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PROSPECTUS February 1, 1999
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Evergreen Variable Annuity Trust
[LOGO OF EVERGREEN FUNDS(SM)
SINCE 1932 APPEARS HERE]
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Evergreen VA Masters Fund
(the "Fund")
The Fund is a series of Evergreen Variable Annuity Trust (the "Trust").
The Trust is designed to provide investors with a selection of investment
alternatives which seek to provide capital growth, income and diversification
through its nine investment series. The Trust is an open-end management
investment company. This prospectus sets forth concise information about the
Trust and the Fund that a prospective investor should know before investing.
Shares of the Fund are only sold to separate accounts funding variable annuity
and variable life insurance contracts issued by life insurance companies. The
address of the Trust is 200 Berkeley Street, Boston, Massachusetts 02116.
A Statement of Additional Information ("SAI") for the Trust dated May 1,
1998, as amended August 10, 1998 and February 1, 1999, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference
herein. The SAI provides information regarding certain matters discussed in
this prospectus and other matters which may be of interest to investors, and
may be obtained without charge by calling the Trust at (800)321-9332. There
can be no assurance that the investment objective of the Fund will be
achieved. Investors are advised to read this prospectus carefully.
The shares offered by this prospectus are not deposits or obligations of
any bank or any subsidiaries of a bank, are not endorsed or guaranteed by any
bank, and are not insured or otherwise protected by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. An investment in the Fund involves risk, including the
possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Keep This Prospectus for Future Reference
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TABLE OF CONTENTS
OVERVIEW OF THE FUND................................................... 3
FINANCIAL HIGHLIGHTS................................................... 3
DESCRIPTION OF THE FUND................................................ 4
Investment Objective and Policies................................... 4
Investment Practices and Restrictions............................... 5
MANAGEMENT OF THE FUND................................................. 9
Board of Trustees................................................... 9
Investment Advisor.................................................. 9
Managers............................................................ 9
Administrator....................................................... 10
SALE AND REDEMPTION OF SHARES.......................................... 10
Participating Insurance Companies................................... 10
Purchases........................................................... 11
Redemptions......................................................... 11
Dividends........................................................... 11
Tax Status.......................................................... 11
Effect of Banking Laws.............................................. 12
GENERAL INFORMATION.................................................... 12
Custodian, and Transfer and Dividend
Paying Agent....................................................... 12
Expenses of the Trust............................................... 12
Shareholder Rights.................................................. 13
Description of Shares............................................... 13
Portfolio Turnover and Brokerage.................................... 13
Performance......................................................... 14
General............................................................. 14
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OVERVIEW OF THE FUND
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The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this prospectus. See "Description of the
Fund" and "Management of the Fund."
The Fund's investment objective is to seek long-term capital appreciation
by investing at least 65% of its assets in equity securities.
The Fund's investment program is based on the Manager of Managers
Strategy of Evergreen Investment Management (formerly known as the Capital
Management Group or "CMG"), a division of First Union National Bank ("FUNB")
("EIM"). EIM allocates the Fund's portfolio assets on an approximately equal
basis among a number of investment management organizations ("Managers")--
currently four in number--each of which employs a different investment style.
In EIM's opinion, the Manager of Managers strategy may provide advantages
over the use of a single manager because of the following primary factors:
(i) Most equity investment management firms consistently employ a
distinct investment "style" which causes them to emphasize stocks with
particular characteristics;
(ii) because of changing investor preferences, any given investment style
will move into and out of market favor and will result in better investment
performance under certain market conditions but less successful performance
under other conditions; and
(iii) consequently, by allocating the Fund's portfolio on an
approximately equal basis among Managers employing different styles, the
impact of any one such style on investment performance will be diluted, and
the investment performance of the total portfolio will be more consistent and
less volatile over the long term than if a single style were employed
throughout the entire period.
EIM, based on the foregoing principles and on its analysis and evaluation
of information regarding the personnel and investment styles and performance
of numerous professional investment management firms, has selected for
appointment by the Fund a group of Managers representing a blending of
different investment styles which, in its opinion, is appropriate to the
Fund's investment objective.
EIM has ultimate responsibility for the investment performance of the
Fund. EIM continuously monitors the performance and investment styles of the
Fund's portfolio Managers and from time to time may recommend changes of
Managers based on factors such as changes in a Manager's investment style or a
departure by a Manager from the investment style for which it had been
selected, a deterioration in a Manager's performance relative to that of other
investment management firms practicing a similar style, or adverse changes in
its ownership or personnel.
The Fund's current Managers are:
Evergreen Asset Management Corp. ("Evergreen Asset")
MFS Institutional Advisors, Inc. ("MFS")
OppenheimerFunds, Inc. ("Oppenheimer")
Putnam Investment Management, Inc. ("Putnam")
The investment styles described in the section entitled "Description of
the Fund--Investment Objective and Policies" will be those applied by each of
the Managers to the segment of the Fund's portfolio for which that Manager is
responsible.
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FINANCIAL HIGHLIGHTS
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As of the date of this prospectus, the Fund had not commenced operations.
Therefore, no financial highlights are currently available.
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DESCRIPTION OF THE FUND
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is nonfundamental; as a result, the Fund
may change its objective without a shareholder vote. The Fund has also adopted
certain fundamental investment policies which are mainly designed to limit the
Fund's exposure to risk. The Fund's fundamental policies cannot be changed
without a shareholder vote. See the SAI for more information regarding the
Fund's fundamental investment policies or other related investment policies.
There can be no assurance that the Fund's investment objective will be
achieved.
The Fund's investment objective is to seek long-term capital appreciation
by investing at least 65% of its assets in equity securities.
Evergreen Asset's segment of the portfolio will primarily be invested, in
accordance with its value oriented strategy, in equity securities of U.S. and
foriegn companies with market capitalizations between approximately $500
million and $5 billion. In accordance with the value style of investing,
Evergreen Asset invests in companies it believes the market has temporarily
undervalued in relation to such factors as the company's assets, cash flow and
earnings potential.
MFS manages its segment of the portfolio by primarily investing, in
accordance with its growth oriented investment strategy, in equity securities
of companies with market capitalizations between approximately $500 million
and $5 billion. Such companies generally would be expected to show earnings
growth over time that is well above the growth rate of the overall economy and
the rate of inflation, and would have the products, management and market
opportunities which are usually necessary to continue sustained growth. MFS
may invest up to 25% (and generally expects to invest between 0% and 10%) of
its segment of the Fund's assets in foreign securities (not including American
Depositary Receipts), including foreign growth securities, which are not
traded on a U.S. exchange.
Oppenheimer manages its segment of the portfolio in accordance with a
blended growth and value investment strategy. Investments are primarily in
equity securities of those companies with market capitalizations over $5
billion; however, Oppenheimer may, when it deems advisable, invest in the
equity securities of mid-cap and small-cap companies. In purchasing portfolio
securities, Oppenheimer may invest without limit in foreign securities and
may, to a limited degree, invest in non-convertible debt securities and
preferred stocks which have the potential for capital appreciation.
Putman's segment of the portfolio will primarily be invested, in
accordance with its growth oriented investment strategy, in equity securities
of U.S. and foreign issuers with market capitalizations of $2 billion or more.
Putman may also purchase non-convertible debt securities which offer the
opportunity for capital appreciation.
In the evaluation of a company, more consideration is given to growth
potential than to dividend income. Putman believes that evaluating a company's
probable future earnings, dividends, financial strength, working assets and
competitive position will prove more profitable in the long run than simply
seeking current dividend income.
Equity securities include common stocks, preferred stocks, bonds,
warrants or rights that are convertible into stocks, and depositary receipts
for those securities. Investments may also be made to a limited degree in non-
convertible debt securities and preferred stocks which offer an opportunity
for capital appreciation.
Each Manager may also invest, for temporary defensive purposes, up to
100% of the assets allocated to its segment in short-term obligations. Such
obligations may include U.S. government securities, master demand notes,
commercial paper and notes, bank deposits and other financial obligations.
In addition to the investment policies detailed above, the Fund may
employ certain additional investment strategies which are discussed in
"Investment Practices and Restrictions."
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INVESTMENT PRACTICES AND RESTRICTIONS
Repurchase Agreements. The Fund may invest in repurchase agreements. A
repurchase agreement is an agreement by which the Fund purchases a security
(usually U.S. government securities) for cash and obtains a simultaneous
commitment from the seller (usually a bank or broker-dealer) to repurchase the
security at an agreed-upon price and specified future date. The repurchase
price reflects an agreed-upon interest rate for the time period of the
agreement. The Fund's risk is the inability of the seller to pay the agreed-
upon price on the delivery date. However, this risk is tempered by the ability
of the Fund to sell the security in the open market in the case of a default.
In such a case, the Fund may incur costs in disposing of the security which
would increase Fund expenses. The Fund's Managers will monitor the
creditworthiness of the firms with which the Fund enters into repurchase
agreements.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement is an agreement by the Fund to sell
a security and repurchase it at a specified time and price. The Fund could
lose money if the market values of the securities it sold decline below their
repurchase prices. Reverse repurchase agreements may be considered a form of
borrowing, and, therefore, a form of leverage. Leverage may magnify gains or
losses of the Fund.
When-Issued, Delayed-Delivery and Forward Commitment Transactions. The Fund
may enter into transactions whereby it commits to buying a security, but does
not pay for or take delivery of the security until some specified date in the
future. The value of these securities is subject to market fluctuation during
this period and no income accrues to the Fund until settlement. At the time of
settlement, a when-issued security may be valued at less than its purchase
price. When entering into these transactions, the Fund relies on the other
party to consummate the transaction; if the other party fails to do so, the
Fund may be disadvantaged. The Fund does not intend to purchase when-issued
securities for speculative purposes, but only in furtherance of its investment
objective.
Securities Lending. To generate income and offset expenses, the Fund may lend
securities to broker-dealers and other financial institutions. Loans of
securities by the Fund may not exceed 33 1/3% of the value of the Fund's total
assets. While securities are on loan, the borrower will pay the Fund any
income accruing on the security. Also, the Fund may invest any collateral it
receives in additional securities. Gains or losses in the market value of a
lent security will affect the Fund and its shareholders. When the Fund lends
its securities, it runs the risk that it could not retrieve the securities on
a timely basis, possibly losing the opportunity to sell the securities at a
desirable price. Also, if the borrower files for bankruptcy or becomes
insolvent, the Fund's ability to dispose of the securities may be delayed.
Investing in Securities of Other Investment Companies. The Fund may invest in
the securities of other investment companies. As a shareholder of another
investment company, the Fund would pay its portion of the other investment
company's expenses. These expenses would be in addition to the expenses that
the Fund currently bears concerning its own operations and may result in some
duplication of fees.
Borrowing. The Fund may borrow from banks in an amount up to 33 1/3% of its
total assets, taken at market value. The Fund may also borrow an additional 5%
of its total assets from banks and others. The Fund may only borrow as a
temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. The Fund may not purchase additional securities
when borrowings exceed 5% of total assets.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk and borrowed funds are subject to interest
costs which will reduce net income.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities and other securities which are not readily marketable.
Repurchase agreements with maturities longer than seven days will be included
for the purpose of the foregoing 15% limit. The inability of the Fund to
dispose of illiquid investments readily or at a reasonable price could impair
its ability to raise cash for redemptions or other purposes.
Restricted Securities. The Fund may invest in restricted securities, including
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 (the "1933 Act"). Generally, Rule 144A establishes a safe harbor from
the registration requirements of the 1933 Act for resale by large
institutional investors of
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securities not publicly traded in the U.S. The Fund's Managers determine the
liquidity of Rule 144A securities according to the guidelines and procedures
adopted by the Trust's Board of Trustees. The Board of Trustees monitors the
Managers' application of those guidelines and procedures. Securities eligible
for resale pursuant to Rule 144A, which the Fund's Managers have determined to
be liquid or readily marketable, are not subject to the 15% limit on illiquid
securities.
Options and Futures. The Fund may engage in options and futures transactions.
Options and futures transactions are intended to enable the Fund to manage
market, interest rate or exchange rate risk. The Fund does not use these
transactions for speculation or leverage.
The Fund may attempt to hedge all or a portion of its portfolio through
the purchase of both put and call options on its portfolio securities and
listed put options on financial futures contracts for portfolio securities.
The Fund may also purchase call options on financial futures contracts. The
Fund may write covered call options on its portfolio securities to attempt to
increase its current income. The Fund will maintain its position in
securities, option rights, and segregated cash subject to puts and calls until
the options are exercised, closed, or have expired. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series.
The Fund may write (i.e., sell) covered call and put options. By writing
a call option, the Fund becomes obligated during the term of the option to
deliver the securities underlying the option upon payment of the exercise
price. By writing a put option, the Fund becomes obligated during the term of
the option to purchase the securities underlying the option at the exercise
price if the option is exercised. The Fund also may write straddles
(combinations of covered puts and calls on the same underlying security). The
Fund may only write "covered" options. This means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits
and maintains with its custodian in a segregated account liquid assets having
a value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. The Fund receives a premium from writing a
call or put option which it retains whether or not the option is exercised. By
writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Fund might become obligated to purchase the underlying securities for more
than their current market price upon exercise.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of instrument called for in the
contract ("going short"), and the buyer, who agrees to take delivery of the
instrument ("going long") at a certain time in the future. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities
of the U.S. government. If the Fund enters into financial futures contracts
directly to hedge its holdings of fixed income securities, it would enter into
contracts to deliver securities at an undetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. The Fund
would agree to purchase securities in the future at a predetermined price
(i.e., "go long") to hedge against a decline in market interest rates.
The Fund may also enter into currency and other financial futures
contracts and write options on such contracts. The Fund intends to enter into
such contracts and related options for hedging purposes. The Fund will enter
into futures on securities, currencies, or index-based futures contracts in
order to hedge against changes in interest or exchange rates or securities
prices. A futures contract on securities or currencies is an agreement to buy
or sell securities or currencies during a designated month at whatever price
exists at that time. A futures contract on a securities index does not involve
the actual delivery of securities, but merely requires the payment of a cash
settlement based on changes in the securities index. The Fund does not make
payment or deliver securities upon entering into a futures contract. Instead,
it puts down a margin deposit, which is adjusted to reflect changes in the
value of the contract and which remains in effect until the contract is
terminated.
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The Fund may sell or purchase currency and other financial futures
contracts. When a futures contract is sold by the Fund, the profit on the
contract will tend to rise when the value of the underlying securities or
currencies declines and to fall when the value of such securities or
currencies increases. Thus, the Fund sells futures contracts in order to
offset a possible decline in the value of its securities or currencies. If a
futures contract is purchased by the Fund, the value of the contract will tend
to rise when the value of the underlying securities or currencies increases
and to fall when the value of such securities or currencies declines.
The Fund may enter into closing purchase and sale transactions in order
to terminate a futures contract and may buy or sell put and call options for
the purpose of closing out its options positions. The Fund's ability to enter
into closing transactions depends on the development and maintenance of a
liquid secondary market. There is no assurance that a liquid secondary market
will exist for any particular contract or at any particular time. As a result,
there can be no assurance that the Fund will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the
Fund will continue to be required to maintain the margin deposits on the
contract and to complete the contract according to its terms, in which case it
would continue to bear market risk on the transaction.
Risk Characteristics of Options and Futures. Although options and futures
transactions are intended to enable the Fund to manage market, exchange, or
interest rate risks, these investment devices can be highly volatile, and the
Fund's use of them can result in poorer performance (i.e., the Fund's return
may be reduced). The Fund's attempt to use such investment devices for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. When the Fund uses financial futures contracts and
options on financial futures contracts as hedging devices, there is a risk
that the prices of the securities subject to the financial futures contracts
and options on financial futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the
financial futures contracts and any related options to react to market changes
differently than the portfolio securities. In addition, the Fund's Managers
could be incorrect in their expectations and forecasts about the direction or
extent of market factors, such as interest rates, securities price movements,
and other economic factors. Even if the Fund's Managers correctly predict
interest rate movements, a hedge could be unsuccessful if changes in the value
of the Fund's futures position did not correspond to changes in the value of
its investments. In these events, the Fund may lose money on the financial
futures contracts or the options on financial futures contracts. It is not
certain that a secondary market for positions in financial futures contracts
or for options on financial futures contracts will exist at all times.
Although the Fund's Managers will consider liquidity before entering into
financial futures contracts or options on financial futures contracts, there
is no assurance that a liquid secondary market on an exchange will exist for
any particular financial futures contract or option on a financial futures
contract at any particular time. The Fund's ability to establish and close out
financial futures contracts and options on financial futures contract
positions depends on this secondary market. If the Fund is unable to close out
its position due to disruptions in the market or lack of liquidity, the Fund
may lose money on the futures contract or option, and the losses to the Fund
could be significant.
Derivatives. Derivatives are financial contracts, such as those described
above, whose value is based on an underlying asset, such as a stock or a bond,
or an underlying economic factor, such as an index or an interest rate. The
Fund may invest in derivatives only if the expected risks and rewards are
consistent with its objectives and policies.
Losses from derivatives can sometimes be substantial. This is true partly
because small price movements in the underlying asset can result in immediate
and substantial gains or losses in the value of the derivative. Derivatives
can also cause the Fund to lose money if the Fund fails to correctly predict
the direction in which the underlying asset or economic factor will move.
Investment in Small and Mid-Sized Companies. Investments in securities of
little-known, relatively small or mid-sized and special situation companies
may tend to be speculative and volatile. A lack of management depth in such
companies could increase the risks associated with the loss of key personnel.
Also, the material and financial resources of such companies may be limited,
with the consequence that funds or external financing necessary for growth may
be unavailable. Such companies may also be involved in the development or
marketing of new products or services for which there are no established
markets. If projected markets do not materialize or only regional markets
develop, such companies may be adversely affected or may be subject to the
consequence of local events. Moreover, such companies may be insignificant
factors in their industries and may
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become subject to intense competition from larger companies. Securities of
companies in which the Fund may invest will frequently be traded only in the
over-the-counter market or on regional stock exchanges and will often be
closely held. Securities of this type may have limited liquidity and may be
subject to wide price fluctuations. As a result of the risk factors described
above, to the extent the Fund invests in small and mid-sized companies, the
net asset value of the Fund's shares can be expected to vary significantly.
Foreign Investments. Foreign securities may involve additional risks.
Specifically, they may be affected by the strength of foreign currencies
relative to the U.S. dollar, or by political or economic developments in
foreign countries. Accounting procedures and government supervision may be
less stringent than those applicable to U.S. companies. There may be less
publicly available information about a foreign company than about a U.S.
company. Foreign markets may be less liquid or more volatile than U.S. markets
and may offer less obligations abroad than would be the case in the U.S.
because of differences in the legal systems. Foreign securities may be subject
to foreign taxes, which may reduce yield, and may be less marketable than
comparable U.S. securities. All these factors are considered by the Fund's
Managers before making any of these types of investments.
Foreign Currency Transactions. As discussed above, the Fund may invest in
securities of foreign issuers. When the Fund invests in foreign securities,
they usually will be denominated in foreign currencies, and the Fund
temporarily may hold funds in foreign currencies. Thus, the value of the
Fund's shares will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell.
The Fund intends to use these contracts to hedge the U.S. dollar value of a
security it already owns, particularly if the Fund expects a decrease in the
value of the currency in which the foreign security is denominated. Although
the Fund will attempt to benefit from using forward contracts, the success of
its hedging strategy will depend on the Managers' ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. The value of the Fund's investments denominated in foreign currencies
will depend on the relative strength of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by changes in the
exchange rates or exchange control regulations between foreign currencies and
the U.S. dollar. Changes in foreign currency exchange rates also may affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund. The Fund does not intend to enter
into foreign currency transactions for speculation or leverage.
Special Risk Considerations Regarding the Multi-Manager Strategy. EIM oversees
the portfolio management services provided to the Fund by each of the four
Managers. EIM does not, however, determine what investments will be purchased
or sold for any segment of the portfolio. Because each Manager will be
managing its segment of the portfolio independently from the other Managers,
the same security may be held in two different segments of the portfolio, or
may be acquired for one segment of the portfolio at a time when the Manager of
another segment deems it appropriate to dispose of the security from that
other segment. Similarly, under some market conditions, one or more of the
Managers may believe that temporary, defensive investments in short-term
instruments or cash are appropriate when another Manager or Managers believe
continued exposure to the equity markets is appropriate for their segments of
the portfolio. Because each Manager directs the trading for its own segment of
the portfolio, and does not aggregate its transactions with those of the other
Managers, the Fund may incur higher brokerage costs than would be the case if
a single investment advisor or Manager were managing the entire portfolio.
Also, because each segment of the portfolio will perform differently from the
other segments depending upon the investments it holds and changing market
conditions, one segment may be larger or smaller at various times than other
segments. Net cash inflows or outflows resulting from sales and redemptions of
the Fund's shares will, however, continue to be allocated on an equal basis
among the four segments of the portfolio without regard to the relative size
of the segments. EIM will not reallocate assets among the segments to reduce
these differences in size until the assets allocated to one Manager either
exceeds 35% or is less than 15% of the Fund's average daily net assets for a
period of three consecutive months. In such event EIM may, but is not
obligated to, reallocate assets among Managers to provide for a more equal
distribution of the Fund's assets.
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MANAGEMENT OF THE FUND
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BOARD OF TRUSTEES
The Trust is supervised by a Board of Trustees that is responsible for
representing the interests of shareholders. The Trustees meet periodically
throughout the year to oversee the Fund's activities, reviewing among other
things, the Fund's performance and its contractual agreements with various
service providers.
INVESTMENT ADVISOR
The investment advisor of the Fund is EIM of FUNB which is a wholly-owned
subsidiary of First Union Corporation ("First Union"). First Union is located
at 301 South College Street and FUNB is located at 201 South College Street,
Charlotte, North Carolina 28288-0630. First Union and its subsidiaries provide
a broad range of financial services to individuals and businesses throughout
the United States.
Pursuant to its Investment Advisory and Management Agreement (the
"Advisory Agreement") EIM oversees the administration of all aspects of the
business and affairs of the Fund and selects, contracts with and compensates
Managers to manage the assets of the Fund's portfolio. EIM monitors the
Managers for
compliance with the investment objectives and policies of the Fund, reviews
the performance of the Managers, and periodically reports to the Trust. EIM
has the right under the Advisory Agreement to directly manage any or all of
the Fund's assets.
EIM is entitled to receive from the Fund an annual fee equal to 0.95% of
average daily net assets of the Fund.
The Trust and FUNB have received an exemptive order from the SEC that
permits the Manager, subject to certain conditions, and without the approval
of shareholders to: (a) employ a new unaffiliated Manager or Managers for the
Fund pursuant to the terms of a new portfolio management agreement, in each
case either as a replacement for an existing Manager or as an additional
Manager; (b) change the terms of any portfolio management agreement; and (c)
continue the employment of an existing Manager on the same advisory contract
terms where a contract has been assigned because of a change in control of the
Manager. In such circumstances, shareholders would receive notice of such
action, including the information concerning the Manager that normally is
provided in a proxy statement. The exemptive order permits disclosure of fees
paid to unaffiliated Managers are on aggregate basis only.
Shareholders have the right to terminate arrangements with a Manager by
vote of a majority of the outstanding shares to the Fund. In addition,
shareholders have the right to approve, in accordance with current SEC
interpretations, any new portfolio management agreements with affiliated
Managers.
Manager Oversight. David Francis is primarily responsible for overseeing the
Managers. Mr. Francis joined FUNB in 1994 from Federated Investment
Counseling, a division of Federated Investors in Pittsburgh, PA, where he
managed equities for employee benefit and tax-exempt separate accounts and
mutual funds. He is a Senior Vice President, Managing Director and Chief
Investment Officer of EIM.
MANAGERS
Subject to the supervision of EIM, each Manager manages a segment of the
Fund's portfolio in accordance with the Fund's investment objective and
policies, makes investment decisions for the segment, and places orders to
purchase and sell securities for the segment. The Fund pays no direct fees to
any of the Managers.
Set forth below is a brief description of the Fund's Managers.
Evergreen Asset, 2500 Westchester Avenue, Purchase, New York 10577, is a
wholly-owned subsidiary of First Union. Evergreen Asset, with its
predecessors, has served as investment advisor to the Evergreen mutual funds
since 1971.
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MFS, 500 Boylston Street, Boston, Massachusetts 02116, together with its
parent company, is America's oldest mutual fund organization. MFS and its
predecessor organizations have a history of money management dating from 1924
and the founding of the first mutual fund in the United States. MFS is a
subsidiary of Massachusetts Financial Services Company, which is a subsidiary
of SunLife of Canada (U.S.) Financial Services Holdings, Inc., which in turn
is an indirect wholly-owned subsidiary of SunLife Assurance Company of Canada.
As of July 31, 1998, MFS managed more than $87 billion on behalf of over 3.3
million investor accounts.
Oppenheimer, Two World Trade Center, New York, New York 10048, has
operated as an investment advisor since 1959. As of August 31, 1998,
Oppenheimer and its subsidiaries managed investment companies with assets of
more than $85 billion and with more than 4 million shareholder accounts.
Oppenheimer is owned by Oppenheimer Acquisition Corp., a holding company that
is owned in part by senior officers of Oppenheimer and controlled by
Massachusetts Mutual Life Insurance Company.
Putnam, One Post Office Square, Boston, Massachusetts 02109, has been
managing mutual funds since 1937. As of June 30, 1998, Putnam and its
affiliates managed more than $278 billion of assets. Putnam is a subsidiary of
Putnam Investments, Inc., which is owned by Marsh & McLennan Companies, Inc.,
a publicly-owned holding company whose principal businesses are international
insurance and reinsurance brokerage, employee benefit consulting and
investment management.
Evergreen Asset has entered into a sub-advisory agreement with Lieber &
Company, an indirect wholly-owned subsidiary of First Union, which provides
that Lieber & Company's research department and staff will furnish Evergreen
Asset with information, investment recommendations, advice and assistance, and
will generally be available for consultation on the segment of the Fund's
portfolio managed by Evergreen Asset. Lieber & Company will be reimbursed by
Evergreen Asset in connection with the rendering of services on the basis of
the direct and indirect costs of performing such services. There is no
additional charge to the Fund for the services provided by Lieber & Company.
The address of Lieber & Company is 2500 Westchester Avenue, Purchase, New York
10577.
EIM pays the Managers of the Fund sub-advisory fees equal in the
aggregate up to .50% of the Fund's average daily net assets. Evergreen Asset,
an affiliate of EIM, receives a sub-advisory fee equal to .50% of the first
$500 million of the Fund's average daily net assets managed by Evergreen
Asset, .40% of the next $500 million of such net assets, and .35% of such net
assets in excess of $1 billion.
ADMINISTRATOR
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
the Fund. As administrator, and subject to the supervision and control of the
Trust's Board of Trustees, EIS provides the Fund with facilities, equipment
and personnel. For its services as administrator, EIS is entitled to receive a
fee based on the aggregate average daily net assets of the Fund at a rate
based on the total assets of all mutual funds administered by EIS for which
any affiliate of the FUNB serves as investment advisor. The administration fee
is calculated in accordance with the following schedule.
Administration Fee
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% on assets in excess of $30 billion
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SALE AND REDEMPTION OF SHARES
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PARTICIPATING INSURANCE COMPANIES
The Fund is organized to serve as an investment vehicle for (a) separate
accounts funding variable annuity ("VA") and variable life insurance ("VLI")
contracts issued by certain life insurance companies ("Participating Insurance
Companies"). The Trust does not currently foresee any disadvantages to the
holders of VA and VLI contracts arising from the fact that the interests of
holders of VA and VLI contracts may differ due to the difference of tax
treatment and other considerations.
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Nevertheless, the Trustees have established procedures for the purpose of
identifying any irreconcilable material conflicts that may arise and to
determine what action, if any, would be taken in response thereto. The VA and
VLI contracts are described in the separate prospectuses issued by the
Participating Insurance Companies. The Trust assumes no responsibility for
such prospectuses.
PURCHASES
Shares of the Fund are sold at net asset value to the separate accounts
of Participating Insurance Companies. All investments in the Trust are
credited to the shareholder's account in the form of full or fractional shares
of the Fund (rounded to the nearest 1/1000 of a share). The Trust does not
issue share certificates. Initial and subsequent purchase payments allocated
to the Fund are subject to the limits described in the separate prospectuses
issued by the Participating Insurance Companies or in pension and retirement
plan documents.
How the Fund Value its Shares. The net asset value of shares of the Fund is
calculated by dividing the value of the amount of the Fund's net assets by the
number of outstanding shares. Shares are valued each day the New York Stock
Exchange (the "Exchange") is open as of the close of regular trading
(currently 4:00 p.m. eastern time). The securities in the Fund are valued at
their current market value determined on the basis of market quotations or, if
such quotations are not readily available, such other methods as the Trustees
believe would accurately reflect fair value. Non-dollar denominated securities
will be valued as of the close of the Exchange at the closing price of such
securities in their principal trading markets.
REDEMPTIONS
The separate accounts of Participating Insurance Companies redeem shares
to make benefit or surrender payments under the terms of the VA or VLI
contract. Redemptions are processed on any day on which the Trust is open for
business and are effected at net asset value next determined after the
redemption order, in proper form, is received by the Trust or its agent. The
net asset value per share of the Fund is determined once daily, as of 4:00
p.m. eastern time on each business day the Exchange is open and on such other
days as the Trustees determine, and on any other day during which there is a
sufficient degree of trading in the Fund's portfolio securities that the net
asset value of the Fund is materially affected by changes in the value of
portfolio securities.
The Trust may suspend the right of redemption only under the following
unusual circumstances: (1) when the Exchange is closed (other than weekends
and holidays) or trading is restricted; (2) when an emergency exists, making
disposal of portfolio securities or the valuation of net assets not reasonably
practicable; or (3) during any period when the SEC has by order permitted a
suspension of redemptions for the protection of shareholders.
DIVIDENDS
All dividends payable by the Fund are distributed at least annually to
the separate accounts of Participating Insurance Companies and will be
automatically reinvested in additional shares of the Fund. Dividends and other
distributions made by the Fund to such separate accounts are taxable, if at
all, to the Participating Insurance Companies; they are not currently taxable
to the VA or VLI owners.
TAX STATUS
The Fund is treated as a separate entity for federal income tax purposes
and is not combined with the Trust's other Funds. It is the intention of the
Fund to qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and meet all other
requirements necessary for it to be relieved of federal income taxes on that
part of its net investment income and net capital gains distributed to its
shareholders. The Fund intends to distribute all of its net investment income
and net capital gains to its shareholders.
For a discussion of the tax consequences of VA or VLI contracts, refer to
the prospectus of the VA or VLI contract offered by the Participating
Insurance Company. VA or VLI contracts purchased through insurance
11
<PAGE>
company separate accounts provide for the accumulation of all earnings from
interest, dividends, and capital appreciation without current federal income
tax liability to the owner. Depending on the VA or VLI contract, distributions
from the contract may be subject to ordinary income tax and, in addition, a
10% penalty tax on distributions before age 59 1/2. Only the portion of a
distribution attributable to income on the investment in the contract is
subject to federal income tax. Investors should consult with competent tax
advisors for a more complete discussion of possible tax consequences in a
particular situation.
Section 817(h) of the Code provides that investments of a separate
account underlying a VA or VLI contract (or the investments of a mutual fund,
the shares of which are owned by the VA or VLI separate account) must be
"adequately diversified" in order for the VA or VLI contract to be treated as
an annuity for tax purposes. The Treasury Department has issued regulations
prescribing these diversification requirements. The Fund intends to comply
with these requirements. If a separate account underlying a VA or VLI contract
was not adequately diversified, the owner of such VA or VLI contract would be
immediately subject to tax on the earnings allocable to the contract.
Additional information about the tax status of the Fund is provided in the
SAI.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment advisor, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase
of shares of such an investment company upon the order of its customer. FUNB
and its affiliates are subject to and in compliance with the aforementioned
laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB or its affiliates being
prevented from continuing to perform the services required under the
investment advisory contract or from acting as agent in connection with the
purchase of shares of the Fund by its customers. If FUNB or its affiliates
were prevented from continuing to provide the services called for under the
investment advisory 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.
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GENERAL INFORMATION
- -------------------------------------------------------------------------------
CUSTODIAN, AND TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02109 (the "Custodian") acts as custodian of the assets of the
Trust. Evergreen Service Company, 200 Berkeley Street, Boston, Massachusetts
02116 acts as the transfer agent and dividend disbursing agent for the Trust
and in doing so performs certain bookkeeping, data processing and
administrative services for the Trust and the Fund.
EXPENSES OF THE TRUST
The Fund bears all expenses of its operations other than those incurred
by EIM under its investment Advisory Agreement, and EIS under its
administration agreement with the Trust. In particular, the Fund pays
investment advisory fees, administrative fees, custodian fees and expenses,
legal, accounting and auditing fees, brokerage fees, interest and taxes,
registration fees and expenses, expenses of the transfer and dividend
disbursing agent, the compensation and expenses of Trustees who are not
otherwise affiliated with the Trust, FUNB, Evergreen Asset, MFS, Oppenheimer,
Putnam or any of their affiliates, expenses of printing and mailing reports
and notices and proxy material to beneficial shareholders of the Trust, and
any extraordinary expenses.
12
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SHAREHOLDER RIGHTS
The Trust is a Delaware business trust organized on December 23, 1997,
and was originally organized as a Massachusetts business trust in 1996.
Pursuant to current interpretations of the 1940 Act, each Participating
Insurance Company will solicit voting instructions from VA or VLI contract
owners with respect to any matters that are presented to a vote of
shareholders. On any matter submitted to a vote of shareholders, all the
shares of the Trust then issued and outstanding and entitled to vote shall be
voted in the aggregate and not by fund except for matters concerning only a
specific fund. Certain matters approved by a vote of shareholders of one fund
of the Trust may not be binding on the fund whose shareholders have not
approved such matters. The holder of each share of the Trust shall be entitled
to one vote for each full share and a fractional vote for each fractional
share. Shares of one fund may not bear the same economic relationship to the
Trust as shares of another fund.
The Trust is not required to hold annual meetings of shareholders and
does not plan to do so. The Trustees may call special meetings of shareholders
for action by shareholder vote as may be required by the 1940 Act or the
Trust's Declaration of Trust. The Trustees will be a self-perpetuating body
until fewer than 50% of the Trustees, then serving as Trustees, are Trustees
who were elected by shareholders. At that time a meeting of shareholders will
be called to elect additional Trustees.
The Declaration of Trust may be amended by a vote of the Trustees;
provided, if any such amendment materially adversely affects the rights of any
shares of any series or any class with respect to matters to which such
amendment is applicable, such amendment shall be subject to approval by
holders of a majority of the outstanding voting securities, as that term is
defined in the 1940 Act, of such series or class. Shares have no pre-emptive
or conversion rights and are fully paid and nonassessable. When a majority is
required, it means the lesser of 67% or more of the shares present at a
meeting when the holders of more than 50% of the outstanding shares are
present or represented by proxy, or more than 50% of the outstanding shares.
DESCRIPTION OF SHARES
The Declaration of Trust permits the Trustees to establish and designate
series or classes in addition to the Fund. Each share of any series or class
represents an equal proportionate share in the net assets of that series or
class with each other share of that series or class. The Trustees may divide
or combine the shares of any series or class into a greater or lesser number
of shares of that series or class without thereby changing the proportionate
interests in the assets of that series or class. Upon liquidation of a
particular series or class, the shareholders of that series or class shall be
entitled to share pro rata in the net assets of such series or class available
for distribution to shareholders.
Any inquiries regarding the Trust should be directed to the Trust at the
telephone number or address shown on the cover page of this prospectus. All
inquiries regarding the VA or VLI contracts should be directed to the
Participating Insurance Company, as indicated in the VA or VLI prospectus
accompanying this prospectus.
PORTFOLIO TURNOVER AND BROKERAGE
The estimated annual portfolio turnover rate for the Fund is not expected
to exceed 100%. A portfolio rate of 100% would occur if all of the Fund's
portfolio securities were replaced in one year. The portfolio turnover rate
experienced by the Fund directly affects the transaction costs relating to the
purchase and sale of securities which the Fund bears directly. A high rate of
portfolio turnover will increase such costs. It is contemplated that Lieber &
Company, an affiliate of Evergreen Asset and a member of the New York and
American Stock Exchanges will, with respect to assets of the Fund managed by
Evergreen Asset and to the extent practicable, effect substantially all of the
portfolio transactions for Evergreen Asset's portion of the Fund effected on
those exchanges. In addition, broker-dealers affiliated with MFS, Oppenheimer
and Putnam may be utilized by these Managers to effect portfolio transactions
for the Fund. See the SAI for further information regarding the practices of
the Fund affecting portfolio turnover and brokerage allocation practices.
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<PAGE>
PERFORMANCE
From time to time, the Trust may advertise the "average annual or
cumulative total return" of the Fund and may compare the performance of the
Fund with that of other mutual funds with similar investment objectives as
listed in rankings prepared by Lipper Analytical Services, Inc., or similar
independent services monitoring mutual fund performance, and with appropriate
securities or other relevant indices. The "average annual total return" of the
Fund refers to the average annual compounded rate of return over the stated
period that would equate an initial investment in the Fund at the beginning of
the period to its ending redeemable value, assuming reinvestment of all
dividends and distributions and deduction of all recurring charges. Figures
will be given for the recent one, five and ten year periods and for the life
of the Fund if it has not been in existence for such periods. When considering
"average annual total return" figures for periods longer than one year it is
important to note that the Fund's annual total return for any given year might
have been greater or less than its average for the entire period. "Cumulative
total return" represents the total change in value of an investment in the
Fund for a specified period (again reflecting changes in the Fund's share
price and assuming reinvestment of Fund distributions).
The performance of the Fund will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Fund's investments and expenses. Consequently, the Fund's performance figures
are historical and should not be considered representative of the performance
of the Fund for any future period.
GENERAL
Independent Auditors. KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, serves as the independent public accountants of the
Trust.
Legal Counsel. Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W.,
Washington, D.C. 20036, acts as counsel for the Trust.
Year 2000 Risks. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Fund's investment advisor and the
Fund's other service providers do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." The Fund's investment advisor is taking
steps to address the Year 2000 Problem with respect to the computer systems
that it use and to obtain assurances that comparable steps are being taken by
the Fund's other major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse impact
on the Fund.
Additional Information. This prospectus and the SAI, which has been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statement filed by the Trust with the SEC under the 1933
Act. Copies of the Registration Statement may be obtained at a reasonable
charge from the SEC or may be examined, without charge, at the offices of the
SEC in Washington, D.C.
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Investment Advisor
Evergreen Investment Management Division of First Union National Bank, 210
South College Street, Charlotte, North Carolina 28288
Manager
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase, New York
10577
MFS Institutional Advisors, Inc., 500 Boylston Street, Boston, Massachusetts
02116
Oppenheimer Funds, Inc., Two World Trade Center, New York, New York 10048
Putnam Investment Management, Inc., One Post Office Square, Boston,
Massachusetts 02109
Custodian
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
Transfer Agent
Evergreen Service Company, P.O. Box 2121, Boston, Massachusetts 02116-2121
Legal Counsel
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C. 20036
Independent Auditors
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
Distributor
Evergreen Distributor, Inc., 125 W. 55th Street, New York, New York 10019
32009 546759RV0
EVERGREEN VARIABLE ANNUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998, as amended
August 15, 1998 and February 1, 1999
Evergreen VA Fund ("Evergreen")
Evergreen VA Growth and Income Fund ("Growth and Income")
Evergreen VA Foundation Fund ("Foundation")
Evergreen VA Global Leaders Fund ("Global Leaders")
Evergreen VA Aggressive Growth Fund ("Aggressive")
Evergreen VA Strategic Income Fund ("Strategic Income")
Evergreen VA Small Cap Equity Income Fund ("Small Cap")
Evergreen VA International Growth Fund ("International Growth").
Evergreen VA Masters Fund ("Masters")
This Statement of Additional Information ("SAI") pertains to the Funds listed
above. It is not a prospectus and should be read in conjunction with the
prospectuses of Evergreen, Growth and Income, Foundation, Global Leaders,
Aggressive, Strategic Income, Small Cap and International Growth dated May 1,
1998, as amended August 15, 1998 and Masters, which is dated February 1, 1999,
as amended from time to time. The Funds are offered to separate accounts funding
variable annuity and variable life insurance contracts issued by life insurance
companies ("Participating Insurance Companies"). Copies of the prospectuses may
be obtained without charge by calling the number listed above.
TABLE OF CONTENTS
FUND INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . .
Fundamental Policies. . . . . . . . . . . . . . . . . . . .
Investment Guidelines . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . .
PRINCIPAL HOLDERS OF FUND SHARES . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY SERVICES . . . . . . . . . . . . . . . . . .
ADMINISTRATIVE SERVICE PROVIDERS . . . . . . . . . . . . . . . .
BROKERAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL TAX INFORMATION . . . . . . . . . . . . . . . . . . .
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL SALE AND REDEMPTION . . . . . . . . . . . . . . . . .
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 35
GLASS STEAGALL ACT . . . . . . . . . . . . . . . . . . . . . . 35
GENERAL INFORMATION ABOUT THE FUNDS. . . . . . . . . . . . . . 35
Custodian . . . . . . . . . . . . . . . . . . . . . . . . 35
Transfer Agent. . . . . . . . . . . . . . . . . . . . . . 36
CAPITALIZATION AND ORGANIZATION. . . . . . . . . . . . . . . . 36
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . 37
Yield Calculations. . . . . . . . . . . . . . . . . . . . 37
Non-Standardized Performance. . . . . . . . . . . . . . . 38
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . 38
Independent Accounts. . . . . . . . . . . . . . . . . . . 39
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . 39
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 39
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
FUND INVESTMENTS
GENERAL INFORMATION
The investment objective of each Fund and a description of the securities in
which each Fund may invest is set forth under "Description of the Funds -
"Investment Objectives and Policies" in each Fund's prospectus. The Funds'
investment objectives are nonfundamental and may be changed without the approval
of shareholders. Shareholders would be notified prior to the implementation of
any such change. The following expands upon the discussion in the prospectuses
regarding certain investments of each Fund.
U.S. Government Securities
The types of U.S. government securities in which the Funds may invest generally
include direct obligations of the U.S. Treasury such as U. S. Treasury bills,
notes and bonds and obligations issued or guaranteed by U.S. government agencies
or instrumentalities. These securities are backed by:
(I) the full faith and credit of the U.S. Treasury; (ii) the issuer's right to
borrow from the U.S. Treasury; (iii) the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities; or
(iv) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive financial
support from the U.S. government are:
(I) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation ("FHLMC");
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association
Securities Issued by the Government National Mortgage Association ("GNMA")
The Funds 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 Funds may
purchase securities on a when-issued or delayed delivery basis and may purchase
or sell securities on a forward commitment basis. Settlement of such
transactions normally occurs within a month or more after the purchase or sale
commitment is made. The Funds may purchase securities under such conditions only
with the intention of actually acquiring them, but may enter into a separate
agreement to sell the securities before the settlement date. Since the value of
securities purchased may fluctuate prior to settlement, a Fund may be required
to pay more at settlement than the security is worth. In addition, the purchaser
is not entitled to any of the interest earned prior to settlement. Upon making a
commitment to purchase a security on a when-issued, delayed delivery or forward
commitment basis, a Fund will hold liquid assets worth at least the equivalent
of the amount due. The liquid assets will be monitored on a daily basis and
adjusted as necessary to maintain the necessary value. Purchases made under such
conditions are a form of leveraging and may involve the risk that yields secured
at the time of commitment may be lower than otherwise available by the time
settlement takes place, causing an unrealized loss to a Fund. Leverage may cause
any gains or losses of a Fund to be magnified. In addition, when a Fund engages
in such purchases, it relies on the other party to consummate the sale. If the
other party fails to perform its obligations, a Fund may miss the opportunity to
obtain a security at a favorable price or yield.
Brady Bonds (Strategic Income and International Growth).
Each Fund may also invest in Brady Bonds. Brady Bonds are created through the
exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructurings under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed-rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations that have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments, but generally are not collateralized. Brady
Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Zero Coupon "Stripped" and Payment-in-Kind Bonds (Strategic Income and
International Growth)
Each Fund may invest in zero-coupon and pay-in-kind securities. These securities
are debt securities that do not make regular cash interest payments. Zero-coupon
securities are sold at a deep discount to their face value. Pay-in-kind
securities pay interest through the issuance of additional securities or, at the
option of the issuer, cash. Because such securities do not pay current cash
income, the price of these securities can be volatile when interest rates
fluctuate. In order to continue to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended, the Fund may be required to
distribute a portion of such discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
In general, owners of zero coupon or payment-in-kind bonds have substantially
all the rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon or payment-in-kind bonds have the
right upon default on the underlying coupon obligations or principal obligations
to proceed directly and individually against the issuer and are not required to
act in concert with other holders of zero coupon bonds.
Restricted and Illiquid Securities
Each Fund may invest in restricted and illiquid securities. The ability of the
Board of Trustees ("Trustees") to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for sale under the Rule. The Funds
which invest in Rule 144A securities believe that the Staff of the SEC has left
the question of determining the liquidity of all restricted securities (eligible
for resale under the Rule) for determination by the Trustees. The Trustees
consider the following criteria in determining the liquidity of certain
restricted securities:
(I) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
Restricted securities would generally be acquired either from institutional
investors who originally acquired the securities in private placements or
directly from the issuers of the securities in private placements. Restricted
securities and securities that are not readily marketable may sell at a discount
from the price they would bring if freely marketable.
Lending of Portfolio Securities
Each Fund may lend its portfolio securities to generate income and to offset
expenses. The collateral received when a Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the lending Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent of collateral to the borrower or
placing broker. A Fund does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
Repurchase Agreements
Each Fund may enter into repurchase agreements with entities that are registered
as U.S. Government securities dealers, including member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by the Advisor or
Manager (as defined later) to be creditworthy. In a repurchase agreement, a Fund
obtains a security and simultaneously commits to return the security to the
seller at a set price (including principal and interest) within a period of time
usually not exceeding seven days. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security.
A Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from a
Fund, a Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. Each Fund's Advisor or Manager believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the investment Advisor or Manager to be creditworthy pursuant to
guidelines established by the Board of Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These
transactions are
similar to borrowing cash. In a reverse repurchase agreement, a Fund transfers
possession of a
portfolio instrument to another person, such as a financial institution, broker
or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but the
ability to enter
into reverse repurchase agreements does not ensure that the Fund will be able
to
avoid selling
portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund,
in a
dollar amount
sufficient to make payment for the obligations to be purchased, are segregated
at the trade date.
These securities are marked to market daily and maintained until the
transaction
is settled.
Options and Futures Transactions
To the extent provided in the prospectuses, each Fund may seek to increase
the current
return on its investments by writing covered call or put options. In addition,
a
Fund may at times
seek to hedge against either a decline in the value of its portfolio securities
or an increase in the
price of securities which its Advisor or Manager plans to purchase through the
writing and purchase
and sale of options including options on stock indices and the purchase and
sale
of futures
contracts and related options. Expenses and losses incurred as a result of such
hedging strategies
will reduce a Fund's current return.
The ability of a Fund to engage in the options and futures strategies
described below will
depend on the availability of liquid markets in such instruments. Markets in
options and futures with
respect to stock indices and U.S. government securities are relatively new and
still developing. It is
impossible to predict the amount of trading interest that may exist in various
types of options or
futures. Therefore no assurance can be given that a Fund will be able to
utilize
these instruments
effectively for the purposes stated below.
Writing Covered Options on Securities. A Fund may write covered call
options and covered
put options on optionable securities of the types in which it is permitted to
invest from time to time
as its Advisor or Manager determines is appropriate in seeking to attain the
Fund's investment
objective. Call options written by a Fund give the holder the right to buy the
underlying security
from the Fund at a stated exercise price; put options give the holder the right
to sell the underlying
security to the Fund at a stated price.
A put option would be considered "covered" if the Fund owns an option to
sell the
underlying security subject to the option having an exercise price equal to or
greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. A call option
is covered if the Fund owns or has the right to acquire the underlying
securities subject to the call
option (or comparable securities satisfying the cover requirements of
securities
exchanges) at all
times during the option period or the Fund maintains in a segregated account at
the Fund's
custodian bank cash or short-term U.S. government securities with a value equal
to or greater than
the Fund's obligation under the option. A Fund may also write combinations of
covered puts and
covered calls on the same underlying security.
A Fund will receive a premium from writing an option, which increases the
Fund's return in
the event the option expires unexercised or is terminated at a profit. The
amount of the premium
will reflect, among other things, the relationship of the market price of the
underlying security to
the exercise price of the option, the term of the option, and the volatility of
the market price of the
underlying security. By writing a call option, a Fund will limit its
opportunity
to profit from any
increase in the market value of the underlying security above the exercise
price
of the option. By
writing a put option, a Fund will assume the risk that it may be required to
purchase the underlying
security for an exercise price higher than its then current market price,
resulting in a potential
capital loss if the purchase price exceeds the market price plus the amount of
the premium
received.
A Fund may terminate an option which it has written prior to its expiration
by entering into
a closing purchase transaction in which it purchases an option having the same
terms as the option
written. The Fund will realize a profit (or loss) from such transaction if the
cost of such transaction
is less (or more) than the premium received from the writing of the option.
Because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying
security, any loss resulting from the repurchase of a call option may be offset
in whole or in part by
unrealized appreciation of the underlying security owned by the Fund.
Purchasing Put and Call Options on Securities. A Fund may purchase put
options to protect
its portfolio holdings in an underlying security against a decline in market
value. This protection is
provided during the life of the put option since the Fund, as holder of the put,
is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's
market price. For the purchase of a put option to be profitable, the market
price of the underlying
security must decline sufficiently below the exercise price to cover the premium
and transaction
costs. By using put options in this manner, any profit which the Fund might
otherwise have realized
on the underlying security will be reduced by the premium paid for the put
option and by
transaction costs.
A Fund may also purchase a call option to hedge against an increase in
price of a security
that it intends to purchase. This protection is provided during the life of the
call option since the
Fund, as holder of the call, is able to buy the underlying security at the
exercise price regardless of
any increase in the underlying security's market price. For the purchase of a
call option to be
profitable, the market price of the underlying security must rise sufficiently
above the exercise price
to cover the premium and transaction costs. By using call options in this
manner, any profit which
the Fund might have realized had it bought the underlying security at the time
it purchased the call
option will be reduced by the premium paid for the call option and by
transaction costs.
Purchase and Sale of Options and Futures on Securities and Stock Indices. A
Fund may
purchase and sell options on securities, stock indices and stock index futures
contracts as a hedge
against movements in the equity markets. In the future, a Fund may purchase and
sell such options
for other investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than
the right to take or make delivery of the specific security at a specific price,
an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the
closing level of that stock index is greater than, in the case of a call, or
less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to such
difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery
of this amount. Unlike options on specific securities, all settlements of
options on stock indices are
in cash and gain or loss depends on general movements in the stocks included in
the index rather
than price movements in particular stocks. Currently options traded include the
Standard & Poor's
500 Composite Stock Price Index, the NYSE Composite Index, the AMEX Market Value
Index, the
National Over-The-Counter Index, the Nikkei 225 Stock Average Index, the
Financial Times Stock
Exchange 100 Index and other standard broadly based stock market indices.
Options are also
traded in certain industry or market segment indices such as the Pharmaceutical
Index.
A stock index futures contract is an agreement in which one party agrees
to
deliver to the
other an amount of cash equal to a specific dollar amount times the difference
between the value
of a specific stock index at the close of the last trading day of the contract
and the price at which
the agreement is made. No physical delivery of securities is made.
If a Fund's Advisor or Manager expects general stock market prices to rise
,
it might
purchase a call option on a stock index or a futures contract on that index as
a
hedge against an
increase in prices of particular equity securities it wants ultimately to buy
for the Fund. If in fact the
stock index does rise, the price of the particular equity securities intended
to
be purchased may
also increase, but that increase would be offset in part by the increase in the
value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the
Fund's Advisor or Manager expects general stock market prices to decline, it
might purchase a put
option or sell a futures contract on the index. If that index does in fact
decline, the value of some
or all of the equity securities held by the Fund may also be expected to
decline, but that decrease
would be offset in part by the increase in the value of the Fund's position in
such put option or
futures contract.
Purchase and Sale of Interest Rate Futures. A Fund may purchase and sell
interest rate
futures contracts on U.S. Treasury bills, notes and bonds and GNMA certificates
either for the
purpose of hedging its portfolio securities against the adverse effects of
anticipated movements in
interest rates or for other investment purposes.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general
level of interest rates. Generally, as interest rates rise, the market value of
the securities held by a
Fund will fall, thus reducing the net asset value of the Fund. This interest
rate risk can be reduced
without employing futures as a hedge by selling such securities and either
reinvesting the proceeds
in securities with shorter maturities or by holding assets in cash. However,
this strategy entails
increased transaction costs in the form of dealer spreads and brokerage
commissions and would
typically reduce the Fund's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising
interest rates. As rates increase, the value of a Fund's short position in the
futures contracts will
also tend to increase thus offsetting all or a portion of the depreciation in
the market value of the
Fund's investments that are being hedged. While the Fund will incur commission
expenses in selling
and closing out futures positions (which is done by taking an opposite position
in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the
purchase and sale of portfolio securities.
A Fund may purchase interest rate futures contracts in anticipation of a
decline in interest
rates when it is not fully invested. As such purchases are made, it is expected
that an equivalent
amount of futures contracts will be closed out.
A Fund will enter into futures contracts which are traded on national or
foreign futures
exchanges, and are standardized as to maturity date and the underlying
financial
instrument.
Futures exchanges and trading in the United States are regulated under the
Commodity Exchange
Act by the Commodity Futures Trading Commission ("CFTC"). Futures are traded in
London at the
London International Financial Futures Exchange, in Paris, at the MATIF, and in
Tokyo at the Tokyo
Stock Exchange.
Options on Futures Contracts. A Fund may purchase and write call and put
options on
securities, stock index and interest rate futures contracts. A Fund may use
such
options on futures
contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly
on the underlying securities or stock indices or purchasing or selling the
underlying futures. For
example, a Fund may purchase put options or write call options on stock index
futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock
market prices or rise in interest rates, respectively, or purchase call options
or write put options on
stock index or interest rate futures, rather than purchasing such futures, to
hedge against possible
increases in the price of equity securities or debt securities, respectively,
which the Fund intends to
purchase.
In connection with transactions in stock index options, stock index
futures, interest rate
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an
amount of cash and short-term U.S. government securities. The current initial
margin requirement
per contract is approximately 2% of the contract amount. Thereafter, subsequent
payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value
of the futures contract. Brokers may establish deposit requirements higher than
exchange
minimums.
Limitations. A Fund will not purchase or sell futures contracts or options
on futures
contracts or stock indices for non-hedging purposes if, as a result, the sum of
the initial margin
deposits on its existing futures contracts and related options positions and
premiums paid for
options on futures contracts or stock indices would exceed 5% of the net assets
of the Fund unless
the transaction meets certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options and
futures strategies
depends, among other things, on a Fund's ability to terminate options and
futures positions at times
when its Advisor or Manager deems it desirable to do so. Although a Fund will
not enter into an
option or futures position unless its Advisor or Manager believes that a liquid
market exists for such
option or future, there can be no assurance that a Fund will be able to effect
closing transactions at
any particular time or at an acceptable price. The Advisor or Managers
generally
expect that
options and futures transactions for the Funds will be conducted on recognized
exchanges. In
certain instances, however, a Fund may purchase and sell options in the over-
the-counter market.
The Staff of the SEC considers over-the-counter options to be illiquid.
A Fund's
ability to terminate
option positions established in the over-the-counter market may be more limited
than in the case of
exchange traded options and may also involve the risk that securities dealers
participating in such
transactions would fail to meet their obligations to the Fund.
The use of options and futures involves the risk of imperfect correlation
between
movements in options and futures prices and movements in the price of the
securities that are the
subject of the hedge. The successful use of these strategies also depends on
the
ability of a Fund's
Advisor or Manager to forecast correctly interest rate movements and general
stock market price
movements. This risk increases as the composition of the securities held by the
Fund diverges from
the composition of the relevant option or futures contract.
Junk Bonds (Growth and Income, Strategic Income and International Growth)
Growth and Income may invest up to 5% of its total assets, International
Growth may
invest up to 10% of its total assets and Strategic Income may invest without
limit in bonds rated
below Baa3 by Moody's Investors Service Inc. ("Moody's") or BBB by Standard &
Poor's Ratings
Services ("Standard & Poor's") (commonly known as "junk bonds"). Securities
rated less than Baa
by Moody's or BBB by Standard & Poor's are classified as non-investment grade
securities and are
considered speculative by those rating agencies. It is the policy of each
Fund's
Advisor or Manager
not to rely exclusively on ratings issued by credit rating agencies but to
supplement such ratings
with the Advisor or Manager's own independent and ongoing review of credit
quality. Junk bonds
may be issued as a consequence of corporate restructurings, such as leveraged
buyouts, mergers,
acquisitions, debt recapitalizations, or similar events or by smaller or highly
leveraged companies.
When economic conditions appear to be deteriorating, junk bonds may decline in
market value due
to investors' heightened concern over credit quality, regardless of prevailing
interest rates. Although
the growth of the high yield securities market in the 1980s had paralleled a
long economic
expansion, many issuers could be affected by adverse economic and market
conditions. It should
be recognized that an economic downturn or increase in interest rates is likely
to have a negative
effect on (I) the high yield bond market, (ii) the value of high yield
securities and (iii) the ability of
the securities' issuers to service their principal and interest payment
obligations, to meet their
projected business goals or to obtain additional financing. The market for junk
bonds, especially
during periods of deteriorating economic conditions, may be less liquid than
the
market for
investment grade bonds. In periods of reduced market liquidity, junk bond
prices
may become more
volatile and may experience sudden and substantial price declines. Also, there
may be significant
disparities in the prices quoted for junk bonds by various dealers. Under such
conditions, a Fund
may find it difficult to value its junk bonds accurately. Under such
conditions,
a Fund may have to
use subjective rather than objective criteria to value its junk bond
investments
accurately and rely
more heavily on the judgment of the Trust's Board of Trustees. Prices for junk
bonds also may be
affected by legislative and regulatory developments. For example, recent
federal
rules require that
savings and loans gradually reduce their holdings of high-yield securities.
Also, from time to time,
Congress has considered legislation to restrict or eliminate the corporate tax
deduction for interest
payments or to regulate corporate restructurings such as takeovers, mergers or
leveraged buyouts.
Such legislation, if enacted, could depress the prices of outstanding junk
bonds.
Variable and Floating Rate Securities (Foundation and Strategic Income)
Foundation may invest no more than 5% of its total assets, at the time of
the investment in
question, and Strategic Income may invest without limit in variable and
floating
rate securities. The
terms of variable and floating rate instruments provide for the interest rate
to
be adjusted according
to a formula on certain predetermined dates. Variable and floating rate
instruments that are
repayable on demand at a future date are deemed to have a maturity equal to the
time remaining
until the principal will be received on the assumption that the demand feature
is exercised on the
earliest possible date. For the purposes of evaluating the interest-rate
sensitivity of the Fund,
variable and floating rate instruments are deemed to have a maturity equal to
the period remaining
until the next interest-rate readjustment. For the purposes of evaluating the
credit risks of variable
and floating rate instruments, these instruments are deemed to have a maturity
equal to the time
remaining until the earliest date the Fund is entitled to demand repayment of
principal.
Convertible Securities
Each Fund may invest in convertible securities. Convertible securities
include fixed-income
securities that may be exchanged or converted into a predetermined number of
shares of the
issuer's underlying common stock at the option of the holder during a specified
period. Convertible
securities may take the form of convertible preferred stock, convertible bonds
or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these
securities. The investment characteristics of each convertible security vary
widely, which allow
convertible securities to be employed for a variety of investment strategies.
Each Fund will exchange or convert convertible securities into shares of
underlying common
stock when, in the opinion of its Advisor or Manager, the investment
characteristics of the
underlying common shares will assist a Fund in achieving its investment
objective. A Fund may also
elect to hold or trade convertible securities. In selecting convertible
securities, the Advisor or
Manager evaluates the investment characteristics of the convertible security as
a fixed-income
instrument, and the investment potential of the underlying equity security for
capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Advisor or Manager
considers numerous factors, including the economic and political outlook, the
value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the
issuer's management capability and practices.
Warrants (All Funds Except Strategic Income)
Each Fund may invest in warrants. Warrants are options to purchase common
stock at a
specific price (usually at a premium above the market value of the optioned
common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than one
year to twenty years, or they may be perpetual. However, most warrants have
expiration dates
after which they are worthless. In addition, a warrant is worthless if the
market price of the
common stock does not exceed the warrant's exercise price during the life of
the
warrant.
Warrants have no voting rights, pay no dividends, and have no rights with
respect to the assets of
the corporation issuing them. The percentage increase or decrease in the market
price of the
warrant may tend to be greater than the percentage increase or decrease in the
market price of the
optioned common stock.
Sovereign Debt Obligations (Growth and Income, Strategic Income and
International
Growth)
Each Fund may purchase sovereign debt instruments issued or guaranteed by
foreign
governments or their agencies, including debt of Latin American nations or
other
developing
countries. Sovereign debt may be in the form of conventional securities or
other
types of debt
instruments such as loans or loan participations. Sovereign debt of developing
countries may
involve a high degree of risk, and may be in default or present the risk of
default. Governmental
entities responsible for repayment of the debt may be unable or unwilling to
repay principal and
interest when due, and may require renegotiation or rescheduling of debt
payments. In addition,
prospects for repayment of principal and interest may depend on political as
well as economic
factors.
Closed-End Investment Companies
Each Fund may purchase the equity securities of closed-end investment
companies to
facilitate investment in certain foreign countries. Equity securities of closed-
end investment
companies generally trade at a discount to their net asset value. Investments
in
closed-end
investment companies involve the payment of management fees to the Advisor or
Managers of
such investment companies.
Foreign Currency Transactions; Currency Risks
The exchange rates between the U.S. dollar and foreign currencies are a
function of such
factors as supply and demand in the currency exchange markets, international
balances of
payments, governmental intervention, speculation and other economic and
political conditions.
Although a Fund values its assets daily in U.S. dollars, a Fund generally does
not convert its
holdings to U.S. dollars or any other currency. Foreign exchange dealers may
realize a profit on the
difference between the price at which a Fund buys and sells currencies.
Each Fund will engage in foreign currency exchange transactions in
connection with its
portfolio investments. A Fund will conduct its foreign currency exchange
transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through
forward contracts to purchase or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
Each Fund may enter into forward foreign currency exchange contracts in
order to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar
and a foreign currency involved in an underlying transaction. A forward foreign
currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may
be any fixed number of days (usually less than one year) from the date of the
contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their
customers. A forward contract generally has a deposit requirement, and no
commissions are
charged at any stage for trades. Although foreign exchange dealers do not
charge
a fee for
conversion, they do realize a profit based on the difference (the spread)
between the price at which
they are buying and selling various currencies. However, forward foreign
currency exchange
contracts may limit potential gains which could result from a positive change
in
such currency
relationships. The Funds' Advisor or Managers believe that it is important to
have the flexibility to
enter into forward foreign currency exchange contracts whenever they determine
that it is in a
Fund's best interest to do so. A Fund will not speculate in foreign currency
exchange.
Except for cross-hedges, a Fund will not enter into forward foreign
currency exchange
contracts or maintain a net exposure in such contracts when it would be
obligated to deliver an
amount of foreign currency in excess of the value of its portfolio securities
or
other assets
denominated in that currency or, in the case of a "cross-hedge" denominated in
a
currency or
currencies that the Advisor or Manager believes will tend to be closely
correlated with that currency
with regard to price movements. At the consummation of such a forward contract,
a Fund may
either make delivery of the foreign currency or terminate its contractual
obligation to deliver the
foreign currency by purchasing an offsetting contract obligating it to
purchase,
at the same
maturity date, the same amount of such foreign currency. If a Fund chooses to
make delivery of the
foreign currency, it may be required to obtain such currency through the sale
of
portfolio securities
denominated in such currency or through conversion of other assets of the Fund
into such
currency. If a Fund engages in an offsetting transaction, the Fund will incur a
gain or loss to the
extent that there has been a change in forward contract prices.
Each Fund will place cash or high grade debt securities in a separate
account of the Fund at
its custodian bank in an amount equal to the value of the Fund's total assets
committed to forward
foreign currency exchange contracts entered into as a hedge against a
substantial decline in the
value of a particular foreign currency. If the value of the securities placed
in
the separate account
declines, additional cash or securities will be placed in the account on a
daily
basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such
contracts.
It should be realized that this method of protecting the value of a Fund's
portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices
of the securities. It simply establishes a rate of exchange which can be
achieved at some future
point in time. Additionally, although such contracts tend to minimize the risk
of loss due to a
decline in the value of the hedged currency, at the same time they tend to
limit
any potential gain
which might result should the value of such currency increase. Generally, a
Fund
will not enter into
a forward foreign currency exchange contract with a term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right to buy
or sell a stated
amount of foreign currency at the exercise price on a specified date or during
the option period.
The owner of a call option has the right, but not the obligation, to buy the
currency. Conversely,
the owner of a put option has the right, but not the obligation, to sell the
currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the
terms of the sold option. However, either the seller or the buyer may, in the
secondary market,
close its position during the option period at any time prior to expiration.
A call option on a foreign currency generally rises in value if the
underlying currency
appreciates in value, and a put option on a foreign currency generally rises in
value if the underlying
currency depreciates in value. Although purchasing a foreign currency option
can
protect the Fund
against an adverse movement in the value of a foreign currency, the option will
not limit the
movement in the value of such currency. For example, if a Fund was holding
securities
denominated in a foreign currency that was appreciating and had purchased a
foreign currency put
to hedge against a decline in the value of the currency, the Fund would not
have
to exercise its put
option. Likewise, if a Fund were to enter into a contract to purchase a
security
denominated in
foreign currency and, in conjunction with that purchase, were to purchase a
foreign currency call
option to hedge against a rise in value of the currency, and if the value of
the
currency instead
depreciated between the date of purchase and the settlement date, the Fund
would
not have to
exercise its call. Instead, the Fund could acquire in the spot market the
amount
of foreign currency
needed for settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the same
risks that apply to
options generally. In addition, there are certain additional risks associated
with foreign currency
options. The markets in foreign currency options are relatively new, and a
Fund's ability to establish
and close out positions on such options is subject to the maintenance of a
liquid secondary market.
Although the Funds will not purchase or write such options unless and until, in
the opinion of the
Advisor or Managers, the market for them has developed sufficiently to ensure
that the risks in
connection with such options are not greater than the risks in connection with
the underlying
currency, there can be no assurance that a liquid secondary market will exist
for a particular option
at any specific time. In addition, options on foreign currencies are affected
by
all of those factors
that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency
relative to the U.S. dollar. As a result, the price of the option position may
vary with changes in the
value of either or both currencies and may have no relationship to the
investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market
(generally
consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any
regulatory requirement that quotations available through dealers or other
market
sources be firm or
revised on a timely basis. Available quotation information is generally
representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller
transactions (i.e,
less than $1 million) where rates may be less favorable. The interbank market
in
foreign currencies
is a global, around-the-clock market. To the extent that the U.S. option
markets
are closed while
the markets for the underlying currencies remain open, significant price and
rate movements may
take place in the underlying markets that cannot be reflected in the options
markets until they
reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such contracts,
a Fund may be
able to achieve many of the same objectives as it would through the use of
forward foreign
currency exchange contracts. The Funds may be able to achieve these objectives
possibly more
effectively and at a lower cost by using futures transactions instead of
forward
foreign currency
exchange contracts.
A foreign currency futures contract sale creates an obligation by the Fund,
as seller, to
deliver the amount of currency called for in the contract at a specified future
time for a specified
price. A currency futures contract purchase creates an obligation by the Fund,
as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms
of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are
closed out before the settlement date without the making or taking of delivery
of the currency.
Closing out of currency futures contracts is effected by entering into an
offsetting purchase or sale
transaction. An offsetting transaction for a currency futures contract sale is
effected by the Fund
entering into a currency futures contract purchase for the same aggregate
amount
of currency and
same delivery date. If the price of the sale exceeds the price of the
offsetting
purchase, the Fund is
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 Advisors or Managers, the market for such
options has developed
sufficiently that the risks in connection with such options are not greater
than
the risks in
connection with transactions in the underlying foreign currency futures
contracts. Compared to the
purchase or sale of foreign currency futures contracts, the purchase of call or
put options on
futures contracts involves less potential risk to the Funds because the maximum
amount at risk is
the premium paid for the option (plus transaction costs). However, there may be
circumstances
when the purchase of a call or put option on a futures contract would result in
a loss, such as
when there is no movement in the price of the underlying currency or futures
contract.
Derivatives
To the extent provided for elsewhere in this SAI, each Fund may use
derivatives while
seeking to achieve its investment objective. Derivatives are financial
contracts
whose value
depends on, or is derived from, the value of an underlying asset, reference
rate
or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be
used
to earn income or
protect against risk, or both. For example, one party with unwanted risk may
agree to pass that risk
to another party who is willing to accept the risk, the second party being
motivated, for example,
by the desire either to earn income in the form of a fee or premium from the
first party, or to
reduce its own unwanted risk by attempting to pass all or part of that risk to
the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance
returns, to hedge or adjust the risk profile of the portfolio, and in place of
more traditional direct
investments to obtain exposure to otherwise inaccessible markets. A Fund is
permitted to use
derivatives for one or more of these purposes. The use of derivatives for non-
hedging purposes
entails greater risks. The Funds use futures contracts and related options as
well as forwards for
hedging purposes. Derivatives are a valuable tool, which, when used properly,
can provide
significant benefit to Fund shareholders. However, a Fund may take positions in
those derivatives
that are within its investment policies if, in the Advisor's or Manager's
judgment, this represents an
effective response to current or anticipated market conditions. An Advisor's or
Manager's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's
investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately
negotiated contracts. Exchange-traded derivatives tend to be more liquid and
subject to less credit
risk than those that are privately negotiated.
There are four principal types of derivative instruments - options,
futures, forwards and
swaps - from which virtually any type of derivative transaction can be created.
Further information
regarding options, futures, forwards and swaps is provided elsewhere in this
section.
Debt instruments that incorporate one or more of these building blocks for
the purpose of
determining the principal amount of and/or rate of interest payable on the debt
instruments are
often referred to as "structured securities". An example of this type of
structured security is
indexed commercial paper. The term is also used to describe certain securities
issued in connection
with the restructuring of certain foreign obligations.
The term "derivative" is also sometimes used to describe securities
involving rights to a
portion of the cash flows from an underlying pool of mortgages or other assets
from which
payments are passed through to the owner of, or that collateralize, the
securities. See "Mortgage
Backed Securities," below.
While the judicious use of derivatives by experienced investment managers
such as the
Funds' Advisors or Managers can be beneficial, derivatives also involve risks
different from, and, in
certain cases, greater than, the risks presented by more traditional
investments. Following is a
general discussion of important risk factors and issues concerning the use of
derivatives that
investors should understand before investing in the Funds.
* Market Risk - This is the general risk attendant to all investments that
the value of a
particular investment will decline or otherwise change in a way which is
detrimental to a Fund's
interest.
* Management Risk - Derivative products are highly specialized instruments
that require
investment techniques and risk analyses different from those associated with
stocks and bonds.
The use of a derivative requires an understanding not only of the underlying
instrument, but also of
the derivative itself, without the benefit of observing the performance of the
derivative under all
possible market conditions. In particular, the use and complexity of
derivatives
require the
maintenance of adequate controls to monitor the transactions entered into, the
ability to assess the
risk that a derivative adds to a Fund's portfolio and the ability to forecast
price, interest rate or
currency exchange rate movements correctly.
* Credit Risk - This is the risk that a loss may be sustained by the Fund
as a result of the
failure of another party to a derivative (usually referred to as a
"counterparty") to comply with the
terms of the derivative contract. The credit risk for exchange-traded
derivatives is generally less
than for privately negotiated derivatives, since the clearing house, which is
the issuer or
counterparty to each exchange-traded derivative, provides a guarantee of
performance. This
guarantee is supported by a daily payment system (i.e., margin requirements)
operated by the
clearing house in order to reduce overall credit risk. For privately negotiated
derivatives, there is no
similar clearing agency guarantee. Therefore, a Fund's Advisor or Manager
considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential
credit risk.
* Liquidity Risk - Liquidity risk exists when a particular instrument is
difficult to purchase or
sell. If a derivative transaction is particularly large or if the relevant
market is illiquid (as is the case
with many privately negotiated derivatives), it may not be possible to initiate
a transaction or
liquidate a position at an advantageous price.
* Leverage Risk - Since many derivatives have a leverage component, adverse
changes in
the value or level of the underlying asset, rate or index can result in a loss
substantially greater than
the amount invested in the derivative itself. In the case of swaps, the risk of
loss generally is
related to a notional principal amount, even if the parties have not made any
initial investment.
Certain derivatives have the potential for unlimited loss, regardless of the
size of the initial
investment.
* Other Risks - Other risks in using derivatives include the risk of
mispricing or improper
valuation and the inability of derivatives to correlate perfectly with
underlying assets, rates and
indices. Many derivatives, in particular privately negotiated derivatives, are
complex and often
valued subjectively. Improper valuations can result in increased cash payment
requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly
or even highly
correlate or track the value of the assets, rates or indices they are designed
to closely track.
Consequently, a Fund's use of derivatives may not always be an effective means
of, and
sometimes could be counterproductive to, furthering a Fund's investment
objective.
Mortgage-Backed Securities (Strategic Income)
Mortgage-backed securities are securities that directly or indirectly
represent a participation
in, or are secured by and payable from, mortgage loans secured by real
property.
The term
mortgage-backed securities includes adjustable rate mortgage securities and
derivative mortgage
products such as collateralized mortgage obligations.
There are currently three basic types of mortgage-backed securities: (I)
those issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities,
such as GNMA,
Federal National Mortgage Association ("FNMA"), and FHLMC (securities issued by
GNMA, but not
those issued by FNMA or FHLMC, are backed by the "full-faith and credit" of the
U.S.); (ii) those
issued by private issuers that represent an interest in or are collateralized
by
mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies
or
instrumentalities;
and (iii) those issued by private issuers that represent an interest in or are
collateralized by whole
mortgage loans or mortgage-backed securities without a government guarantee but
usually having
some form of private credit enhancement.
Strategic Income will invest in mortgage pass-through securities
representing participation
interests in pools of residential mortgage loans originated by governmental or
private lenders. Such
securities, which are ownership interests in the underlying mortgage loans,
differ from conventional
debt securities, which provide for periodic payment of interest in fixed
amounts
(usually
semi-annually) with principal payments at maturity or on specified call dates.
Mortgage
pass-through securities provide for monthly payments that are a "pass through"
of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on
the pooled mortgage loans, net of any fees paid to the guarantor of such
mortgage loans, net of
any fees paid to the guarantor of such securities and the servicers of the
underlying mortgage
loans.
Strategic Income may also invest in fixed rate and adjustable rate
collateralized mortgage
obligations ("CMOs"), including CMOs with rates that move inversely to market
rates that are
issued by and guaranteed as to principal and interest by the U.S. government,
its agencies or
instrumentalities. The principal governmental issuer of CMOs is FNMA. In
addition, FHLMC issues a
significant number of CMOs. The Fund will not invest in CMOs that are issued by
private issuers.
CMOs are debt obligations collateralized by mortgage securities in which the
payment of the
principal and interest is supported by the credit of, or guaranteed by, the
U.S.
government or an
agency or instrumentality of the U.S. government. The secondary market for CMOs
is actively
traded.
CMOs are structured by redirecting the total payment of principal and
interest on the
underlying mortgage securities used as collateral to create classes with
different interest rates,
maturities and payment schedules. Instead of interest and principal payments on
the underlying
mortgage securities being passed through or paid pro rata to each holder (e.g.,
the Fund), each
class of a CMO is paid from and secured by a separate priority payment of the
cash flow generated
by the pledged mortgage securities.
Most CMO issues have at least four classes. Classes with an earlier
maturity receive priority
on payments to assure the early maturity. After the first class is redeemed,
excess cash flow not
necessary to pay interest on the remaining classes is directed to the repayment
of the next
maturing classes until that class is fully redeemed. This process continues
until all classes of the
CMO issue have been paid in full. Among the CMO classes available are floating
(adjustable) rate
classes, which have characteristics similar to adjustable rate mortgage
securities ("ARMS"), and
inverse floating rate classes whose coupons vary inversely with the rate of
some
market index. The
Fund may purchase any class of CMO other than the residual (final) class.
Equipment Trust Certificates (Strategic Income)
Equipment Trust Certificates are a mechanism for financing the purchase of
transportation
equipment, such as railroad cars and locomotives, trucks, airplanes and oil
tankers.
Under an equipment trust certificate, the equipment is used as the security
for the debt and
title to the equipment is vested in a trustee. The trustee leases the equipment
to the user, i.e. the
railroad, airline, trucking or oil company. At the same time equipment trust
certificates in an
aggregate amount equal to a certain percentage of the equipment's purchase
price
are sold to
lenders. The trustee pays the proceeds from the sale of certificates to the
manufacturer. In
addition, the company using the equipment makes an initial payment of rent
equal
to their balance
of the purchase price to the trustee, which the trustee then pays to the
manufacturer. The trustee
collects lease payments from the company and uses the payments to pay interest
and principal on
the certificates. At maturity, the certificates are redeemed and paid, the
equipment is sold to the
company and the lease is terminated.
Generally, these certificates are regarded as obligations of the company
that is leasing the
equipment and are shown as liabilities in its balance sheet. However, the
company does not own
the equipment until all the certificates are redeemed and paid. In the event
the
company defaults
under its lease, the trustee terminates the lease. If another lessee is
available, the trustee leases the
equipment to another user and makes payments on the certificates from new lease
rentals.
Interest-Rate Swap Contracts (Strategic Income)
Interest rate swaps are over-the-counter ("OTC") agreements between parties
and
counterparties to make periodic payments to each other for a stated time,
generally entered into for
the purpose of changing the nature or amount of interest being received on debt
securities held by
one or both parties. The calculation of these payments is based on an agreed-
upon amount called
the "notional amount." The notional amount is not typically exchanged in swaps
(except in
currency swaps). The periodic payments may be fixed or floating. Floating
payments change
(positively or inversely) with fluctuations in interest or currency rates or
equity or commodity prices,
depending on the swap contract's terms.
Swaps may be used to hedge against adverse changes in interest rates, for
instance. Thus
the Fund may have a portfolio of debt instruments (ARMS, for instance) the
floating interest rates
of which adjust frequently because they are tied positively to changes in
market
interest rates. The
Fund would then be exposed to interest rate risk because a decline in interest
rates would reduce
the interest receipts on its portfolio. If the Advisor or Manager believed
interest rates would decline,
the Fund, could enter into an interest rate swap with another financial
institution to hedge the
interest rate risk. In the swap contract, the Fund would agree to make payments
based on a
floating interest rate in exchange for receiving payments based on a fixed
interest rate. Thereafter,
if interest rates declined, the Fund's fixed rate receipts on the swap would
offset the reduction in
its portfolio receipts. If interest rates rose, the higher rates the Fund could
obtain from new
portfolio investments (assuming sale of existing investments) would offset the
higher rates it paid
under the swap agreement.
Equity Swap Contracts (Aggressive)
The counterparty to an equity swap contract would typically be a bank,
investment banking
firm or broker/dealer. For example, the counterparty would generally agree to
pay the Fund the
amount, if any, by which the notional amount of the equity swap contract would
have increased in
value if such notional amount had been invested in the stocks comprising the
S&P
500 Index in
proportion to the composition of the Index, plus the dividends that would have
been received on
those stocks. The Fund would agree to pay to the counterparty a floating rate
of
interest (typically
the London Inter Bank Offered Rate) on the notional amount of the equity swap
contract plus the
amount, if any, by which that notional amount would have decreased in value had
it been invested
in such index stocks. Therefore, the return to the Fund on any equity swap
contract should be the
gain comprising the S&P 500 Index less the interest paid by the Fund on the
notional amount. The
Fund will only enter into equity swap contracts on a net basis, i.e., the two
parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any
payments. Payments under equity swap contracts may be made at the conclusion of
the contract
or periodically during its term.
The Fund may also from time to time enter into the opposite side of equity
swap contracts
(i.e., where the Fund is obligated to pay the increase (net of interest) or
receive the decrease (plus
interest) on the contract) to reduce the amount of the Fund's equity market
exposure consistent
with the Fund's investment objective and policies. These positions are
sometimes
referred to as
"reverse equity swap contracts."
Equity swap contracts will not be used to leverage the Fund. Since the SEC
considers
equity swap contracts and reverse equity swap contracts to be illiquid
securities, the Fund will not
invest in equity swap contracts or reverse equity swap contracts if the total
value of such
investments together with that of all other illiquid securities that the Fund
owns would exceed the
Fund's limitations on investment in illiquid securities.
The Fund does not believe that its obligations under equity swap contracts
or reverse equity
swap contracts are senior securities and, accordingly, the Fund will not treat
them as being subject
to its borrowing restrictions. However, the net amount of the excess, if any,
of
the Fund's
obligations over its respective entitlement with respect to each equity swap
contract and each
reverse equity swap contract will be accrued on a daily basis and an amount of
cash , U.S.
Government securities or other liquid high quality debt securities having an
aggregate market value
at least equal to the accrued excess will be maintained in a segregated account
by the Fund's
custodian.
Currency Swaps, Index Swaps and Caps And Floors (Strategic Income and
Aggressive)
A currency swap is an agreement to exchange cash flows on a notional amount
of two or
more currencies based on the relative value differential among them. An index
swap is an
agreement to swap cash flows on a notional amount based on changes in the
values
of reference
indices. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified
index exceeds an agreed-upon interest rate, to receive payments of interest
on a
notional principal
amount from the party selling such interest rate cap. The purchase of an
interest rate floor entitles
the purchaser to receive payments of interest on a notional principal amount
from the party selling
such interest rate floor. A Fund's Advisor or Manager expects to enter into
these types of
transactions on behalf of the Fund primarily to preserve a return or spread
on a
particular
investment or portion of its portfolio or to protect against any increase in
the
price of securities the
Fund anticipates purchasing at later date rather than for speculative purposes.
Accordingly,
Strategic Income and Aggressive intend to use these transactions as hedges and
not as speculative
investments and will not sell interest rate caps or floors unless the Fund owns
securities or other
instruments providing the income stream the Fund may be obligated to pay. Caps
and floors require
segregation of assets with a value equal to the Fund's net obligation, if any.
Special Risks of Swaps, Caps and Floors
As with futures, options, forward contracts, and mortgage backed and other
asset-backed
securities, the use of swap, cap and floor contracts exposes the Funds to
additional investment risk
and transaction costs. These risks include operational risk, market risk and
credit risk.
Operational risk includes, among others, the risks that a Fund's Advisor or
Manager will
incorrectly analyze market conditions or will not employ appropriate strategies
and monitoring with
respect to these instruments or will be forced to defer closing out certain
hedged positions to avoid
adverse tax consequences.
Market risk includes, among others, the risks of imperfect correlations
between the
expected values of the contracts, or their underlying bases, and movements in
the prices of the
securities or currencies being hedged, and the possible absence of a liquid
secondary market for
any particular instrument at any time. The swap market has grown substantially
in recent years
with a large number of banks and investment banking firms acting both as
principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively
more liquid. Nevertheless, a secondary market for swaps is never assured, and
caps and floors,
which are more recent innovations for which standardized documentation has not
been fully
developed, are much less liquid than swaps.
Credit risk is primarily the risk that counterparties may be financially
unable to fulfill their
contracts on a timely basis, if at all. If there is a default by the
counterparty to any such contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction.
There is no assurance that contract counterparties will be able to meet
contract
obligations or that,
in the event of default, a Fund will succeed in pursuing contractual remedies.
Each Fund thus
assumes the risk that it may be delayed in or prevented from obtaining payments
owed to it
pursuant to such contracts. Each Fund will closely monitor the credit of swap
counterparties in
order to minimize this risk. The Fund will not enter into any equity swap
contract or reverse equity
swap contract unless, at the time of entering into such transaction, the
unsecured senior debt of
the counterparty is rated at least A by Moody's or Standard & Poor's.
Investment in Other Investment Companies
Each Fund may purchase the shares of other investment companies to the
extent permitted
under the 1940 Act. Currently, each Fund may not (1) own more than 3% of the
outstanding
voting stock of another investment company, (2) invest more than 5% of its
assets in any single
investment company, and (3) invest more than 10% of its assets in investment
companies.
However, each Fund may invest all of its investable assets in securities of a
single open-end
management investment company with substantially the same fundamental
investment
objectives,
policies and limitations as each Fund.
Short Sales
Each Fund may not make short sales of securities or maintain a short
position unless, at all
times when a short position is open, it owns an equal amount of such securities
or of securities
which, without payment of any further consideration, are convertible into or
exchangeable for
securities of the same issue as, and equal in amount to, the securities sold
short. Each Fund may
effect a short sale in connection with an underwriting in which a Fund is a
participant.
FUNDAMENTAL POLICIES
Each Fund has adopted the fundamental investment restrictions set forth
below which may
not be changed without the vote of a majority of the Fund's outstanding shares,
as defined in the
Investment Company Act of 1940 (the"1940 Act"). Where necessary, an
explanation
beneath a
fundamental policy describes the Fund's practices with respect to that policy,
as allowed by current
law. If the law governing a policy changes, the Fund's practices may change
accordingly without a
shareholder vote. Unless otherwise stated, all references to the assets of the
Fund are in terms of
current market value.
1. Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a
diversified investment company under the 1940 Act.
Further Explanation of Diversification Policy:
To remain classified as a diversified investment company under the 1940
Act, each Fund
must conform with the following: With respect to 75% of its total assets, a
diversified investment
company may not invest more than 5% of its total assets, determined at market
or
other fair value
at the time of purchase, in the securities of any one issuer, or invest in more
than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These
limitations do not apply to investments in securities issued or guaranteed by
the United States
("U.S.") government or its agencies or instrumentalities.
2. Concentration
Each Fund may not concentrate its investments in the securities of issuers
primarily
engaged in any particular industry (other than securities that are issued or
guaranteed by the U.S.
government or its agencies or instrumentalities).
Further Explanation of Concentration Policy:
Each Fund may not invest more than 25% of its total assets, taken at market
value, in the
securities of issuers primarily engaged in any particular industry (other than
securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks or enter into reverse repurchase agreements
in an
amount up to 33 1/3% of its total assets, taken at market value. Each Fund may
also borrow up to
an additional 5% of its total assets from banks or others. A Fund may borrow
only as a temporary
measure for extraordinary or emergency purposes such as the redemption of Fund
shares. A Fund
may not purchase securities while outstanding borrowings exceed 5% of its total
assets.^ Each
Fund may obtain such short-term credit as may be necessary for the clearance of
purchases and
sales of portfolio securities. Each Fund may purchase securities on margin and
engage in short sales
to the extent permitted by applicable law
5. Underwriting
Each Fund may not underwrite securities of other issuers, except insofar as
a Fund may be
deemed to be an underwriter in connection with the disposition of its portfolio
securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the extent
permitted by
applicable law, a Fund may invest in (a) securities that are directly or
indirectly secured by real
estate, or (b) securities issued by issuers that invest in real estate.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on commodities,
except to
the extent that a Fund may engage in financial futures contracts and related
options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and
without registering as a commodity pool operator under the Commodity Exchange
Act.
8. Lending
Each Fund may not make loans to other persons, except that a Fund may lend
its portfolio
securities in accordance with applicable law. The acquisition of investment
securities or other
investment instruments shall not be deemed to be the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, a Fund may lend portfolio
securities to
broker-dealers and other financial institutions in an amount up to 33 1/3% of
its total assets, taken
at market value. While securities are on loan, the borrower will pay the Fund
any income accruing
on the security. The Fund may invest any collateral it receives in additional
portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade, short-
term obligations or
interest bearing cash equivalents. Gains or losses in the market value of a
security lent will affect
the Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give the
Fund collateral in
cash or government securities. The Fund will require collateral in an amount
equal to at least 100%
of the current market value of the securities lent, including accrued
interest.
The Fund has the
right to call a loan and obtain the securities lent any time on notice of not
more than five business
days. The Fund may pay reasonable fees in connection with such loans.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and the
principal occupations and
some of their affiliations over the last five years. Unless otherwise
indicated,
the address for each
Trustee and officer is 200 Berkeley Street, Boston, Massachusetts 02116. Each
Trustee is also a
Trustee of each of other Trusts in the Evergreen Fund complex.
Name
Position with Trust
Principal Occupation for Last Five
Years
Laurence B. Ashkin
(DOB: 2/2/28)
Trustee
Real estate developer and construction
consultant; and President of Centrum
Equities and Centrum Properties, Inc.
Charles A. Austin III
(DOB: 10/23/34)
Trustee
Investment Counselor to Appleton
Partners, Inc.; and former Managing
Director, Seaward Management
Corporation (investment advice);
Director, the Andover Companies
(insurance); and Trustee Arthritis
Foundation of New England.
K. Dun Gifford
(DOB: 10/12/38)
Trustee
Trustee, Treasurer and Chairman of
the Finance Committee, Cambridge
College; Chairman Emeritus and
Director, American Institute of Food
and Wine; Chairman and President,
Oldways Preservation and Exchange
Trust (education); former Chairman of
the Board, Director, and Executive
Vice 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
(DOB: 8/13/24)
Chairman of the Board of
Trustees
Former Chairman of the Distribution
Foundation for the Carolinas; and
former Vice President of Lance Inc.
(food manufacturing).
Leroy Keith, Jr.
(DOB: 2/14/29)
Trustee
Chairman of the Board and Chief
Executive Officer, Carson Products
Company; Director of Phoenix Total
Return Fund and Equifax Inc.; Trustee
of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and The Phoenix Big
Edge Series Fund; and former
President, Morehouse College.
Gerald M. McDonnell
(DOB: 7/14/39)
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer)
Thomas L. McVerry
(DOB: 8/2/39)
Trustee
Former Vice president and Director of
Rexham Corporation; and former
Director of Carolina Cooperative
Federal Credit Union.
William Walt Pettit
(DOB: 8/26/55)
Trustee
Partner in the law firm of William Walt
Pettit, P.A.
David M. Richardson
(DOB: 9/14/41)
Trustee
Vice Chair and former Executive Vice
President, DHR International, Inc.
(executive recruitment); former Senior
Vice President, Boyden International
Inc. (executive recruitment); and
Director, Commerce and Industry
Association of New Jersey, 411
International, Inc., and J&M Cumming
Paper Co.
Russell A. Salton, III MD
(DOB: 6/2/47)
Trustee
Medical Director, U.S. Health
Care/Aetna Health Services; former
Managed Health Care Consultant; and
former President, Primary Physician
Care.
Michael S. Scofield
(DOB: 2/20/43)
Trustee
Attorney, Law Offices of Michael S.
Scofield.
Richard J. Shima
(DOB: 8/11/39)
Trustee
Former Chairman, Environmental
Warranty, Inc. (insurance agency);
Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas
Corporation, Hartford Hospital, Old
State House Association, Middlesex
Mutual Assurance Company, and
Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Greater
Hartford YMCA; former Director, Vice
Chairman and Chief Investment
Officer, The Travelers Corporation;
former Trustee, Kingswood-Oxford
School; and former Managing Director
and Consultant, Russell Miller, Inc.
William J. Tomko*
(DOB: 8/30/58)
President and Treasurer
Executive Vice President/ Operations,
BISYS Fund Services.
Nimish S. Bhatt*
(DOB: 6/6/63)
Vice President and
Assistant Treasurer
Vice President, Tax, BISYS Fund
Services; former Assistant Vice
President, Evergreen Asset
Management Corp./First Union Bank;
former Senior Tax Consultant/Acting
Manager, Investment Companies
Group, PricewaterhouseCoopers LLP,
New York.
Bryan Haft*
(DOB: 1/23/65)
Vice President
Team Leader, Fund Administration,
BISYS Fund Services.
Michael H. Koonce
(DOB: 4/20/60)
Secretary
Senior Vice President and Assistant
General Counsel, First Union
Corporation; former Senior Vice
President and General Counsel,
Colonial Management Associates, Inc.
*Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
EXPENSES
Trustee Compensation
Listed below is the estimated trustee compensation for the twelve-month
period ended
December 31, 1997. The Trustees do not receive any retirement benefits from the
Trust.
Trustee
Compensation from Trust
Compensation from Trust
and Fund Complex
Laurence B. Ashkin
$ 0
$ 68,673
Charles A. Austin III
$ 0
$ 43,312
K. Dunn Gifford
$ 0
$ 38,818
James S. Howell
$4,000
$ 107,167
Leroy Keith Jr.
$ 0
$ 39,218
Gerald M. McDonnell
$ 0
$ 94,014
Thomas L. McVerry
$ 0
$ 96,065
William Walt Pettit
$ 0
$ 91,709
David M. Richardson
$ 0
$ 43,312
Russell A. Salton, III
$4,000
$ 93,651
Michael S. Scofield
$4,000
$ 90,815
Richard J. Shima
$ 0
$ 63,333
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, the officers and Trustees of the Trust owned
as a group less
than 1% of the outstanding shares of any Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge,
owned beneficially or of record more than 5% of a Fund's outstanding shares as
of September 30,
1998.
Evergreen
Nationwide Life Insurance Co.
Variable Account #6
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
78.933%
Security Equity Life Insurance Co.
Registered Share Account
Attn: Richard Leifels
84 Business Park Dr., Ste. 303
Armonk, NY 10504-1738
11.389%
Security Equity Life Insurance Co.
Unregistered Share Account
Attn: Richard Leifels
84 Business Park Dr., Ste. 303
Armonk, NY 10504-1738
5.696%
Growth & Income
Nationwide Life Insurance Co.
Variable Account #6
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
89.168%
Security Equity Life Ins. Co.
Registered Share Account
Attn: Richard Leifels
84 Business Park Dr., Ste. 303
Armonk, NY 10504-1738
7.877%
Foundation
Nationwide Life Insurance Co.
Variable Account #6
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
85.940%
Security Equity Life Insurance Co.
Unregistered Share Account
Attn: Richard Leifels
84 Business Park Dr., Ste. 303
Armonk, NY 10504-1738
6.610%
Security Equity Life Insurance Co.
Registered Share Account
Attn: Richard Leifels
84 Business Park Dr., Ste. 303
Armonk, NY 10504-1738
5.174%
Global Leaders
Nationwide Life Insurance
NWVA6
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
84.961%
Nationwide Life Insurance
NWVA6 Seed Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
15.039%
Aggressive
Nationwide Life Insurance
NWVA6
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
64.167%
Nationwide Life Insurance
NWVA6 Seed Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
35.833%
Strategic Income
Nationwide Life Insurance
NWVA6
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
88.511%
Nationwide Life Insurance
NWVA6 Seed Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
11.489%
Small Cap
NONE
International Growth
Nationwide Life Insurance
NWVA6 Seed Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
99.151%
INVESTMENT ADVISORY SERVICES
The investment advisor to Evergreen, Growth and Income, Foundation, Global
Leaders and
Small Cap is Evergreen Asset Management Corp., a New York corporation, with
offices at 2500
Westchester Avenue, Purchase, New York ("Evergreen Asset" or the "Advisor.").
Evergreen Asset
is owned by First Union National Bank ("FUNB") which, in turn, is a subsidiary
of First Union
Corporation ("First Union"), a bank holding company headquartered in Charlotte,
North Carolina.
The Advisor or Manager to Strategic Income and International Growth is
Evergreen
Investment
Management Company with offices at 200 Berkeley Street, Boston, Massachusetts
("EIMC" or the
"Advisor"). Evergreen is owned by FUNB. The Advisor or Manager to Aggressive
and
Masters is
Evergreen Investment Management (formerly known as Capital Management or
"CMG"),
a division
of FUNB ("EIM" or the "Advisor").
On behalf of each of its Funds, the Trust has entered into an investment
advisory
agreement with the Advisor or Manager (the "Advisory Agreements"). Under the
Advisory
Agreements, with respect to Funds other than Masters, and subject to the
supervision of the
Trust's Board of Trustees, the Advisor or Managers furnish to the appropriate
Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection
with its services for managing the investment and reinvestment of the Fund's
assets. The Advisor
or Manager pays for all of the expenses incurred in connection with the
provision of its services.
The Advisory Agreement with respect to Masters is similar to the Trust's other
Advisory
Agreements except that the Advisor selects sub-advisors (hereinafter referred
to
as "Managers) for
the Fund and monitors each Managers investment program and results. The Advisor
has primary
responsibility under the multi-manager strategy to oversee the Managers,
including making
recommendations to the Trust regarding the hiring, termination and replacement
of Managers.
Each Fund pays for all charges and expenses, other than those specifically
referred to as
being borne by the Advisor or Manager, including, but not limited to, (1)
custodian charges and
expenses; (2) bookkeeping and auditors' charges and expenses; (3) transfer
agent
charges and
expenses; (4) fees and expenses of Independent Trustees (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 registrations
and qualification of
such Fund and its shares with the SEC or under state or other securities laws;
(10) expenses of
preparing, printing and mailing prospectuses, statements of additional
information, notices, reports
and proxy materials to shareholders of each Fund; (11) expenses of
shareholders'
and Trustees'
meetings; (12) charges and expenses of legal counsel for each Fund and for the
Independent
Trustees of the Trust on matters relating to such Fund; (13) charges and
expenses of filing annual
and other reports with the SEC and other authorities; and (14) all
extraordinary
charges and
expenses of such Fund. (See also the section entitled "Financial Information.")
Each Advisory Agreement continues in effect for two years from its
effective date and,
thereafter, from year to year only if approved at least annually by the Board
of
Trustees of the
Trust or by a vote of a majority of each Fund's outstanding shares. In either
case, the terms of the
Advisory Agreement and continuance thereof must be approved by the vote of a
majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval.
The Advisory Agreements may be terminated, without penalty, on 60 days' written
notice by the
Trust's Board of Trustees, by a vote of a majority of outstanding shares or by
the respective
Advisor or Manager. Each Advisory Agreement will terminate automatically upon
its "assignment"
as that term is defined in the 1940 Act.
Each Advisory Agreement provides in substance that the Advisor or Manager
shall not be
liable for any action or failure to act in accordance with its duties
thereunder
in the absence of
willful misfeasance, bad faith or gross negligence on the part of the Advisor
or
Manager or of
reckless disregard of its obligations thereunder. The Sub-Advisory Agreements
or
Portfolio
Management Agreements continue in effect from year to year provided that their
continuance is
approved annually by a vote of a majority of the Trustees of the Trust
including
a majority of the
Independent Trustees cast in person at a meeting duly called for the purpose of
voting on such
approval or a majority of the outstanding voting shares of each Fund.
Certain other clients of each Advisor or Manager may have investment
objectives and
policies similar to those of the Funds. Each Advisor or Manager (including the
Sub-Advisor or
Manager) may, from time to time, make recommendations which result in the
purchase or sale of a
particular security by its other clients simultaneously with a Fund. If
transactions on behalf of more
than one client during the same period increase the demand for securities being
purchased or the
supply of securities being sold, there may be an adverse effect on price or
quantity. It is the policy
of each Advisor or Manager to allocate advisory recommendations and the placing
of orders in a
manner which is deemed equitable by the Advisor or Manager to the accounts
involved, including
the Funds. When two or more of the clients of the Advisor or Manager (including
one or more of
the Funds) are purchasing or selling the same security on a given day from the
same broker-dealer,
such transactions may be averaged as to price.
Although the investment objectives of the Funds are not the same, and their
investment
decisions are made independently of each other, they rely upon the same
resources for investment
advice and recommendations. Therefore, on occasion, when a particular security
meets the
different investment objectives of the various Funds, they may simultaneously
purchase or sell the
same security. This could have a detrimental effect on the price and quantity
of
the security
available to each Fund. If simultaneous transactions occur, each Advisor or
Manager attempts to
allocate the securities, both as to price and quantity, in accordance with a
method deemed
equitable to each Fund and consistent with their different investment
objectives. In some cases,
simultaneous purchases or sales could have a beneficial effect, in that the
ability of one Fund to
participate in volume transactions may produce better executions for that Fund.
The method of computing the investment advisory fee for each Fund is set
forth in the
Funds' prospectus. The following table shows the advisory fees paid by each
Fund
(other than
Small Cap, International Growth and Masters) and any fee waivers or
reimbursements during the
fiscal years ended December 31, 1997 and December 31, 1996:
Advisory Fees Paid
Advisory Fees Waived
Other Expense
Reimbursements
FUND
1997
1996*
1997
1996*
1997
1996*
EVERGREEN
$104,629
$ 0
$47,624
$48,143
- --
$21,541
FOUNDATION
$166,385
$8,779
$20,317
$58,681
- --
- --
GROWTH AND INCOME
$158,978
$ 0
$47,995
$61,749
- --
$6,384
GLOBAL LEADERS**
$ 0
- --
$12,787
- --
$11,883
- --
AGGRESSIVE**
$ 0
- --
$6,358
- --
$14,437
- --
STRATEGIC INCOME**
$ 0
- --
$6,441
- --
$11,836
- --
* For the period from March 1, 1996 (commencement of operations) to December
31, 1996.
** For the period from March 6, 1997 (commencement of operations) to December
31, 1997.
Managers
Masters investment program is based upon the Advisor's multi-manager
concept. The
Advisor allocates the Fund's portfolio assets on an equal basis among a number
of investment
management organizations-currently four in number - each of which employs a
different investment
style, and periodically rebalances the Fund's portfolio among the Managers so
as
to maintain an
approximate equal allocation of the portfolio among them throughout all market
cycles. Each
manager provides these services under a Portfolio Management Agreement. Each
Manager has
discretion, subject to oversight by the Trustees and the Advisor, to purchase
and sell portfolio
assets consistent with the Fund's investment objectives, policies and
restrictions and specific
investment strategies developed by the Advisor. The Fund's current Managers
are:
Evergreen
Asset, MFS Institutional Advisors, Inc.("MFS"), OppenhheimerFunds,
Inc.("Oppenheimer"), and
Putnam Investment Management, Inc.("Putnam").
The Trust and FUNB have received an exemptive order from the SEC that
permits the
Advisor to employ a "manager of managers" strategy in connection with its
management of the
Fund. The exemptive order permits the Advisor, subject to certain conditions,
and without
shareholder approval, to: (a) select new Managers who are unaffiliated with the
Advisor with the
approval of the Trust's Board of Trustees; (b) change the material terms of the
Portfolio
Management Agreements with the Managers; and (c) continue the employment of a
Manager after
the event which would otherwise cause the automatic termination of a Portfolio
Management
Agreement. Shareholders would be notified of any Manager changes. Shareholders
have the right to
terminate arrangements with a Manager by vote of a majority of the outstanding
shares of the
Fund. The order also permits the Fund to disclose Manager's fees only in the
aggregate.
With respect to affiliated Managers such as Evergreen Asset, shareholder
approval is
required by the employment of an affiliated Managers as a replacement for an
unaffiliated Manager
or change in the material terms of the Portfolio Management Agreement.
Transactions Among Advisory Affiliates
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to permit
purchase
and sales transactions to be effected between each Fund and the other
registered
investment
companies for which either Evergreen Asset, EIMC or FUNB act as Advisor or
Manager or between
the Fund and any advisory clients of Evergreen Asset, EIMC, FUNB or Lieber &
Company ("Lieber").
Each Fund may from time to time engage in such transactions but only in
accordance with these
procedures and if they are equitable to each participant and consistent with
each participant's
investment objectives.
ADMINISTRATIVE SERVICE PROVIDERS
Evergreen Investment Services ("EIS") provides administrative services to
each of the Funds
for a fee based on the average daily net assets of each fund administered by
EIS
for which an
affiliate of FUNB also serve as Advisor or Manager, calculated daily and
payable
monthly at the
following annual rates: .050% on the first $7 billion; .035% on the next $3
billion; .030% on the
next $5 billion; .020% on the next $10 billion; .015% on the next $5 billion;
and .010% on assets
in excess of $30 billion.^
For the fiscal period ended December 31, 1997, the Funds, other than Small
Cap,
International Growth and Masters, which had not yet commenced operations,
incurred, and paid to
EIS the following administrative service costs: Evergreen: $4,994; Growth and
Income: $6,751;
Foundation: $7,044; Global Leaders: $385; Strategic Income: $323; Aggressive
Growth: $301. As
part of its regular banking operations, FUNB and its affiliates may make loans
to public companies.
Thus, it may be possible, from time to time, for the Funds to hold or acquire
the securities of
issuers which are also lending clients of FUNB and its affiliates. The lending
relationship will not be
a factor in the selection of securities.
BROKERAGE
Decisions regarding each Fund's portfolio are made by its Advisor or
Manager, subject to
the supervision and control of the Trustees. Orders for the purchase and sale
of
securities and other
investments are placed by employees of the Advisor or Manager, all of whom, in
the case of
Evergreen Asset, are associated with Lieber. In general, the same individuals
perform the same
functions for the other funds managed by the Advisor or Manager. A Fund will
not
effect any
brokerage transactions with any broker or dealer affiliated directly or
indirectly with the Advisor or
Manager unless such transactions are fair and reasonable, under the
circumstances, to the Fund's
shareholders. Circumstances that may indicate that such transactions are fair
or
reasonable include
the frequency of such transactions, the selection process and the commissions
payable in
connection with such transactions.
A substantial portion of the transactions in equity securities for each
Fund will occur on
domestic stock exchanges. Transactions on stock exchanges involve the payment
of
brokerage
commissions. In transactions on stock exchanges in the United States, these
commissions are
negotiated, whereas on many foreign stock exchanges these commissions are
fixed.
In the case of
securities traded in the foreign and domestic over-the-counter markets, there
is
generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter
transactions will generally be placed directly with a principal market maker,
although the Fund may
place an over-the-counter order with a broker-dealer if a better price
(including commission) and
execution are available.
It is anticipated that most purchase and sale transactions involving fixed
income securities
will be with the issuer or an underwriter or with major dealers in such
securities acting as principals.
Such transactions are normally on a net basis and generally do not involve
payment of brokerage
commissions. However, the cost of securities purchased from an underwriter
usually includes a
commission paid by the issuer to the underwriter. Purchases or sales from
dealers will normally
reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Advisor
or Manager shall be prompt execution at the most favorable price. An Advisor or
Manager will also
consider such factors as the price of the securities and the size and
difficulty
of execution of the
order. If these objectives may be met with more than one firm, the Advisor or
Manager will also
consider the availability of statistical and investment data and economic facts
and opinions helpful
to the Advisor or Manager. To the extent that receipt of these services for
which the Advisor or
Manager or its affiliates might otherwise have paid, it would tend to reduce
its
expenses.
Under Section 11(a) of the Securities Exchange Act of 1934, as amended, and
the rules
adopted thereunder by the SEC, Lieber may be compensated for effecting
transactions in portfolio
securities for a Fund on a national securities exchange provided the conditions
of the rules are met.
Each Fund advised by Evergreen Asset has entered into an agreement with Lieber
authorizing Lieber
to retain compensation for brokerage services. In accordance with such
agreement, it is
contemplated that Lieber, a member of the New York and American Stock
Exchanges,
will, to the
extent practicable, provide brokerage services to the Fund (for Masters, only
with respect to assets
managed by Evergreen Asset) with respect to substantially all securities
transactions effected on
the New York and American Stock Exchanges. In addition, broker-dealers
affiliated with MFS,
Putnam and Oppenheimer may execute portfolio transactions for the account of
Masters. In such
transactions, the Advisor or Manager will seek the best execution at the most
favorable price while
paying a commission rate no higher than that offered to other clients of Lieber
or that which can be
reasonably expected to be offered by an unaffiliated broker-dealer having
comparable execution
capability in a similar transaction. However, no Fund will engage in
transactions in which Lieber
would be a principal. While no Fund contemplates any ongoing arrangements with
other brokerage
firms, brokerage business may be given from time to time to other firms. In
addition, the Trustees
have adopted procedures pursuant to Rule 17e-1 under the 1940 Act to ensure
that
all brokerage
transactions with Lieber, as an affiliated broker-dealer are fair and
reasonable.
Any profits from brokerage commissions accruing to Lieber as a result of
portfolio
transactions for the Fund will accrue to FUNB and to its ultimate parent, First
Union. The Advisory
Agreements do not provide for a reduction of the Advisor or Manager's fee with
respect to any
Fund by the amount of any profits earned by Lieber from brokerage commissions
generated by
portfolio transactions of the Fund.
The following chart shows: (1) for the years ended December 31, 1997 and
1996 the
amount of brokerage commissions paid by each Fund, to all brokers and the
commissions, if any,
paid to Lieber; (2) for the year ended December 31, 1997 the percentage of all
commissions paid to
Lieber; and (3) for the year ended December 31, 1997 the percentage of the
total
dollar amount of
all portfolio transactions with respect to which commissions have been paid
which were effected
by Lieber:
TOTAL
BROKERAGE
COMMISSIONS
COMMISSIONS PAID TO LIEBER
PERCENT OF
TRANSACTIONS
EFFECTED BY
LIEBER
FUND
1997
1996
1997
1996
1997
EVERGREEN
$19,154
$17,474
$16,810 (87.8%)
$16,882
85.5%
FOUNDATION
$16,976
$17,682
$16,976 (100%)
$16,849
100%
GROWTH AND INCOME
$20,369
$20,587
$17,413 (85.5%)
$17,389
79.3%
GLOBAL LEADERS
$6,526
- --
$1,965 (30.1%)
- --
53.4%
STRATEGIC INCOME
0
- --
0
- --
- --
AGGRESSIVE
$754
- --
0
- --
- --
ADDITIONAL TAX INFORMATION
(See also "Sale and Redemption of Shares - Tax Status" in the Funds'
Prospectuses)
Each Fund other than Small Cap, International Growth and Masters has
qualified and
intends to continue to qualify, and each of Small Cap, International Growth and
Masters intends to
qualify as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of
1986, as amended (the "Code"). By following such policy, each Fund expects to
eliminate or
reduce to a nominal amount the federal income taxes to which it may be subject.
In order to qualify as a regulated investment company, each Fund must,
among other
things, (1) derive at least 90% of its gross income from dividends, interest,
payments with respect
to securities loans, and gains from the sale or other disposition of stock or
securities, foreign
currencies or other income (including gains from options, futures or forward
contracts) derived with
respect to its business of investing in stock, securities or currencies, and
(2)
diversify its holdings
so that at the end of each quarter of its taxable year (I)at least 50% of the
market value of the
Fund's assets is represented by cash or cash items, U.S. government securities,
securities of other
regulated investment companies, and other securities limited, in respect of any
one issuer, to an
amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets
is invested in the
securities of any one issuer (other than U.S. government securities or the
securities of other
regulated investment companies) or of two or more issuers that the Fund
controls
and that are
engaged in the same, similar, or related trades or businesses.
These requirements may limit the range of the Fund's investments. If a Fund
qualifies as a
regulated investment company, it will not be subject to federal income tax on
the part of its income
distributed to shareholders, provided the Fund distributes during its taxable
year at least (a) 90% of
its taxable net investment income (generally, dividends, interest, certain
other
income, and the
excess, if any, of net short-term capital gain over net long-term loss), and
(b)
90% of the excess of
(I) its tax-exempt interest income less (ii) certain deductions attributable to
that income. Each Fund
intends to make sufficient distributions to shareholders to meet this
requirement. For a discussion
of the tax consequences of variable annuity or variable life insurance
contracts
("variable insurance
contracts"), refer to the prospectus of the variable insurance contracts
offered
by the Participating
Insurance Company. Variable annuity contracts purchased through insurance
company separate
accounts provide for the accumulation of all earnings from interest, dividends,
and capital
appreciation without current federal income tax liability for the owner.
Depending on the variable
annuity contract, distributions from the contract may be subject to ordinary
income tax and, in
addition, a 10% penalty tax on distributions before age 59-1/2. Only the
portion
of a distribution
attributable to income on the investment in the contract is subject to federal
income tax. Investors
should consult with competent tax advisors for a more complete discussion of
possible tax
consequences in a particular situation.
The Funds will not be subject to the 4% federal excise tax imposed on
registered
investment companies that do not distribute all of their income and gains each
calendar year
because such tax does not apply to a registered investment company whose only
shareholders are
segregated asset accounts of Participating Insurance Companies held in
connection with variable
insurance contracts.
Section 817(h) of the Code imposes certain diversification standards on the
underlying
assets of variable
insurance contracts held in the Funds. The Code provides that
a variable
insurance
contract shall not be treated as an annuity contract or life insurance
contract for the
current or any prior period for which the investments are not, in accordance
with regulations
prescribed by the U.S. Treasury Department, adequately diversified.
Disqualification of the variable
insurance contract as an annuity contract or life insurance contract would
result in immediate
imposition of federal income tax on variable insurance contract owners with
respect to earnings
allocable to the contract (including, upon disqualification, accumulated
earnings), while the liability
would generally arise prior to the receipt of payments under the contract.
Section 817(h)(2) of the
Code
is a safe harbor provision which provides that variable insurance contracts
meet the
diversification
requirements if, as of the close of each quarter, the underlying
assets meet the
diversification standards for a regulated investment company and no more than
55% of the total
assets consists of cash, cash items, U.S. government securities and securities
of other regulated
investment companies. The U.S. Treasury Department has issued Regulations
(Treas. Reg. 1.817-5)
that establish diversification requirements for the investment portfolios
underlying variable
insurance contracts. The Regulations amplify the diversification requirements
for variable annuity
contracts set forth in Section 817(h) of the Code and provide an alternative to
the safe harbor
provision described above. Under the Regulations, an investment portfolio will
be deemed
adequately
diversified if: (1) no more than 55% of the value of the total assets
of the portfolio is
represented by any one investment; (2) no more than 70% of such value is
represented by any two
investments; (3) no more than 80% of such value is represented by any three
investments; and (4)
no more than 90% of such value is represented by any four investments. For
purposes of these
Regulations all securities of the same issuer are treated as a single
investment. The Regulations
provide that, in the case of a regulated investment company whose shares are
available to the
public only through variable insurance contracts which meet certain other
requirements, the
diversification
tests are applied by reference to the underlying assets owned by
the regulated
investment company rather than by reference to the shares of the regulated
investment company
owned
under the annuity contract. Each Fund intends to meet the requirements for
application of
the
diversification tests on this look-through basis. The Code provides that for
purposes of
determining whether or not the diversification standards imposed on the
underlying assets of
variable insurance contracts by Section 817(h) of the Code have been met, each
United States
government agency or instrumentality shall be treated as a separate issuer.
Each Fund will be managed in such a manner as to comply with the
diversification
requirements. It is possible that in order to comply with the diversification
requirements, less
desirable investment decisions may be made which would affect the investment
performance of
such Fund.
NET ASSET VALUE
The following information supplements that set forth in the Funds
Prospectus under the
Section entitled "Sale and Redemption of Shares".
On each Fund business day on which a purchase or redemption order is
received by a Fund
and trading in the types of securities in which a Fund invests might materially
affect the value of
Fund shares, the per share net asset value of each such Fund is computed in
accordance with the
Trust's
Declaration of Trust and By-Laws as of the next close of regular trading
on the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) by dividing
the value of the
Fund's total assets, less its liabilities, by the total number of its shares
then outstanding. A Fund
business day is any weekday, exclusive of national holidays on which the
Exchange is closed and
Good Friday. For each Fund, securities for which the primary market is on a
domestic or foreign
exchange and over-the-counter securities admitted to trading on the NASDAQ
National List are
valued at the last quoted sale or, if no sale, at the mean of closing bid and
asked prices and
portfolio bonds are presently valued by a recognized pricing service when such
prices are believed
to reflect the fair value of the security. Over-the-counter securities not
included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one
or more brokers. If accurate quotations are not available, securities will be
valued at fair value
determined in good faith by the Board of Trustees.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of
all assets and liabilities will be translated into United States dollars at the
mean between the buying
and selling rates of the currency in which such a security is denominated
against United States
dollars
last quoted by any major bank. If such quotations are not available, the
rate of exchange will
be determined in accordance with policies established by the Fund. The Trustees
will monitor, on
an ongoing basis, a Fund's method of valuation. Trading in securities on
European and Far Eastern
securities exchanges and over-the-counter markets is normally completed well
before the close of
business on each business day in New York. In addition, European or Far Eastern
securities trading
generally or in a particular country or countries may not take place on all
business days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not business
days
in New York and on which the Fund's net asset value is not calculated. Such
calculation does
not take place contemporaneously with the determination of the prices of the
majority of the
portfolio securities used in such calculation. Events affecting the values of
portfolio securities that
occur
between the time their prices are determined and the close of the Exchange
will not be
reflected in a Fund's calculation of net asset value unless the Trustees deem
that the particular
event would materially affect net asset value, in which case an adjustment will
be made. Securities
transactions are accounted for on the trade date, the date the order to buy or
sell is executed.
Dividend income and other distributions are recorded on the ex-dividend date,
except certain
dividends and distributions from foreign securities which are recorded as soon
as the Fund is
informed after the ex-dividend date.
ADDITIONAL SALE AND REDEMPTION
INFORMATION
Shares of the Trust are sold continuously to variable annuity and variable
life insurance
accounts of Participating Insurance Companies and to qualified pension and
retirement plans. The
Trust may suspend the right of redemption or postpone the date of payment for
shares during any
period when (1) trading on the Exchange is restricted by applicable rules and
regulations of the
SEC, (2) the Exchange is closed for other than customary weekend and holiday
closings, (3) the
SEC has by order permitted such suspension, or (4) an emergency exists as
determined by the SEC.
The Trust may redeem shares involuntarily if redemption appears appropriate
in light of the
Trust's responsibilities under the 1940 Act.
GLASS STEAGALL ACT
The Glass-Steagall Act and other banking laws and regulations presently
prohibit banks or
non-bank affiliates of member banks of the Federal Reserve System from
sponsoring, organizing or
controlling or acting as the principal underwriter of the shares of a
registered, open-end investment
company continuously engaged in the issuance of its shares. Further, they
prohibit banks from
issuing, underwriting, or distributing securities in general. Such laws and
regulations do not prohibit
such a holding company or affiliate from acting as Advisor, administrator,
transfer agent or
custodian to such an investment company or from purchasing shares of such a
company as agent
for and upon the order of their customer. Each Advisor subject to and in
compliance with such
banking laws and regulations. Changes in federal statutes and regulations
relating to the permissible
activities of banks, as well as further judicial or administrative decisions or
interpretations of such
statutes and regulations, could prevent the Advisor from continuing to perform
such services for
the Trust. If the Advisor were prohibited from acting as investment advisors to
the Funds, it is
expected that the Trustees would recommend to the shareholders that they
approve
new
investment advisors elected by the Trustees. It is not expected that the
shareholders would suffer
any
adverse financial consequences (if another advisor with equivalent abilities
to the Advisor is
found) as a result of any of these occurrences.
GENERAL INFORMATION ABOUT THE FUNDS
CUSTODIAN
Cash and securities owned by the Funds of the Trust are held by State
Street Bank and
Trust Company, Box 9021, Boston, Massachusetts 02205-9827 ("State Street" or the
"Custodian") pursuant to a Custodian Agreement with the Trust (the "Custodian
Agreement"),
Under the Custodian Agreement, State Street (1) maintains a separate account or
accounts in the
name of each Fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3)
collects
and receives all income and other payments and distributions on account
of the Funds'
portfolio securities; (4) responds to correspondence from security brokers and
others relating to its
duties; and (5) makes periodic reports to the Trustees concerning the Trust's
operations. State
Street may, at its own expense, open and maintain a sub-custody account or
accounts on behalf of
the
Trust, provided that State Street shall remain liable for the performance of
all of its duties under
the Custodian Agreement. Rules adopted under the 1940 Act permit the Trust to
maintain its
securities and cash in the custody of certain eligible banks and securities
depositories.
TRANSFER AGENT
Evergreen Service Company ("ESC"), 200 Berkeley Street, Boston,
Massachusetts 02116, a
subsidiary of FUNB, serves as transfer agent and dividend disbursing agent for
each Fund pursuant
to
a transfer agency agreement with the Trust (the "Transfer Agency Agreement").
Under the
Transfer Agency Agreement, ESC has agreed (1) to issue and redeem shares of the
Trust; (2) to
address and mail all communications by the Trust to its shareholders, including
reports to
shareholders, dividend and distribution notices, and proxy material for its
meetings of shareholders;
(3) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (4) to
maintain
shareholder accounts and certain sub-accounts; and (5) to make periodic
reports to the
Trustees concerning the Trust's operations. The Funds pay ESC $23.50 annual fee
per open
account and $9.00 annual fee per closed account.
CAPITALIZATION AND ORGANIZATION
The Trust is a Delaware business trust organized on December 23, 1997. It
is the successor
to a Massachusetts business trust organized in 1994. The Trust is governed by
the Board of
Trustees. References to the "Board of Trustees" or Trustees" in this SAI refer
to the Trustees of
the Trust. Each Fund may issue an unlimited number of shares of beneficial
interest with a $0.001
par value. Shares of these Funds are fully paid, nonassessable and fully
transferable when issued
and have no pre-emptive, conversion or exchange rights. Fractional shares have
proportionally the
same rights, including voting rights, as are provided for a full share.
Under the Trust's Declaration of Trust, each Trustee continues in office
until the termination
of the Trust or his or her earlier death, incapacity, resignation or removal.
Shareholders can remove
a Trustee upon a vote of two-thirds of the outstanding shares of beneficial
interest of the Trust.
Vacancies
will be filled by a majority of the remaining Trustees, subject to the
1940 Act. As a
result, normally no annual or regular meetings of shareholders will be held,
unless otherwise
required by the Declaration of Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders of
more than 50%
of
the shares voting for the election of Trustees can elect 100% of the Trustees
if they choose to
do so and in such event the holders of the remaining shares so voting will not
be able to elect any
Trustees. The Trustees are authorized to reclassify and issue any unissued
shares to any number of
additional series without shareholder approval. Accordingly, in the future, for
reasons such as the
desire to establish one or more additional portfolios of the Trust with
different investment
objectives, policies or restrictions, additional series of shares may be
created. Any issuance of
shares of another series or class would be governed by the 1940 Act and the law
of the State of
Delaware. If shares of another series of the Trust were issued in connection
with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be
entitled
to one vote for all purposes. Generally, shares of all portfolios would
vote as a single series
on matters, such as the election of Trustees, that affected all portfolios in
substantially the same
manner. As to matters affecting each portfolio differently, such as approval of
the Advisory
Agreement and changes in investment policy, shares of each portfolio would vote
separately.
In addition any Fund may, in the future, divide its shares into or create
additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different
distribution related and other specific costs borne by such classes, they will
have the same voting
and other rights described for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust,
similar to those set forth in Section 16(c) of the 1940 Act, will be available
to shareholders of each
Fund. The rights of the holders of shares of a series of the Trust may not be
modified except by the
vote of a majority of the outstanding shares of such series.
PERFORMANCE INFORMATION
From time to time a Fund may advertise its "total return". The Fund's
"total return" is its
average annual compounded total return for recent one, five, and ten-year
periods (or the period
since the Fund's inception). The Fund's total return for such a period is
computed by finding,
through the use of a formula prescribed by the SEC, the average annual
compounded rate of return
over the period that would equate an assumed initial amount invested to the
value of such
investment at the end of the period. For purposes of computing total return,
income dividends and
capital gains distributions paid on shares of the Fund are assumed to have been
reinvested when
paid. The information below does not reflect charges and deductions which are
or
may be imposed
under the variable insurance contracts issued by Participating Insurance
Companies. The average
annual compounded total return for the shares offered by the Funds for, as
applicable, the period
from inception (March 1, 1996 for Evergreen, Growth and Income and Foundation)
through
December 31, 1996 and for the year ended December 31, 1997 were, respectively:
Evergreen - 1
YR:37.16%; SINCE INCEPTION:28.05%; Growth and Income - 1 YR:34.66%; SINCE
INCEPTION:29.23%; Foundation - 1 YR:27.80%; SINCE INCEPTION:23.47%. The average
annual
compounded
total return for the period from inception (March 6, 1997) for Global
Leaders,
Aggressive and Strategic Income through December 31, 1997 was: Global Leaders -
8.80%;
Aggressive - 11.00%; Strategic Income - 5.28%.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other
communications to shareholders. Yield quotations are expressed in annualized
terms and may be
quoted on a compounded basis. Yields are computed by dividing the Fund's
interest income (as
defined
in the SEC yield formula) for a given 30-day period, net of expenses, by
the average
number of shares entitled to receive distributions during the period, dividing
this figure by the
Fund's net asset value per share at the end of the period and annualizing the
result (assuming
compounding of income) in order to arrive at an annual percentage rate. The
formula for calculating
yield is as follows:
6
YIELD = 2[(a- b/cd)+1)-1]
------------------------
cd
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the period
that were
entitled to receive dividends
d = The maximum offering price per share on the last day of the
period
Income is calculated for purposes of yield quotations in accordance with
standardized
methods applicable to all stock and bond funds.
Gains and losses generally are excluded from the calculation. Income
calculated for
purposes of determining a Fund's yield differs from income as determined for
other accounting
purposes. Because of the different accounting methods used, and because of the
compounding
assumed in yield calculations, the yields quoted for a Fund may differ from the
rate of distributions
a Fund paid over the same period, or the net investment income reported in a
Fund's financial
statements.
Yield information is useful in reviewing a Fund's performance, but because
yields fluctuate,
such
information cannot necessarily be used to compare an investment in a Fund's
shares with
bank deposits, savings accounts and similar investment alternatives which often
provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a
function of the kind and quality of the instruments in the Funds' investment
portfolios, portfolio
maturity, operating expenses and market conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be
somewhat higher than prevailing market rates, and in periods of rising interest
rates the yields will
tend to be somewhat lower. Also, when interest rates are falling, the inflow of
net new money to a
Fund from the continuous sale of its shares will likely be invested in
instruments producing lower
yields than the balance of the Fund's investments, thereby reducing the current
yield of the Fund.
In periods of rising interest rates, the opposite can be expected to occur.
NON-STANDARDIZED PERFORMANCE
In addition to the performance information described above, a Fund may
provide total return
information for designated periods, such as for the most recent six months or
most recent twelve
months. This total return information is computed as described under "Total
Return" above except
that no annualization is made.
From time to time, a Fund may quote its performance in advertising and
other types of
literature
as compared to the performance of the Standard & Poor's 500 Composite
Stock Price
Index, the Dow Jones Industrial Average, Russell 2000 Index, [benchmark for
Strategic Income] or
any other commonly quoted index of common stock or fixed income prices, which
are unmanaged
indices of selected common stock or fixed income prices. A Fund's performance
may also be
compared to those of other mutual funds having similar objectives. This
comparative performance
would be expressed as a ranking prepared by Lipper Analytical Services, Inc. or
similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by
assuming, to the extent applicable, reinvestment of all capital gains
distributions and income
dividends paid. Any such comparisons may be useful to investors who wish to
compare a Fund's
past performance with that of its competitors. Of course, past performance
cannot be a guarantee
of future results.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to the shareholder's broker or to
each Advisor at
the address or telephone number shown on the front cover of this SAI. This SAI
does not contain
all the information set forth in the Registration Statement filed by the Trust
with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable
charge from the SEC or may be examined, without charge, at the offices of the
SEC in Washington,
D.C.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts, 02110 serve
as
independent public accountants to the Trust.
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036, is
counsel to the Trust.
FINANCIAL STATEMENTS
The financial statements of Evergreen, Growth and Income, Foundation,
Global Leaders,
Strategic Income and Aggressive Growth appearing in their most current fiscal
year Annual Report
to
shareholders and the report thereon of KPMG Peat Marwick LLP are incorporated
by reference in
this Statement of Additional Information. The Annual Report to Shareholders,
which contains the
referenced statements, is available upon request and without charge.
APPENDIX A
APPENDIX A - BOND, NOTE AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Services. A Standard & Poor's corporate bond
rating is a current
assessment of the credit worthiness of an obligor with respect to a specific
obligation. This
assessment of credit worthiness may take into consideration obligors such as
guarantors, insurers
or lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or
obtained
by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not
perform any audit in connection with the ratings and may, on occasion, rely on
unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result of
changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of
interest and repayment of principal in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy,
reorganization or their arrangement under the laws of bankruptcy and other laws
affecting
creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and
indicates an extremely strong capacity to pay interest and repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest
and repay principal is very strong and in the majority of instances they differ
from AAA issues only
in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is
somewhat
more susceptible to the adverse effects of changes in circumstances and
economic
conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay
principal.
Whereas they normally exhibit protection parameters, adverse economic
conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay
principal for debt in this category than is higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in
accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree of
speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal
payments. The BB rating category is also used for debt subordinated to senior
debt that is assigned
an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has the
capacity to meet
interest payments and principal repayments. Adverse business, financial, or
economic conditions
will likely impair capacity or willingness to pay interest and repay principal.
The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to default,
and is dependent
upon favorable business, financial and economic conditions to meet timely
payment of interest and
repayment of principal. In the event of adverse business, financial or economic
conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used
for debt subordinated to senior debt that is assigned an actual or implied B or
B- rating.
CC - The rating CC is typically applied to debt subordinated to senior debt
that is assigned
an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior debt
which is assigned an
actual or implied CCC - debt rating. The C rating may be used to cover a
situation where a
bankruptcy petition has been filed, but debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest payments
or principal
payments are not made on a due date even if the applicable grace period has not
expired, unless
Standard & Poor's believes that such payments will be made during such grace
periods; it will also
be used upon a filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings
from AA to CCC may be modified by the addition of a plus or minus sign to show
relative standing
within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information
on which to base a rating, or that Standard & Poor's does not rate a particular
type of obligation as
a matter of policy. Debt obligations of issuers outside the United States and
its territories are rated
on the same basis as domestic corporate issues. The ratings measure the credit
worthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by
the Comptroller of the Currency, bonds rated in the top four categories (AAA,
AA, A, BBB,
commonly
known as "Investment Grade" ratings) are generally regarded as eligible
for bank
investment. In addition, the Legal Investment Laws of various states may impose
certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance
companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's rating symbols
and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the
smallest
degree of investment risk and are generally referred to as "gilt edge".
Interest payments
are protected by a large or by an exceptionally stable margin and principal is
secure. While the
various protective elements are likely to change such changes as can be
visualized are most unlikely
to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated
lower than the best bonds because margins of protection may not be as large as
in Aaa securities
or fluctuations of protective elements may be of greater amplitude or there may
be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear
adequate for the present but certain protective elements may be lacking or may
be
characteristically unreliable over any great length of time. Some bonds lack
outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above
categories which possess the strongest investment attributes are designated by
the symbol "1"
following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very
moderate and thereby not well safeguarded during good and bad times over the
future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment.
Assurance
of interest and principal payments or of maintenance of other terms of
the contract over
any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or
there may be present elements of danger with respect to principal or interest.
Ca - bonds which are rated Ca represent obligations which are speculative
in a high degree.
Such issues are often in default or have other marked shortcomings.
C - bonds which are rated C are the lowest rated class of bonds and issues
so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible risk
factors; AA -- high
credit quality, with strong protection factors and modest risk, which may vary
very slightly from
time to time because of economic conditions; A--average credit quality with
adequate protection
factors, but with greater and more variable risk factors in periods of economic
stress. The indicators
"+" and "-" to the AA and A categories indicate the relative position of a
credit within those rating
categories.
Fitch IBCA, Inc.: AAA -- highest credit quality, with an exceptionally
strong ability to pay
interest and repay principal; AA -- very high credit quality, with very strong
ability to pay interest
and repay principal; A --high credit quality, considered strong as regards
principal and interest
protection,
but may be more vulnerable to adverse changes in economic conditions
and
circumstances. The indicators "+" and "-" to the AA, A and BBB categories
indicate the relative
position of credit within those rating categories.
DESCRIPTION OF NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing
beyond three years will most likely receive a long-term debt rating. The
following criteria will be
used in making that assessment.
Amortization schedule (the larger the final maturity relative to other
maturities the more
likely it will be treated as a note).
Source of Payment (the more dependent the issue is on the market for its
refinancing, the
more likely it will be treated as a note.) Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined
to possess overwhelming safety characteristics will be given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for short-term
obligations will be
designated
Moody's Investment Grade (MIG). This distinction is in recognition of
the differences
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of major
importance in bond
risk are of lesser importance over the short run. Rating symbols and their
meanings follow:
MIG 1 - This designation denotes best quality. There is present strong
protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the
market for refinancing.
MIG 2 - This designation denotes high quality. Margins of protection are
ample although
not so large as in the preceding group.
MIG 3 - This designation denotes favorable quality. All security elements
are accounted for
but this is lacking the undeniable strength of the preceding grades. Liquidity
and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.
MIG 4 - This designation denotes adequate quality. Protection commonly
regarded as
required of an investment security is present and although not distinctly or
predominantly
speculative, there is specific risk.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries the
smallest degree
of investment risk. The modifiers 1, 2, and 3 are used to denote relative
strength within this
highest classification.
Standard & Poor's Rating Services: "A" is the highest commercial paper
rating category
utilized by Standard & Poor's Services which uses the numbers 1+, 1, 2 and 3 to
denote relative
strength within its "A" classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating category
utilized by Duff
& Phelps which uses + or - to denote relative strength within this
classification. Duff 2 represents
good certainty of timely payment, with minimal risk factors. Duff 3 represents
satisfactory
protection factors, with risk factors larger and subject to more variation.
Fitch IBCA, Inc.: F-1+ -- denotes exceptionally strong credit quality given
to issues
regarded as having strongest degree of assurance for timely payment; F-1 -- very
strong, with only
slightly less degree of assurance for timely payment than F-1+; F-2 -- good
credit quality, carrying
a satisfactory degree of assurance for timely payment.
