such appointment and agrees to perform the services and duties
set forth in Section 2 of this Agreement in consideration of the compensation
provided for in Section 4 hereof.
2. SERVICES AND DUTIES. As Administrator, and subject to the supervision and
control of the Trustees of the Trust, EIS will hereafter provide facilities,
equipment and personnel to carry out the following administrative services for
operation of the business and affairs of the Trust and each of its portfolios:
(1) prepare, file and maintain the Trust=s governing documents,
including the Declaration of Trust (which has previously been
prepared and filed), the By-laws, minutes of meetings of
Trustees and shareholders, and proxy statements for meetings
of shareholders;
(2) prepare and file with the Securities and Exchange Commission
and the appropriate state securities authorities the
registration statements for the Trust and the Trust=s shares
and all amendments thereto, reports to regulatory authorities
and shareholders, prospectuses, proxy statements, and such
other documents as may be necessary or convenient to enable
the Trust to make a continuous offering of its shares;
(3) prepare, negotiate and administer contracts on behalf of the
Trust with, among others, the Trust=s distributor, custodian
and transfer agent;
(4) supervise the Trust=s fund accounting agent in the maintenance
of the Trust=s general ledger and in the preparation of the
Trust=s financial statements, including oversight of expense
accruals and payments and the determination of the net asset
value of the Trust=s assets and of the Trust=s shares, and of
the declaration and payment of dividends and other
distributions to shareholders;
(5) calculate performance data of the Trust for dissemination to
information services covering the investment company industry;
(6) prepare and file the Trust=s tax returns;
(7) examine and review the operations of the Trust=s custodian and transfer
agent;
(8) coordinate the layout and printing of publicly disseminated
prospectuses and reports;
(9) prepare various shareholder reports;
(10) assist with the design, development and operation of new portfolios of
the Trust;
(11) coordinate shareholder meetings;
(12) provide general compliance services; and
(13) advise the Trust and its Trustees on matters concerning the Trust and
its affairs.
The foregoing, along with any additional services that EIS shall agree
in writing to perform for the Trust hereunder, shall hereafter be referred to as
AAdministrative Services.@ Administrative Services shall not include any duties,
functions, or services to be performed for the Trust by the Trust=s investment
adviser, distributor, custodian or transfer agent pursuant to their agreements
with the Trust.
3. EXPENSES. EIS shall be responsible for expenses incurred in providing office
space, equipment and personnel as may be necessary or convenient to provide the
Administrative Services to the Trust. The Trust shall be responsible for all
other expenses incurred by EIS on behalf of the Trust, including without
limitation postage and courier expenses, printing expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees who are not EIS employees, and trade
association dues.
4. COMPENSATION. For the Administrative Services provided, the Trust hereby
agrees to pay and EIS hereby agrees to accept as full compensation for its
services rendered hereunder an administrative fee, calculated daily and payable
monthly, at an annual rate determined in accordance with the table below.
- ---------------------------- --- -----------------------------------------------
Aggregate Daily Net Assets of Funds
Administered by EIS for Which Any Affiliate of
Administrative Fee First Union National Bank Serves as Investment
Adviser
- ---------------------------- --- -----------------------------------------------
- ---------------------------- --- -----------------------------------------------
.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
- ---------------------------- --- -----------------------------------------------
- ---------------------------- --- -----------------------------------------------
.010% on assets in excess of $30 billion
- ---------------------------- --- -----------------------------------------------
Each portfolio of the Trust shall pay a portion of the administrative fee equal
to the rate determined above times that portfolio=s average annual daily net
assets.
5. RESPONSIBILITY OF ADMINISTRATOR. EIS shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection
with the matters to which this Agreement relates, except a loss resulting from
wilful misfeasance, bad faith or gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and duties
under this Agreement. EIS shall be entitled to rely on and may act upon advice
of counsel (who may be counsel for the Trust) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. Any person, even though also an officer, director, partner, employee or
agent of EIS, who may be or become an officer, trustee, employee or agent of the
Trust, shall be deemed, when rendering services to the Trust or acting on any
business of the Trust (other than services or business in connection with the
duties of EIS hereunder) to be rendering such services to or acting solely for
the Trust and not as an officer, director, partner, employee or agent or one
under the control or direction of EIS even though paid by EIS.
6. DURATION AND TERMINATION.
(1) This Agreement shall continue in effect from year to year
thereafter, provided it is approved, at least annually, by a
vote of a majority of Trustees of the Trust including a
majority of the disinterested Trustees.
(2) This Agreement may be terminated at any time, without payment
of any penalty, on sixty (60) day=s prior written notice by a
vote of a majority of the Trust=s Trustees or by EIS.
7. AMENDMENT. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
8. NOTICES. Notices of any kind to be given to the Trust hereunder by EIS shall
be in writing and shall be duly given if delivered to the Trust and to its
investment adviser at the following address: First Union National Bank, One
First Union Center, Charlotte, North Carolina 28288. Notices of any kind to be
given to EIS hereunder by the Trust shall be in writing and shall be duly given
if delivered to EIS at 200 Berkeley Street, Boston, Massachusetts 02116.
Attention: Chief Administrative Officer.
9. LIMITATION OF LIABILITY. EIS is hereby expressly put on notice of the
limitation of liability as set forth in the Declaration of Trust and agrees that
the obligations pursuant to this Agreement of a particular portfolio and of the
Trust with respect to that particular portfolio be limited solely to the assets
of that particular portfolio, and EIS shall not seek satisfaction of any such
obligation from the assets of any other portfolio, the shareholders of any
portfolio, the Trustees, officers, employees or agents of the Trust, or any of
them.
10. MISCELLANEOUS. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Section 5 hereof, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by Delaware law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Administrative
Services Agreement to be executed by their officers designated below as of the
day and year first above written.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ William J. Tomko
--------------------------------
Name: William J. Tomko
Title: President
EVERGREEN INVESTMENT SERVICES, INC.
By: /s/ Gordon Forrester
--------------------------------
Name: Gordon Forrester
Title: Chief Accounting Officer
<PAGE>
SCHEDULE A
(As amended September 29, 1999)
EVERGREEN VARIABLE ANNUITY TRUST
Evergreen VA Capital Growth Fund
Evergreen VA Equity Index Fund
Evergreen VA Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Growth and Income Fund
Evergreen VA Growth Fund
Evergreen VA High Income Fund
Evergreen VA International Growth Fund
Evergreen VA Masters Fund
Evergreen VA Omega Fund
(formerly Evergreen VA Aggressive Growth Fund)
Evergreen VA Perpetual International Fund
Evergreen VA Small Cap Value Fund
(formerly Evergreen VA Small Cap Equity Income Fund)
Evergreen VA Strategic Income Fund
Evergreen VA Special Equity Fund
EVERGREEN VARIABLE ANNUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
September 29, 1999
Evergreen Service Company
200 Berkeley Street
Boston, Massachusetts 02116
To Whom It May Concern:
Pursuant to Paragraph 1 of the Master Transfer and Recordkeeping Agreement dated
September 18, 1997 between Evergreen Service Company and various Funds (the
"Agreement"), as defined in the Agreement, this is to notify Evergreen Service
Company that the Evergreen VA Capital Growth Fund, Evergreen VA Growth Fund,
Evergreen VA High Income Fund and Evergreen VA Perpetual International Fund,
each a series of Evergreen Variable Annuity Trust, hereby elect to become Fund
parties to such Agreement.
EVERGREEN VARIABLE ANNUITY TRUST
on behalf of:
Evergreen VA Capital Growth Fund
Evergreen VA Growth Fund
Evergreen VA High Income Fund
Evergreen VA Perpetual International Fund
By: /s/ Anthony J. Fischer
------------------------
Anthony J. Fischer
President
Accepted and Agreed:
EVERGREEN SERVICE COMPANY
By: /s/ Ann Marie Becker
----------------------------
Name: Ann Marie Becker
Title: Managing Director
Dated as of September 29, 1999
