1933 Act No. 33-83100
1940 Act No. 811-8716
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 18 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 21 [X]
EVERGREEN VARIABLE ANNUITY TRUST
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices)
(617) 210-3200
(Registrant's Telephone Number)
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 18
TO
REGISTRATION STATEMENT
This Post-Effective Amendment No. 18 to Registrant's Registration
Statement No. 33-83100/811-8716 consists of the following pages, items of
information and documents:
The Facing Sheet
The Contents Page
PART A
------
Prospectus for Evergreen VA Blue Chip Fund is contained herein.
Prospectus for the following funds is contained in the
Registrant's Registration Statement filed on September 29, 1999:
Evergreen VA Capital Growth Fund, Evergreen VA
Growth Fund, Evergreen VA High Income Fund and Evergreen VA
Perpetual International Fund.
Prospectus for the following funds is contained in
Registrant's Registration Statement filed on September 28, 1999:
Evergreen VA Equity Index Fund, Evergreen VA Fund, Evergreen VA Foundation
Fund, Evergreen VA Global Leaders Fund, Evergreen VA Growth and Income Fund,
Evergreen VA International Growth Fund, Evergreen VA Masters Fund,
Evergreen VA Omega Fund, Evergreen VA Small Cap Value Fund, Evergreen VA
Special Equity Fund and Evergreen VA Strategic Income Fund.
PART B
------
Statement of Additional Information for Evergreen VA Blue Chip Fund
is contained herein.
Statement of Additional Information for the following
funds is contained in Registrant's Registration Statement filed
on September 29, 1999: Evergreen VA Capital
Growth Fund, Evergreen VA Growth Fund, Evergreen VA High
Income Fund and Evergreen VA Perpetual International Fund.
Statement of Additional Information for the following funds is
contained in Registrant's Registration Statement
filed on September 28, 1999: Evergreen VA Equity Index Fund, Evergreen VA Fund,
Evergreen VA Foundation Fund, Evergreen VA Global Leaders Fund, Evergreen VA
Growth and Income Fund, Evergreen VA International Growth Fund,
Evergreen VA Masters Fund, Evergreen VA Omega Fund, Evergreen VA Small
Cap Value Fund, Evergreen VA Special Equity Fund and Evergreen VA Strategic
Income Fund.
PART C
------
Financial Statements
Exhibits
Number of Holders of Securities
Indemnification
Business and Other Connections of Investment Adviser
Principal Underwriter
Location of Accounts and Records
Undertakings
Signatures
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
PART A
PROSPECTUS
<PAGE>
Evergreen
Variable Annuity Trust
Evergreen VA Blue Chip Fund
Prospectus, April 18, 2000
The Securities and Exchange Commission has not determined that the information
in this prospectus is accurate or complete, nor has it approved or disapproved
these securities. Anyone who tells you otherwise is committing a crime.
<PAGE>
FUND RISK/RETURN SUMMARIES:
Overview of Fund Risks
Evergreen VA Blue Chip Fund
GENERAL INFORMATION:
The Fund's Investment Advisor
The Fund's Portfolio Manager
Calculating the Share Price
Participating Insurance Companies
How to Buy and Redeem Shares
Other Services
The Tax Consequences of Investing in the Fund
Fees and Expenses of the Fund
Other Fund Practices
In general, the Fund seeks to provide growth of capital and long-term growth of
income. Shares of the Fund are sold only to separate accounts funding variable
annuity contracts and variable life insurance policies issued by life insurance
companies. For further information about these contracts and policies, please
see the separate prospectuses issued by the participating life insurance
companies.
Fund Summaries Key
The Fund's summary is organized around the following basic topics and questions:
Investment Goal
What is the Fund's financial objective? You can find clarification on how the
Fund seeks to achieve its objective by looking at the Fund's strategy and
investment policies. The Fund's Board of Trustees can change the investment
objective without a shareholder vote.
Investment Strategy
How does the Fund go about trying to meet its goals? What types of investments
does it contain? What style of investing and investment philosophy does it
follow? Does it have limits on the amount invested in any particular type of
security?
Risk Factors
What are the specific risks for an investor in the Fund?
Performance
How well has the Fund performed in the past year? The past five years? The past
ten years?
<PAGE>
OVERVIEW OF FUND RISKS
Variable
Annuity Fund
Shares of the Fund are sold only to separate accounts funding variable annuity
contracts and variable life insurance policies issued by life insurance
companies. For more information about the Fund and the other variable annuity
funds offered by Evergreen, please call 1-800-343-2898. Shares of the Fund will
not be available for sale until May 1, 2000.
Evergreen Variable Annuity Funds seek to provide investors with a selection of
investment alternatives which seek to provide capital growth, income and
diversification.
Following this overview, you will find information on the Fund's specific
investment strategies and risks.
Risk Factors For All Mutual Funds
Please remember that mutual fund shares are:
o not guaranteed to achieve their goal
o not a deposit with a bank
o not insured, endorsed or guaranteed by the FDIC or any government agency
o subject to investment risks, including possible loss of your
original investment.
Like most investments, your investment in the Fund could fluctuate significantly
in value over time and could result in a loss of money.
Here are the most important factors that may affect the value of your
investment:
Stock Market Risk
Your investment in the Fund will be affected by general economic conditions such
as prevailing economic growth, inflation and interest rates. When economic
growth slows, or interest or inflation rates increase, equity securities tend to
decline in value. Such events also could cause companies to decrease the
dividends they pay. If these events were to occur, the value of and dividend
yield and total return earned on your investment would likely decline. Even if
general economic conditions do not change, your investment may decline in value
if particular industries, issuers or sectors the Fund invests in do not perform
well.
Market Capitalization Risk
Stocks fall into three broad market capitalization categories - large, medium
and small. Investing primarily in one category carries the risk that due to
current market conditions that category may be out of favor with investors. If
valuations of large capitalization companies appear to be greatly out of
proportion to the valuations of small or medium capitalization companies,
investors may migrate to the stocks of small and mid-sized companies causing a
fund that invests in these companies to increase in value more rapidly than a
fund that invests in larger, fully-valued companies. Investing in medium and
small capitalization companies may be subject to special risks associated with
narrower product lines, more limited financial resources, smaller management
groups, and a more limited trading market for their stocks as compared with
larger companies. As a result, stocks of small and medium capitalization
companies may decline significantly in market downturns.
Investment Style Risk
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
fund may outperform other funds that employ a different style. A fund may also
employ a combination of styles that impact its risk characteristics. Examples of
different styles include growth and value investing. Growth stocks may be more
volatile than other stocks because they are more sensitive to investor
perceptions of the issuing company's growth of earnings potential. Growth
oriented funds will typically underperform when value investing is in favor.
Value stocks are those which are undervalued in comparison to their peers due to
adverse business developments or other factors. Value oriented funds will
typically underperform when growth investing is in favor.
<PAGE>
VA Blue Chip Fund
FUND FACTS:
Goal:
o Capital Growth
Principal Investment:
o Large-Cap U.S. Common Stocks
Investment Advisor:
o Evergreen Investment Management Company
Portfolio Manager:
o Judith A. Warners
NASDAQ Symbol:
o None
Dividend Payment Schedule:
o Annually
Investment Goal
The Fund seeks capital growth with the potential for income.
Investment Strategy
The Fund invests primarily in common stocks of well-established, large U.S.
companies with a long history of performance, typically recognizable names
representing a broad range of industries. To provide balance, the Fund also
invests in quality medium-sized companies. The Fund's stock selection is based
on a diversified style of equity management that allows it to invest in both
value and growth-oriented equity securities. "Value" securities are securities
that the Fund's portfolio manager believes are undervalued. "Growth" securities
are securities of companies that the Fund's portfolio manager believes have
anticipated earnings ranging from steady to accelerated growth. Buy and sell
decisions are based primarily on fundamental analysis to identify companies with
leading positions within their industry, solid managements and strategies, and a
trend of stable or accelerating profits.
The Fund may temporarily invest up to 100% of its assets in high quality money
market instruments in response to adverse economic, political or market
conditions. This strategy is inconsistent with the Fund's principal investment
strategy and investment goal, and if employed could result in a lower return and
loss of market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview
of Fund Risks" on page 1 under the headings:
o Stock Market Risk
o Market Capitalization Risk
o Investment Style Risk
For further information regarding the Fund's investment strategy and risk
factors see "Other Fund Practices."
<PAGE>
PERFORMANCE
Since the Fund will not commence operations until April 28, 2000, total return
information is not yet available.
EXPENSES
This section describes the estimated fees and expenses you would pay if you
bought and held shares of the Fund. The Fund does not assess any fees upon
purchase or redemption. However, surrender charges, mortality and expense risk
fees and other charges may be assessed by the participating insurance companies
under the variable annuity contracts or variable life insurance policies. Such
fees are described in the prospectus of such contracts or policies.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)+
Management 12b-1 Other Total Fund
Fee Fees Expenses Operating Expenses
0.61% None 0.65% 1.26%
+ Estimated for the fiscal year ended December 31, 2000
++ From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The Annual Fund Operating Expenses do not
reflect fee waivers and expense reimbursements. Including fee waivers and
expense reimbursements, Total Fund Operating Expenses are estimated to be 1.00%.
The table below shows the total expenses you would pay on a $10,000 investment
over one- and three-year periods. The example is intended to help you compare
the cost of investing in this Fund versus other mutual funds and is for
illustration purposes only. The example assumes a 5% average annual return and
that you reinvest all of your dividends and distributions. You actual costs may
be higher or lower.
EXAMPLE OF FUND EXPENSES
After:
1 year $128
3 years $400
<PAGE>
THE FUND'S INVESTMENT ADVISOR
The investment advisor manages the Fund's investments and supervises its daily
business affairs. The investment advisor for the Fund is a subsidiary of First
Union Corporation, the sixth largest bank holding company in the U.S., with over
$253 billion in consolidated assets as of 12/31/1999. First Union Corporation is
located at 301 South College Street, Charlotte, North Carolina 28288-0013.
Evergreen Investment Management Company (EIMC) is the investment advisor to the
Fund. EIMC has been managing mutual funds and private accounts since 1932 and
currently manages over $12 billion in investment assets for 31 of the Evergreen
Funds. EIMC is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Under the terms of the investment advisory agreement, the investment advisor is
entitled to receive a fee based on the Fund's average daily net assets as listed
below:
0.61% of the first $100,000,000;
0.56% of the next $100,000,000;
0.51% of the next $100,000,000;
0.46% of the next $100,000,000;
0.41% of the next $100,000,000;
0.36% of the next $500,000,000;
0.31% of the next $500,000,000;
0.26% over $1,500,000,000.
THE FUND'S PORTFOLIO MANAGER
Judith A. Warners has managed the Fund since its inception. Ms. Warners, Vice
President and portfolio manager since January 1995, joined EIMC as an analyst in
1981.
Calculating The Share Price
The value of one share of a Fund, also known as the net asset value, or NAV, is
calculated on each day the New York Stock Exchange is open at 4 p.m. Eastern
time or as of the time the Exchange closes, if earlier. The Fund calculates its
share price for each share by adding up its total assets, subtracting all
liabilities, then dividing the result by the total number of shares outstanding.
Each security held by a Fund is valued using the most recent market data for
that security. If no market data is available for a given security, the Fund
will price that security at fair value according to policies established by the
Fund's Board of Trustees. Short-term securities with maturities of 60 days or
less will be valued on the basis of amortized cost.
The price per share for a Fund purchase or the amount received for a Fund
redemption is based on the next price calculated after the order is received and
all required information is provided.
Participating insurance companies
The Fund was organized to serve as an investment vehicle for separate accounts
funding variable annuity contracts and variable life insurance policies issued
by certain life insurance companies. The Fund does not currently foresee any
disadvantages to the holders of the contracts or policies arising from the fact
that the interests of holders of those contracts or policies may differ due to
the difference of tax treatment and other considerations. Nevertheless, the
Board of Trustees has established procedures for the purpose of identifying any
irreconcilable material conflicts that may arise and to determine what action,
if any, would be taken in response thereto. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the participating insurance companies. The Evergreen Variable Annuity
Trust assumes no responsibility for such prospectuses.
HOW TO BUY AND REDEEM SHARES
Investors may not purchase or redeem shares of the Fund directly, but only
through variable annuity contracts or variable life insurance policies offered
through separate accounts of participating insurance companies. Investors should
refer to the prospectus of the variable annuity contracts or variable life
insurance policies for information on how to purchase such contracts or
policies, how to select specific Evergreen Variable Annuity Funds as investment
options for the contracts or policies and how to redeem funds or change
investment options.
The separate accounts of the participating insurance companies place orders to
purchase and redeem shares of the Fund based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
or variable life insurance policies issued by the participating insurance
companies) to be effected on that day pursuant to the contracts or policies.
Timing of Proceeds
Normally, we will send redemption proceeds on the next business day after we
receive a request; however, we reserve the right to wait up to seven business
days to redeem any investments.
Other Services
Automatic Reinvestment of Dividends
For the convenience of investors, all dividends and capital gains are
distributed to the separate accounts of participating insurance companies and
are automatically reinvested, unless requested otherwise.
THE TAX CONSEQUENCES OF INVESTING IN THE FUND
Fund Distributions
The Fund passes along the net income or profits it receives from its
investments. The Fund expects that any distributions to separate accounts will
be exempt from current federal income taxation to the extent that such
distributions accumulate in a variable annuity contract or variable life
insurance policy.
o Dividends. The Fund may pay a dividend if it receives dividends, interest and
other income on the securities in which it invests.
o Capital Gains. When a mutual fund sells a security it owns for a profit, the
result is a capital gain. The Fund generally distributes capital gains,
if any, at least once a year.
For a discussion of the tax consequences of variable annuity contracts or
variable life insurance policies, refer to the prospectus of the variable
annuity contract or variable life insurance policies offered by the
participating insurance company. Variable annuity contracts or variable life
insurance policies purchased through insurance company separate accounts provide
for the accumulation of all earnings from interest, dividends and capital
appreciation without current federal income tax liability to the owner.
Depending on the variable annuity contract or variable life insurance policies,
distributions from the contract or policy may be subject to ordinary income tax
and, in addition, a 10% penalty tax on distributions before age 59 1/2. Only the
portion of a distribution attributable to income on the investment in the
contract is subject to federal income tax. Investors should consult with
competent tax advisors for a more complete discussion of possible tax
consequences in a particular situation.
FEES AND EXPENSES OF THE FUND
Every mutual fund has fees and expenses that are assessed either directly or
indirectly. This section describes each of those fees.
Management Fee
The management fee pays for the normal expenses of managing the Fund, including
portfolio manager salaries, research costs, corporate overhead expenses and
related expenses.
Other Expenses
Other expenses include miscellaneous fees from affiliated and outside service
providers. These may include legal, audit, custodial and safekeeping fees, the
printing and mailing of reports and statements, automatic reinvestment of
distributions and other conveniences for which the shareholder pays no
transaction fees.
Total Fund Operating Expenses
The total cost of running the Fund is called the expense ratio. As a
shareholder, you are not charged these fees directly; instead they are taken out
before the Fund's net asset value is calculated, and are expressed as a
percentage of the Fund's average daily net assets. The effect of these fees is
reflected in the performance results. Because these fees are "invisible,"
investors should examine them closely, especially when comparing one fund with
another fund in the same investment category. There are three things to remember
about expense ratios: 1) your total return in the Fund is reduced in direct
proportion to the fees; 2) expense ratios can vary greatly between funds and
fund families, from under 0.25 % to over 3.0%; and 3) a Fund's advisor may waive
a portion of the Fund's expenses for a period of time, reducing its expense
ratio.
<PAGE>
OTHER FUND PRACTICES
The Fund may invest in futures and options. Such practices are used to hedge the
Fund's portfolio, to maintain the Fund's exposure to its market, to manage cash
or to attempt to increase income. Although this is intended to increase returns,
these practices may actually reduce returns or increase volatility.
While not a principal investment strategy of the Fund, the Fund may invest up to
25% of its assets in foreign securities. The Fund's investment in non-U.S.
securities could expose it to certain unique risks of foreign investing. For
example, political turmoil and economic instability in the countries in which
the Fund invests could adversely affect the value of your investment. Certain
foreign countries have less developed and less regulated securities markets and
accounting systems than the U.S. This may make it harder to get accurate
information about a security or company and increase the likelihood that an
investment will not perform as well as expected. If the Fund invests in foreign
securities, which may include foreign currency transactions, the value of the
Fund's shares will be affected by changes in exchange rates. To manage this
risk, the Fund may enter into currency futures contracts and forward currency
exchange contracts. Although the Fund uses these contracts to hedge the U.S.
dollar value of a security it already owns, the Fund could lose money if it
fails to predict accurately the future exchange rates. The Fund may engage in
hedging and cross hedging with respect to foreign currencies to protect itself
against a possible decline in the value of another foreign currency in which
certain of the Fund's investments are denominated. A cross hedge cannot protect
against exchange rate risks perfectly, and if the Fund is incorrect in its
judgement of future exchange rate relationships, the Fund could be in a less
advantageous position than if such a hedge had not been established.
Please consult the Statement of Additional Information for more information
regarding these and other investment practices used by the Fund, including
risks.
<PAGE>
Evergreen Funds
Money Market
Florida Municipal Money Market Fund
Money Market Fund
Municipal Money Market Fund
New Jersey Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund
Treasury Money Market Fund
U.S. Government Money Market Fund
Tax Advantaged
Connecticut Municipal Bond Fund
Florida High Income Municipal Bond Fund
Florida Municipal Bond Fund
Georgia Municipal Bond Fund
High Grade Municipal Bond Fund
Maryland Municipal Bond Fund
Municipal Bond Fund
New Jersey Municipal Bond Fund
North Carolina Municipal Bond Fund
Pennsylvania Municipal Bond Fund
Short Intermediate Municipal Fund
South Carolina Municipal Bond Fund
Virginia Municipal Bond Fund
Income
Capital Preservation and Income Fund
Diversified Bond Fund
High Income Fund
High Yield Bond Fund
Intermediate Term Bond Fund
Quality Income Fund
Short Intermediate Bond Fund
Strategic Income Fund
U.S. Government Fund
Balanced
Balanced Fund
Capital Balanced Fund
Foundation Fund
Tax Strategic Foundation Fund
Growth & Income
Blue Chip Fund
Equity Income Fund
Growth and Income Fund
Income and Growth Fund
Select Equity Index Fund
Small Cap Value Fund
Utility Fund
Value Fund
Domestic Growth
Aggressive Growth Fund
Evergreen Fund
Masters Fund
Omega Fund
Select Special Equity Fund
Small Company Growth Fund
Stock Selector Fund
Strategic Growth Fund
Tax Strategic Equity Fund
Global International
Emerging Markets Growth Fund
Global Leaders Fund
Global Opportunities Fund
International Growth Fund
Latin America Fund
Perpetual Global Fund
Perpetual International Fund
Precious Metals Fund
Variable Annuity
VA Blue Chip Fund
VA Capital Growth Fund
VA Equity Index Fund
VA Fund
VA Foundation Fund
VA Global Leaders Fund
VA Growth and Income Fund
VA Growth Fund
VA High Income Fund
VA International Growth Fund
VA Masters Fund
VA Omega Fund
VA Perpetual International Fund
VA Small Cap Value Fund
VA Special Equity Fund
VA Strategic Income Fund
www.evergreen-funds.com
<PAGE>
Information Line for Hearing and Speech Impaired (TTY/TDD)
Call 1-800-343-2888
Each business day, 8 a.m. to 6 p.m. Eastern time
Write us a letter
Evergreen Service Company
P.O. Box 2121
Boston, MA 02106-2121
o for general correspondence
For express, registered or certified mail:
Evergreen Service Company
200 Berkeley Street
Boston, MA 02116-5039
Visit us on-line:
www.evergreen-funds.com
<PAGE>
For More Information About the VA Blue Chip Fund, Ask for:
The Fund's most recent Annual or Semi-annual Report, which contains a
complete financial accounting for the Fund and a complete list of the
Fund's holdings as of a specific date, as well as commentary from the
Fund's portfolio manager. This Report discusses the market conditions and
investment strategies that significantly affected the Fund's performance
during the most recent fiscal year or period.
The Statement of Additional Information (SAI), which contains more detailed
information about the policies and procedures of the Fund. The SAI has been
filed with the Securities and Exchange Commission (SEC) and its contents
are legally considered to be part of this prospectus.
For questions, other information, or to request a copy, without charge, of
any of the documents, call 1-800-343-2898 or ask your investment
representative. We will mail material within three business days.
Information about the Fund (including the SAI) is also available on the
SEC's Internet website at http://www.sec.gov. Copies of this material may
be obtained, for a duplication fee, by writing the SEC Public Reference
Section, Washington DC 20549-6009, or by electronic request at the
following e-mail address: [email protected]. This material can also be
reviewed and copied at the SEC's Public Reference Room in Washington, DC.
For information about the operation of the Public Reference Room, call the
SEC at 1-202-942-8090.
Sec File No.: 811-8716
[LOGO OF EVERGREEN FUNDS APPEARS HERE]
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
STATEMENT OF ADDITIONAL INFORMATION
April 18, 2000
Evergreen VA Blue Chip Fund (the "Fund")
The Fund is a series of Evergreen Variable Annuity Trust (the "Trust").
This Statement of Additional Information ("SAI") pertains to the Fund.
It is not a prospectus but should be read in conjunction with the prospectus
dated April 18, 2000. The Fund is offered to separate accounts funding variable
annuity and variable life insurance contracts issued by life insurance companies
("Participating Insurance Companies"). Copies of the prospectus may be obtained
without charge by calling (800) 343-2898.
<PAGE>
TABLE OF CONTENTS
PART 1
FUND HISTORY................................................................1-
INVESTMENT POLICIES.........................................................1-
OTHER SECURITIES AND PRACTICES..............................................1-
PRINCIPAL HOLDERS OF FUND SHARES............................................1-
EXPENSES....................................................................1-
SERVICE PROVIDERS...........................................................1-
PART 2
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES...............2-
PURCHASE, REDEMPTION AND PRICING OF SHARES..................................2-
PERFORMANCE CALCULATIONS....................................................2-
TAX INFORMATION.............................................................2-
BROKERAGE...................................................................2-
ORGANIZATION................................................................2-
INVESTMENT ADVISORY AGREEMENT...............................................2-
MANAGEMENT OF THE TRUST.....................................................2-
CORPORATE BOND RATINGS......................................................2-
ADDITIONAL INFORMATION......................................................2-
<PAGE>
PART 1
FUND HISTORY
The Trust is an open-end management investment company, which was
organized as a Delaware business trust on December 23, 1997. The Fund is a
diversified series of the Trust. A copy of the Declaration of Trust is on file
as an exhibit to the Trust's Registration Statement, of which this SAI is a
part.
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the "1940
Act"). Where necessary, an explanation beneath a fundamental policy describes
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. Diversification
The Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
Further Explanation of Diversification Policy:
To remain classified as a diversified investment company under the 1940
Act, the Fund must conform with the following: With respect to 75% of its total
assets, a diversified investment company may not invest more than 5% of its
total assets, determined at market or other fair value at the time of purchase,
in the securities of any one issuer, or invest in more than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These limitations do not apply to investments in securities issued or
guaranteed by the United States ("U.S.") government or its agencies or
instrumentalities.
2. Concentration
The 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:
The 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, the Fund may not issue senior
securities.
<PAGE>
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
The Fund may borrow from banks and enter into reverse repurchase
agreements in an amount up to 33-1/3% of its total assets, taken at market
value. The Fund may also borrow up to an additional 5% of its total assets from
banks or others. The Fund may borrow only as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. The
Fund may purchase additional securities as long as outstanding borrowings do not
exceed 5% of its total assets. The Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities.
The Fund may purchase securities on margin and engage in short sales to the
extent permitted by applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a) securities that
are directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may engage in financial futures
contracts and related options and currency contracts and related options and may
otherwise do so in accordance with applicable law and without registering as a
commodity pool operator under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The acquisition
of investment 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, the 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 the Fund lends its securities, it will require the borrower to
give the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
OTHER SECURITIES AND PRACTICES
For information regarding certain securities the Fund may purchase and
certain investment practices the Fund may use, see the following sections under
"Additional Information on Securities and Investment Practices" in Part 2 of
this SAI:
Money Market Instruments
U.S. Government Securities
When-Issued, Delayed-Delivery and Forward Commitment Transactions
Repurchase Agreements
Reverse Repurchase Agreements
Options and Futures Strategies
Swaps, Caps, Floors and Collars
Foreign Securities
Foreign Currency Transactions
Foreign Currency Futures Transactions
Illiquid and Restricted Securities
Investment in Other Investment Companies
Payment-in-kind Securities
Securities Lending
Convertible Securities
Warrants
Derivatives
Limited Partnerships
PRINCIPAL HOLDERS OF FUND SHARES
As of March 31, 2000, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding shares of any class of the Fund.
As of March 31, 2000, no person, to the Fund's knowledge, owned
beneficially or of record more than 5% of the outstanding shares of the Fund's
outstanding shares.
EXPENSES
Advisory Fee
Evergreen Investment Management Company ("EIMC"), is the Fund's
investment advisor. EIMC is entitled to receive from the Fund a fee
equal to the following annual percentages of the the Fund's average daily net
assets:
0.61% of the first $100,000,000
0.56% of the next $100,000,000
0.51% of the next $100,000,000
0.46% of the next $100,000,000
0.41% of the next $100,000,000
0.36% of the next $500,000,000
0.31% of the next $500,000,000
0.265 of the next $1,500,000,000
For more information, see "Investment Advisory Agreements" in Part 2 of
this SAI.
<PAGE>
Trustee Compensation
Listed below is the Trustee compensation paid by the Trust individually
for the fiscal year and calendar year ended December 31, 1999 by the Trust and
the eleven other trusts in the Evergreen Funds complex. The Trustees do not
receive pension or retirement benefits from the Funds. For more information, see
"Management of the Trust" in Part 2 of this SAI.
<TABLE>
<CAPTION>
------------------------------- ------------------------------ -----------------------------
Total Compensation from the
Evergreen Fund Complex for
Aggregate Compensation from the calendar year ended
the Trust for the fiscal 12/31/1999*
Trustee year ended 12/31/1999
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
<S> <C> <C>
Laurence B. Ashkin $92 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Charles A. Austin, III $92 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Arnold H. Dreyfuss** N/A N/A
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
K. Dun Gifford $90 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
James S. Howell*** $125 $97,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Leroy Keith Jr. $90 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Gerald M. McDonnell $92 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Thomas L. McVerry $109 $85,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Louis W. Moelchert** N/A N/A
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
William Walt Pettit $90 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
David M. Richardson $90 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Russell A. Salton, III $92 $77,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Michael S. Scofield $116 $102,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Richard J. Shima $90 $75,000
------------------------------- ------------------------------ -----------------------------
------------------------------- ------------------------------ -----------------------------
Richard K. Wagoner N/A N/A
------------------------------- ------------------------------ -----------------------------
</TABLE>
*Certain Trustees have elected to defer all or part of their
total compensation for the calendar year ended December 31,
1999. The amounts listed below will be payable in later years
to the respective Trustees:
Austin $11,250
Howell $77,600
McDonnell $75,000
McVerry $85,000
Pettit $75,000
Salton $77,000
** Arnold H. Dreyfuss, Louis Moelchert, Jr. and Richard K.
Wagoner were elected to the Board of Trustees on December 16,
1999.
*** As of January 1, 2000, James S. Howell retired and became
Trustee Emeritus.
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
the Fund, subject to the supervision and control of the Trust's Board of
Trustees. EIS provides the Fund with facilities, equipment and personnel and is
entitled to receive an annual fee equal to 0.10% of the average daily net assets
of the Fund.
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union
Corporation, is the Fund's transfer agent. ESC issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is P.O. Box 2121, Boston,
Massachusetts 02106-2121. The Fund pays ESC annual fees as follows:
---------------------- --------------------
Annual Fee Per Open Annual Fee
Account* Per
Closed Account**
---------------------- --------------------
---------------------- --------------------
$23.40 $9.00
---------------------- --------------------
* For shareholder accounts only.
** Closed accounts are maintained on the system in order to
facilitate historical and tax information.
Independent Auditors
KPMG LLP, 99 High Street, Boston, Massachusetts 02110, audits the
financial statements of the Fund.
Custodian
State Street Bank and Trust Company keeps custody of the Fund's
securities and cash and performs other related duties. The custodian's address
is 225 Franklin Street, Boston, Massachusetts 02110.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Fund. Its
address is 1025 Connecticut Avenue, NW, Washington, D.C. 20036.
<PAGE>
EVERGREEN VARIABLE ANNUITY FUNDS
Statement of Additional Information ("SAI")
PART 2
ADDITIONAL INFORMATION ON SECURITIES
AND INVESTMENT PRACTICES
The prospectus describes the Fund's investment objective and the
securities in which it primarily invests. The following describes other
securities the Fund may purchase and investment strategies it may use. Some of
the information below will not apply to the Fund in which you are interested.
Unless specifically stated, each Fund may invest in or use the strategies listed
below.
Money Market Instruments
The Fund may temporarily invest up to 100% of its assets in high
quality short-term obligations, such as notes, commercial paper, certificates of
deposit, banker's acceptances, bank deposits or U.S. government securities if,
in the opinion of the investment advisor, market conditions warrant a temporary
defensive investment strategy.
U.S. Government Securities
The Fund may invest in securities issued or guaranteed by U.S.
government agencies or instrumentalities.
These securities are backed by (1) the discretionary authority of the
U.S. government to purchase certain obligations of agencies or instrumentalities
or (2) the credit of the agency or instrumentality issuing the obligations.
Some government agencies and instrumentalities may not receive
financial support from the U.S. government. Examples of such agencies are:
(i) Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
Securities Issued by the Government National Mortgage Association
("GNMA")
The Fund may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
<PAGE>
Unlike conventional bonds, the principal on GNMA certificates is not
paid at maturity but over the life of the security in scheduled monthly
payments. While mortgages pooled in a GNMA certificate may have maturities of up
to 30 years, the certificate itself will have a shorter average maturity and
less principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due
not only to market fluctuations, but also to early prepayments of mortgages
within the pool. Since prepayment rates vary widely, it is impossible to
accurately predict the average maturity of a GNMA pool. In addition to the
guaranteed principal payments, GNMA certificates may also make unscheduled
principal payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. government securities, they may be less effective as a
means of locking in attractive long- term rates because of the prepayment
feature. For instance, when interest rates decline, prepayments are likely to
increase as the holders of the underlying mortgages seek refinancing. As a
result, the value of a GNMA certificate is not likely to rise as much as the
value of a comparable debt security would in response to same decline. In
addition, these prepayments can cause the price of a GNMA certificate originally
purchased at a premium to decline in price compared to its par value, which may
result in a loss.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Fund may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis.
Settlement of such transactions normally occurs within a month or more after the
purchase or sale commitment is made.
The Fund may purchase securities under such conditions only with the
intention of actually acquiring them, but may enter into a separate agreement to
sell the securities before the settlement date. Since the value of securities
purchased may fluctuate prior to settlement, the Fund may be required to pay
more at settlement than the security is worth. In addition, the purchaser is not
entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued,
delayed delivery or forward commitment basis the Fund will hold liquid assets
worth at least the equivalent of the amount due. The liquid assets will be
monitored on a daily basis and adjusted as necessary to maintain the necessary
value.
Purchases made under such conditions may involve the risk that yields
secured at the time of commitment may be lower than otherwise available by the
time settlement takes place, causing an unrealized loss to the Fund. In
addition, when the Fund engages in such purchases, it relies on the other party
to consummate the sale. If the other party fails to perform its obligations, the
Fund may miss the opportunity to obtain a security at a favorable price or
yield.
Repurchase Agreements
The Fund may enter into repurchase agreements with entities that are
registered as U.S. government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by the
investment advisor to be creditworthy. In a repurchase agreement the Fund
obtains a security and simultaneously commits to return the security to the
seller at a set price (including principal and interest) within period of time
usually not exceeding seven days. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security.
The Fund's custodian or a third party will take possession of the
securities subject to repurchase agreements, and these securities will be marked
to market daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund's investment advisor believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Fund will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker-dealers, which
are deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
Reverse Repurchase Agreements
As described herein, the Fund may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Options and Futures Strategies
The 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 the investment advisor plans to purchase through the writing and purchase
of options and the purchase or sale of futures contracts and related options.
Expenses and losses incurred as a result of such hedging strategies will reduce
the Fund's current return.
The ability of the Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. 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 the Fund will be able to utilize these instruments effectively for
the purposes stated below.
Writing Covered Options on Securities. The 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 the investment advisor determines is
appropriate in seeking to attain the Fund's investment objective. Call options
written by the 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.
The Fund may only write call options on a covered basis or for
cross-hedging purposes and will only write covered put options. 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 time 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. A call option is for cross-hedging purposes if
it is not covered, but is designed to provide a hedge against another security
which the Fund owns or has the right to acquire. In the case of a call written
for cross-hedging purposes or a put option, the Fund will maintain 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. The Fund may also write combinations of covered
puts and covered calls on the same underlying security.
The 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, the 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, the 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
market price plus the amount of the premium received.
The 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. The 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.
The 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.
The Fund may enter into financial futures contracts and write options
on such contracts. The Fund intends to enter into such contracts and related
options for hedging purposes. The Fund will enter into futures on securities or
index-based futures contracts in order to hedge against changes in interest or
exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities at a specified price during a designated
month. A futures contract on a securities index does not involve the actual
delivery of securities, but merely requires the payment of a cash settlement
based on changes in the securities index. The Fund does not make payment or
deliver securities upon entering into a futures contract. Instead, it puts down
a margin deposit, which is adjusted to reflect changes in the value of the
contract and which continues until the contract is terminated.
The Fund may sell or purchase futures contracts. When a futures
contract is sold by the Fund, the value of the contract will tend to rise when
the value of the underlying securities declines and to fall when the value of
such securities increases. Thus, the Fund sells futures contracts in order to
offset a possible decline in the value of its securities. If a futures contract
is purchased by the Fund, the value of the contract will tend to rise when the
value of the underlying securities increases and to fall when the value of such
securities declines. The Fund intends to purchase futures contracts in order to
establish what is believed by the investment advisor to be a favorable price or
rate of return for securities the Fund intends to purchase.
The Fund also intends to purchase put and call options on futures
contracts for hedging purposes. A put option purchased by the Fund would give it
the right to assume a position as the seller of a futures contract. A call
option purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order
to terminate a futures contract and may sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
Although futures and options transactions are intended to enable the
Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates or market prices could result in poorer performance
than if it had not entered into these transactions. Even if the investment
advisor correctly predicts interest rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities positions may be caused by differences
between the futures and securities markets or by differences between the
securities underlying the Fund's futures position and the securities held by or
to be purchased for the Fund. The Fund's investment advisor will attempt to
minimize these risks through careful selection and monitoring of the Fund's
futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but currently
intends to write such options only to close out options purchased by the Fund.
The Fund will not change these policies without supplementing the information in
the prospectus and SAI.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions. Unlike the purchase or sale of a security, the
Fund does not pay or receive money upon the purchase or sale of a futures
contract. Rather the Fund is required to deposit an amount of "initial margin"
in cash or U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is different
from that of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value the Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Limitations. The Fund will not purchase or sell futures contracts or options on
futures contracts 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 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 the Fund's ability to
terminate options and futures positions at times when the investment advisor
deems it desirable to do so. Although the Fund will not enter into an option or
futures position unless the investment advisor believes that a liquid market
exists for such option or future, there can be no assurance that the Fund will
be able to effect closing transactions at any particular time or at an
acceptable price. The investment advisor generally expects that options and
futures transactions for the Fund will be conducted on recognized exchanges. In
certain instances, however, the 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. The 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 the Fund's investment advisor to
forecast correctly interest rate movements and general stock market price
movements. The risk increases as the composition of the securities held by the
Fund diverges from the composition of the relevant option or futures contract.
Swaps, Caps, Floors and Collars
The Fund may enter into interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund would use these transactions as hedges and not as speculative
investments and would not sell interest rate caps or floors where it does not
own securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. 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 and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's Ratings Services
("S&P") or Moody's Investors Service, Inc. ("Moody's") or has an equivalent
rating from another nationally recognized securities rating organization or is
determined to be of equivalent credit quality by the Fund's investment advisor.
If there is a default by the counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. As a result, the
swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Foreign Securities
The Fund may invest in foreign securities or U.S. securities traded in
foreign markets. In addition to securities issued by foreign companies,
permissible investments may also consist of obligations of foreign branches of
U.S. banks and of foreign banks, including European certificates of deposit,
European time deposits, Canadian time deposits and Yankee certificates of
deposit. The Fund may also invest in Canadian commercial paper and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. issuers. Such
risks include the possibility of adverse political and economic developments;
imposition of withholding taxes on interest or other income; seizure,
nationalization, or expropriation of foreign deposits; establishment of exchange
controls or taxation at the source; greater fluctuations in value due to changes
in exchange rates, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
obligations. Such investments may also entail higher custodial fees and sales
commissions than domestic investments. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks.
The Fund may also invest in the stocks of companies located in emerging
markets. These countries generally have economic structures that are less
diverse and mature, and political systems that are less stable than those of
developed countries. Emerging markets may be more volatile than the markets of
more mature economies, and the securities of companies located in emerging
markets are often subject to rapid and large price fluctuations; however, these
markets may also provide higher long-term rates of return.
Foreign Currency Transactions
As one way of managing exchange rate risk, the Fund may enter into
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). The exchange rate for the transaction (the
amount of currency the Fund will deliver and receive when the contract is
completed) is fixed when the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The Fund intends to use these contracts to hedge
the U.S. dollar value of a security it already owns, particularly if the Fund
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Fund will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on the investment
advisor's ability to predict accurately the future exchange rates between
foreign currencies and the U.S. dollar. The value of the Fund's investments
denominated in foreign currencies will depend on the relative strengths of those
currencies and the U.S. dollar, and the Fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates also may affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders by the Fund. The Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental intervention, speculation and
other economic and political conditions. Although the Fund values its assets
daily in U.S. dollars, the 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 the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its portfolio investments. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same objectives as it
would through the use of forward foreign currency exchange contracts. The Fund
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 Fund will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the investment advisors, the
market for such options has developed sufficiently that the risks in connection
with such options are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts. Compared to the purchase
or sale of foreign currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to the Fund 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.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in securities
that are illiquid. A security is illiquid when the Fund cannot dispose of it in
the ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books. The Fund may invest in
"restricted" securities, i.e., securities subject to restrictions on resale
under federal securities laws. Rule 144A under the Securities Act of 1933 ("Rule
144A") allows certain restricted securities to trade freely among qualified
institutional investors. Since Rule 144A securities may have limited markets,
the Board of Trustees will determine whether such securities should be
considered illiquid for the purpose of determining the Fund's compliance with
the limit on illiquid securities indicated above. In determining the liquidity
of Rule 144A securities, the Trustees will consider: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades.
Investment in Other Investment Companies
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stocks of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, the Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
Payment-in-kind Securities
Payment-in-kind ("PIK") securities pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
issuer's option to pay in additional securities typically ranges from one to six
years, compared to an average maturity for all PIK securities of eleven years.
Call protection and sinking fund features are comparable to those offered on
traditional debt issues.
PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Several PIKs are senior debt. In other cases,
where PIKs are subordinated, most senior lenders view them as equity
equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities
- -- is that interest payments are automatically compounded (reinvested) at the
stated coupon rate, which is not the case with cash-paying securities. However,
PIKs are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest).
Their price is expected to reflect an amount representing accredit interest
since the last payment. PIKs generally trade at higher yields than comparable
cash-paying securities of the same issuer. Their premium yield is the result of
the lesser desirability of non-cash interest, the more limited audience for
non-cash paying securities, and the fact that many PIKs have been issued to
equity investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital.
Securities Lending
The Fund may lend portfolio securities to brokers, dealers and other
financial institutions to earn additional income for the Fund. These
transactions must be fully collateralized at all times with cash or short-term
debt obligations, but involve some risk to the Fund if the other party should
default on its obligation and the Fund is delayed or prevented from exercising
its rights in respect of the collateral. Any investment of collateral by the
Fund would be made in accordance with the Fund's investment objective and
policies described in the prospectus.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities
include fixed-income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock at the
option of the holder during a specified period. Convertible securities may take
the form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allow convertible securities to be employed for a
variety of investment strategies.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of its investment adviser, the
investment characteristics of the underlying common shares will assist the Fund
in achieving its investment objective. The Fund may also elect to hold or trade
convertible securities. In selecting convertible securities, the investment
advisor evaluates the investment characteristics of the convertible security as
a fixed-income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the investment advisor 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.
<PAGE>
Warrants
The Fund may invest in warrants. Warrants are options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than one year to twenty years, or
they may be perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, a warrant is worthless if the market price of
the common stock does not exceed the warrant's exercise price during the life of
the warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock.
Derivatives
To the extent provided for elsewhere in this SAI, the Fund may use
derivatives while seeking to achieve its investment objective. Derivatives are
financial contracts whose value depends on, or is derived from, the value of an
underlying asset, reference rate or index. These assets, rates, and indices may
include bonds, stocks, mortgages, commodities, interest rates, currency exchange
rates, bond indices and stock indices. Derivatives can be used to earn income or
protect against risk, or both. For example, one party with unwanted risk may
agree to pass that risk to another party who is willing to accept the risk, the
second party being motivated, for example, by the desire either to earn income
in the form of a fee or premium from the first party, or to reduce its own
unwanted risk by attempting to pass all or part of that risk to the first party.
Derivatives can be used by investors such as the Fund to earn income
and enhance returns, to hedge or adjust the risk profile of the portfolio, and
in place of more traditional direct investments to obtain exposure to otherwise
inaccessible markets. The Fund is permitted to use derivatives for one or more
of these purposes. The use of derivatives for non-hedging purposes entails
greater risks. The Fund uses futures contracts and related options as well as
forwards for hedging purposes. Derivatives are a valuable tool, which, when used
properly, can provide significant benefit to Fund shareholders. However, the
Fund may take positions in those derivatives that are within its investment
policies if, in the investment advisor's judgment, this represents an effective
response to current or anticipated market conditions. An investment advisor's
use of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments - options,
futures, forwards and swaps - from which virtually any type of derivative
transaction can be created. Further information regarding options, futures,
forwards and swaps is provided elsewhere in this section.
Debt instruments that incorporate one or more of these building blocks
for the purpose of determining the principal amount of and/or rate of interest
payable on the debt instruments are often referred to as "structured
securities". An example of this type of structured security is indexed
commercial paper. The term is also used to describe certain securities issued in
connection with the restructuring of certain foreign obligations.
The term "derivative" is also sometimes used to describe securities
involving rights to a portion of the cash flows from an underlying pool of
mortgages or other assets from which payments are passed through to the owner
of, or that collateralize, the securities. See "Mortgage- Backed and
Asset-Backed Securities," above.
While the judicious use of derivatives by experienced investment
managers such as the Fund's investment advisor 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 Fund.
<PAGE>
* Market Risk - This is the general risk attendant to all investments
that the value of a particular investment will decline or otherwise change in a
way which is detrimental to the Fund's interest.
* Management Risk - Derivative products are highly specialized
instruments that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess the risk that a derivative adds
to a Fund's portfolio and the ability to forecast price, interest rate or
currency exchange rate movements correctly.
* Credit Risk - This is the risk that a loss may be sustained by the
Fund as a result of the failure of another party to a derivative (usually
referred to as a "counterparty") to comply with the terms of the derivative
contract. The credit risk for exchange-traded derivatives is generally less than
for privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a guarantee
of performance. This guarantee is supported by a daily payment system (i.e.,
margin requirements) operated by the clearing house in order to reduce overall
credit risk. For privately negotiated derivatives, there is no similar clearing
agency guarantee. Therefore, the Fund's investment advisor considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk - Liquidity risk exists when a particular instrument
is difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
* Leverage Risk - Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks - Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to correlate
perfectly with underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to the Fund. Derivatives do
not always perfectly or even highly correlate or track the value of the assets,
rates or indices they are designed to closely track. Consequently, the Fund's
use of derivatives may not always be an effective means of, and sometimes could
be counterproductive to, furthering the Fund's investment objective.
Limited Partnerships
The Fund may invest in limited and master limited partnerships. A
limited partnership is a partnership consisting of one or more general partners,
jointly and severally responsible as ordinary partners, and by whom the business
is conducted, and one or more limited partners who contribute cash as capital to
the partnership and who generally are not liable for the debts of the
partnership beyond the amounts contributed. Limited partners are not involved in
the day-to-day management of the partnership. They receive income, capital gains
and other tax benefits associated with the partnership project in accordance
with terms established in the partnership agreement. Typical limited
partnerships are in real estate, oil and gas and equipment leasing, but they
also finance movies, research and development, and other projects.
For an organization classified as a partnership under the Internal
Revenue Code of 1986, as amended (the "Code"), each item of income, gain, loss,
deduction, and credit is not taxed at the partnership level but flows through to
the holder of the partnership unit. This allows the partnership to avoid double
taxation and to pass through income to the holder of the partnership unit at
lower individual rates.
A master limited partnership is a publicly traded limited partnership.
The partnership units are registered with the Securities and Exchange Commission
("SEC") and are freely exchanged on a securities exchange or in the
over-the-counter market.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Shares of the Trust are sold continuously to variable annuity and
variable life insurance accounts of participating insurance companies and to
qualified pension and retirement plans. The Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when (1)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC, (2) the Exchange is closed for other than customary weekend and holiday
closings, (3) the SEC has by order permitted such suspension, or (4) an
emergency exists as determined by the SEC.
The Trust may redeem shares involuntarily if redemption appears
appropriate in light of the Trust's responsibilities under the 1940 Act.
Calculation of Net Asset Value
The Fund calculates its net asset value ("NAV") once daily on Monday
through Friday, as described in the prospectus. The Fund will not compute its
NAV on the days the New York Stock Exchange is closed: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The NAV of the Fund is calculated by dividing the value of the Fund's
net assets attributable to that class by all of the shares issued for that
class.
Valuation of Portfolio Securities
Current values for the Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on an established securities exchange or
the over-the-counter National Market System ("NMS") are valued on the basis of
the last sales price on the exchange where primarily traded or on the NMS prior
to the time of the valuation, provided that a sale has occurred.
(2) Securities traded on an established securities exchange or in the
over-the-counter market for which there has been no sale and other
securities traded in the over-the-counter market are valued at the mean
of the bid and asked prices at the time of valuation.
(3) Short-term investments maturing in more than sixty days, for which
market quotations are readily available, are valued at current market
value.
(4) Short-term investments maturing in sixty days or less are valued at
amortized cost, which approximates market.
(5) Securities, including restricted securities, for which market
quotations are not readily available; listed securities or those on NMS
if, in the investment advisor's opinion, the last sales price does not
reflect an accurate current market value; and other assets are valued
at prices deemed in good faith to be fair under procedures established
by the Board of Trustees.
Foreign securities are generally valued on the basis of valuations provided by a
pricing service, approved by the Trust's Board of Trustees, which uses
information with respect to transactions in such securities, quotations from
broker-dealers, market transactions in comparable securities, and various
relationships between securities and yield to maturity in determining value.
PERFORMANCE CALCULATIONS
Total Return
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods. The following
is the formula used to calculate average annual total return:
n
P(1+T) =ERV
P= initial payment of $1,000
T= average total return
n= number of years
ERV= ending redeemable value of the initial $1,000
Non-Standardized Performance
From time to time, the Fund may quote its performance in advertising
and other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average,
Russell 2000 Index or any other commonly quoted index of common stock or fixed
income prices. The Fund's performance may also be compared to those of other
mutual funds having similar objectives. This comparative performance would be
expressed as a ranking prepared by Lipper Analytical Services, Inc. or similar
independent services monitoring mutual fund performance. The Fund's performance
will be calculated by assuming, to the extent applicable, reinvestment of all
capital gains distributions and income dividends paid. Any such comparisons may
be useful to investors who wish to compare a Fund's past performance with that
of its competitors. Of course, past performance cannot be a guarantee of future
results.
TAX INFORMATION
Requirements for Qualifications as a Regulated Investment Company
<PAGE>
The Fund intends to qualify for and elect the tax treatment applicable
to regulated investment companies ("RIC") under Subchapter M of the Code. (Such
qualification does not involve supervision of management or investment practices
or policies by the Internal Revenue Service.) In order to qualify as a RIC, the
Fund must, among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to proceeds from securities loans,
gains from the sale or other disposition of securities or foreign currencies and
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such securities; and (ii)
diversify its holdings so that, at the end of each quarter of its taxable year,
(a) at least 50% of the market value of the Fund's total assets is represented
by cash, U.S. government securities and other securities limited in respect of
any one issuer, to an amount not greater than 5% of the Fund's total assets and
10% of the outstanding voting securities of such issuer, and (b) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. government securities and securities of other regulated
investment companies). By so qualifying, the Fund is not subject to federal
income tax if it timely distributes its investment company taxable income and
any net realized capital gains. For a discussion of the tax consequences of
variable annuity contracts or variable life insurance policies, refer to the
prospectus of the variable annuity contracts and variable life insurance
policies offered by the participating insurance company. Variable annuity
contracts and variable life insurance policies purchased through insurance
company separate accounts provide for the accumulation of all earnings from
interest, dividends, and capital appreciation without current federal income tax
liability for an individual owner. Different rules apply to corporations,
taxable trusts, or other entities which own variable annuity contracts.
Depending on the variable annuity contract or variable life insurance policy,
distributions from the contract or policy may be subject to ordinary income tax
and, in addition, a 10% penalty tax on distributions before age 59-1/2. Only the
portion of a distribution attributable to income on the investment in the
contract or policy is subject to federal income tax. Investors should consult
with competent tax advisors for a more complete discussion of possible tax
consequences in a particular situation.
The Fund will not be subject to the 4% federal excise tax imposed on
registered investment companies that do not distribute all of their income and
gains each calendar year because such tax does not apply to a registered
investment company whose only shareholders are segregated asset accounts of
participating insurance companies held in connection with the variable annuity
contracts and/or variable life insurance policies.
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts and variable life insurance
policies. The Code provides that variable annuity contracts and/or variable life
insurance policies shall not be treated as an annuity contract or life insurance
policy for the current or any prior period for which the investments are not, in
accordance with regulations prescribed by the U.S. Treasury Department,
adequately diversified. Disqualification of the contract or policy as an annuity
contract or life insurance policy would result in immediate imposition of
federal income tax on variable annuity contracts and variable life insurance
policy owners with respect to earnings allocable to the contract or policy
(including, upon disqualification, accumulated earnings), and the tax liability
would generally arise prior to the receipt of payments under the contract.
Section 817(h)(2) of the Code is a safe harbor provision which provides that
variable annuity contracts and variable life insurance policies meet the
diversification requirements if, as of the close of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than 55% of the total assets consists of cash, cash items, U.S.
government securities and securities of other regulated investment companies.
The U.S. Treasury Department has issued Regulations (Treas. Reg. section
1.817-5) that establish diversification requirements for the investment
portfolios underlying variable insurance contracts. The Regulations amplify the
diversification requirements for variable annuity contracts and variable life
insurance policies set forth in Section 817(h) of the Code and provide an
alternative to the safe harbor provision described above. Under the Regulations,
an investment portfolio will be deemed adequately diversified if: (1) no more
than 55% of the value of the total assets of the portfolio is represented by any
one investment; (2) no more than 70% of such value is represented by any two
investments; (3) no more than 80% of such value is represented by any three
investments; and (4) no more than 90% of such value is represented by any four
investments. For purposes of these Regulations all securities of the same issuer
are treated as a single investment. The Regulations provide that, in the case of
a regulated investment company whose shares are available to the public only
through variable insurance contracts which meet certain other requirements, the
diversification tests are applied by reference to the underlying assets owned by
the regulated investment company rather than by reference to the shares of the
regulated investment company owned under the annuity contract. The Fund intends
to meet the requirements for application of the diversification tests on this
look-through basis. The Code provides that for purposes of determining whether
or not the diversification standards imposed on the underlying assets of
variable insurance contracts by Section 817(h) of the Code have been met, each
U.S. government agency or instrumentality shall be treated as a separate issuer.
The Fund will be managed in such a manner as to comply with the
diversification requirements. It is possible that in order to comply with the
diversification requirements, less desirable investment decisions may be made
which would affect the investment performance of the Fund.
Other Tax Considerations
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisors regarding specific questions relating to federal,
state and local tax consequences of investing in shares of the Fund. Each
shareholder who is not a U.S. person should consult his or her tax advisor
regarding the U.S. and foreign tax consequences of ownership of shares of the
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
BROKERAGE
Brokerage Commissions
If the Fund invests in equity securities, it expects to buy and sell
them through brokerage transactions for which commissions are payable. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
If the Fund invests in fixed income securities, it expects to buy and
sell them directly from the issuer or an underwriter or market maker for the
securities. Generally, the Fund will not pay brokerage commissions for such
purchases. When the Fund buys a security from an underwriter, the purchase price
will usually include an underwriting commission or concession. The purchase
price for securities bought from dealers serving as market makers will similarly
include the dealer's mark up or reflect a dealer's mark down. When the Fund
executes transactions in the over-the-counter market, it will deal with primary
market makers unless more favorable prices are otherwise obtainable.
Selection of Brokers
When buying and selling portfolio securities, the investment advisor
seeks brokers who can provide the most benefit to the Fund. When selecting a
broker, an investment advisor will primarily look for the best price at the
lowest commission, but in the context of the broker's:
1. ability to provide the best net financial result to the Fund;
2. efficiency in handling trades;
3. ability to trade large blocks of securities;
4. readiness to handle difficult trades;
5. financial strength and stability; and
6. provision of "research services," defined as (a) reports and
analyses concerning issuers, industries, securities and
economic factors and (b) other information useful in making
investment decisions.
<PAGE>
The Fund may pay higher brokerage commissions to a broker providing it
with research services, as defined in item 6, above. Pursuant to Section 28(e)
of the Securities Exchange Act of 1934, this practice is permitted if the
commission is reasonable in relation to the brokerage and research services
provided. Research services provided by a broker to the investment advisor do
not replace, but supplement, the services the investment advisor is required to
deliver to the Fund. It is impracticable for the investment advisor to allocate
the cost, value and specific application of such research services among its
clients because research services intended for one client may indirectly benefit
another.
When selecting a broker for portfolio trades, the investment advisor
may also consider the amount of Fund shares a broker has sold, subject to the
other requirements described above.
Simultaneous Transactions
The investment advisor makes investment decisions for the Fund
independently of decisions made for its other clients. When a security is
suitable for the investment objective of more than one client, it may be prudent
for an investment advisor to engage in a simultaneous transaction, that is, buy
or sell the same security for more than one client. The investment advisor
strives for an equitable result in such transactions by using an allocation
formula. The high volume involved in some simultaneous transactions can result
in greater value to the Fund, but the ideal price or trading volume may not
always be achieved for the Fund.
<PAGE>
ORGANIZATION
The foregoing is qualified in its entirety by reference to the
Declaration of Trust.
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
Voting Rights
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. At meetings called for the initial election of Trustees
or to consider other matters, each share is entitled to one vote for each dollar
of net asset value applicable to such share. Shares generally vote together as
one class on all matters. Classes of shares of the Fund have equal voting
rights. No amendment may be made to the Declaration of Trust that adversely
affects any class of shares without the approval of a majority of the votes
applicable to the shares of that class. Shares have non-cumulative voting
rights, which means that the holders of more than 50% of the votes applicable to
shares voting for the election of Trustees can elect 100% of the Trustees to be
elected at a meeting and, in such event, the holders of the remaining shares
voting will not be able to elect any Trustees.
<PAGE>
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law (for such reasons as electing or removing Trustees, changing fundamental
policies, and approving advisory agreements or 12b-1 plans), unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
Limitation of Trustees' Liability
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
Banking Laws
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered, open-end investment companies such as the Trust. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment advisor, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer, FUNB and
its affiliates are subject to, and in compliance with, the aforementioned laws
and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB and its affiliates being prevented
from continuing to perform the services required under the investment advisory
contract or from acting as agent in connection with the purchase of shares of
the Fund by its customers. If FUNB and its affiliates were prevented from
continuing to provide for services called for under the investment advisory
agreement, it is expected that the Trustees would identify, and call upon the
Fund's shareholders to approve a new investment advisor. If this were to occur,
it is not anticipated that the shareholders of the Fund would suffer any adverse
financial consequences.
INVESTMENT ADVISORY AGREEMENT
On behalf of the Fund, the Trust has entered into an investment
advisory agreement with the Fund's investment advisor (the "Advisory
Agreement"). Under the Advisory Agreement, and subject to the supervision of the
Trust's Board of Trustees, the investment advisor furnishes to the Fund
investment advisory, management and administrative services, office facilities,
and equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. The investment advisor pays for all of the
expenses incurred in connection with the provision of its services. The Fund
pays for all charges and expenses, other than those specifically referred to as
being borne by the investment advisor, including, but not limited to, (1)
custodian charges and expenses; (2) bookkeeping and auditors' charges and
expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees (Trustees who are not "interested" persons of the Trust as
defined in the 1940 Act); (5) brokerage commissions, brokers' fees and expenses;
(6) issue and transfer taxes; (7) taxes and trust fees payable to governmental
agencies; (8) the cost of share certificates; (9) fees and expenses of the
registration and qualification of the Fund and its shares with the SEC or under
state or other securities laws; (10) expenses of preparing, printing and mailing
prospectuses, SAIs, notices, reports and proxy materials to shareholders of the
Fund; (11) expenses of shareholders' and Trustees' meetings; (12) charges and
expenses of legal counsel for the Fund and for the Independent Trustees on
matters relating to the Fund; (13) charges and expenses of filing annual and
other reports with the SEC and other authorities; and (14) all extraordinary
charges and expenses of the Fund. For information on advisory fees paid by the
Fund, see "Expenses" in Part 1 of this SAI.
<PAGE>
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of the
Fund's outstanding shares. In either case, the terms of the Advisory Agreement
and continuance thereof must be approved by the vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment advisor. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment advisor. The Fund may
engage in such transaction if it is equitable to each participant and consistent
with each participant's investment objective.
<PAGE>
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interest of the shareholders. The Trustees meet periodically
throughout the year to oversee the Fund's activities, reviewing, among other
things, the Fund's performance and its contractual arrangements with various
service providers. Each Trustee is paid a fee for his or her services.
See "Expenses-Trustee Compensation" in Part 1 of this SAI.
The Trust has an Executive Committee which consists of the Chairman of
the Board, Michael S. Scofield, and K. Dun Gifford and Russell Salton, each of
whom is an Independent Trustee. The Executive Committee recommends Trustees to
fill vacancies, prepares the agenda for Board Meetings and acts on routine
matters between scheduled Board meetings.
Set forth below are the Trustees and officers of the Trust and their
principal occupations and affiliations over the last five years. Unless
otherwise indicated, the address for each Trustee and officer is 200 Berkeley
Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of each of
the other Trusts in the Evergreen Fund complex.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Position with Trust Principal Occupations for Last Five Years
Laurence B. Ashkin Trustee Real estate developer and construction consultant; and
(DOB: 2/2/1928) President of Centrum Equities and Centrum Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.; former
(DOB: 10/23/1934) Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice);
Director, The Andover Companies (Insurance); and Trustee,
Arthritis Foundation of New England.
Arnold H. Dreyfuss Trustee Chairman, Eskimo Pie Corporation; Trustee, Mentor Funds,
(DOB: 9/2/1928) Mentor Variable Investment Portfolios, Mentor Institutional
Trust, and Cash Resource Trust; Director, America's Utility
Fund, Inc.; Formerly, Chairman and Chief Executive Officer,
Hamilton Beach/Proctor-Silex, Inc.
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/1938) 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).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/1939) Products Company; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund;
and former President, Morehouse College.
Gerald M. McDonnell Trustee Sales and Marketing Management with Nucor-Yamoto, Inc.
(DOB: 7/14/1939) (steel producer).
Louis W. Moelchert, Jr. (DOB: Trustee President, Private Advisors, LLC; Vice President for
12/20/41) Investments, University of Richmond; Director, America's
Utility Fund, Inc.; Trustee, The Common Fund, Mentor
Variable Investment Portfolios, Mentor Funds, Mentor
Institutional Trust, and Cash Resource Trust.
Thomas L. McVerry Trustee Former Vice President and Director of Rexham Corporation
(DOB: 8/2/39) (manufacturing); and former Director of Carolina
Cooperative Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/1955)
David M. Richardson Trustee President, Richardson & Runden & Company (executive search
(DOB: 9/14/1941) and advisory services); former Vice Chairman DHR
International, Inc. (executive recruitment); former Senior
Vice President, Boyden International Inc. (executive
recruitment); and Director, Commerce and Industry
Association of New Jersey, 411 International, Inc., and J&M
Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health Services;
(DOB: 6/2/47) former Managed Health Care Consultant; and former
President, Primary Physician Care.
Michael S. Scofield Chairman of the Board Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/1943) of Trustees
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/1939) 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.
Richard K. Wagoner, CFA Trustee Former Chief Investment Officer, Executive Vice President
(DOB: 12/12/1937) and Head of Capital Management Group, First Union
Corporation; former consultant to the Board of Trustees of
the Evergreen Funds; former member, New York Stock Exchange;
member, North Carolina Securities Traders Association;
member, Financial Analysts Society.
Anthony J. Fischer* President and Treasurer Vice President/Clients Services, BISYS Fund Services.
(DOB: 2/10/1959)
Nimish S. Bhatt** Vice President and Vice President, Tax, BISYS Fund Services; former Assistant
(DOB: 6/6/63) Assistant Treasurer Vice President, EAMC/First Union Bank; former Senior Tax
Consulting/Acting Manager, Investment Companies Group,
Pricewaterhouse-Coopers LLP, New York.
Bryan Haft** Vice President Team Leader, Fund Administration, BISYS Fund Services.
(DOB: 1/23/65)
Michael H. Koonce Secretary Senior Vice President and Assistant General Counsel, First
(DOB: 4/20/60) Union Corporation; former Senior Vice President and General
Counsel, Colonial Management Associates, Inc.
</TABLE>
*Address: BISYS, 90 Park Avenue, New York, New York 10016
**Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
CORPORATE BOND RATINGS
The Fund relies on ratings provided by independent rating services to
help determine the credit quality of bonds and other obligations the Fund
intends to purchase or already owns. A rating is an opinion of an issuer's
ability to pay interest and/or principal when due. Ratings reflect an issuer's
overall financial strength and whether it can meet its financial commitments
under various economic conditions.
If a security held by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are S&P and Moody's. The Fund may also rely on ratings provided by
Fitch. Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The `Credit Quality'
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
<PAGE>
COMPARISON OF LONG-TERM BOND RATINGS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
----------------- ---------------- --------------- =================================================
MOODY`S S&P FITCH Credit Quality
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Aaa AAA AAA Excellent Quality (lowest risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Aa AA AA Almost Excellent Quality (very low risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
A A A Good Quality (low risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Baa BBB BBB Satisfactory Quality (some risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Ba BB BB Questionable Quality (definite risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
B B B Low Quality (high risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
D DDD/DD/D In Default
----------------- ---------------- --------------- =================================================
</TABLE>
LONG-TERM RATINGS
Moody's Corporate Long-Term Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as `gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e.
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
<PAGE>
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to Caa. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Corporate Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC,
CC, and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
<PAGE>
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
o On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
o Upon voluntary bankruptcy filing or similar action. An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Corporate Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category. Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met.
Securities rated in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
<PAGE>
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitment is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e. below 50%.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
SHORT-TERM RATINGS
Moody's Corporate Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P Corporate Short-Term Obligation Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment
on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
o On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
o Upon voluntary bankruptcy filing or similar action, An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Fitch Corporate Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added `+' to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
S&P Commercial Paper Ratings
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments of principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, SAI or in supplemental sales literature issued by the Fund or the
Distributor, and no person is entitled to rely on any information or
representation not contained therein.
The Fund's prospectus and SAI omit certain information contained in the
Trust's registration statement, which you may obtain for a fee from the SEC in
Washington, D.C., or for free from the SEC's website: http://www.sec.gov.
<PAGE>
EVERGREEN VARIABLE ANNUITY TRUST
PART C
OTHER INFORMATION
Item 23. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Location
- ------- ----------- --------
<S> <C> <C>
(a) Declaration of Trust Incorporated by reference to
Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998.
(b) By-Laws Incorporated by reference to
Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998.
(c) Provisions of instruments Incorporated by reference to
defining the rights of holders Registrant's Post-Effective
of the securities being Amendment No. 7 filed on June 5, 1998.
registered are contained in the
Declaration of Trust Articles II,
III.(6)(c), VI.(3), IV.(8), V, VI,
VII, VIII and By-laws Articles II,
III and VIII
(d)(1) Investment Advisory and Incorporated by reference to
Management Agreement between Registrant's Post-Effective
the Registrant and First Amendment No. 16 filed on September 28, 1999.
Union National Bank
(d)(2) Investment Advisory and Incorporated by reference to
Management Agreement between the Registrant's Post-Effective
Registrant and Evergreen Asset Amendment No. 5 filed on March 20, 1998.
Management Corp.
(d)(3) Sub-Advisory Agreement between Incorporated by reference to
Evergreen Asset Management Corp. Registrant's Post-Effective
and Lieber & Company Amendment No. 8 filed on October 19, 1998.
(d)(4) Portfolio Management Incorporated by reference to
Agreement between sub-advisors Registrant's Post-Effective
to Evergreen VA Masters Fund and Amendment No. 9 filed on February 26, 1999.
First Union National Bank.
(d)(5) Form of Investment Advisory and Contained herein.
Management Agreement between the
Registrant and Evergreen
Investment Management Company
(formerly Keystone Investment
Management Company)
(d)(6) Investment Advisory and Incorporated by reference to
Management Agreement between Registrant's Post-Effective
the Registrant and Meridian Amendment No. 16 filed on September 28, 1999.
Investment Company
(d)(7) Investment Advisory and Incorporated by reference to
Management Agreement between the Registrant's Post-Effective
Registrant and Mentor Investment Amendment No. 17 filed on September 29, 1999.
Advisors LLC
(d)(8) Investment Advisory and Incorporated by reference to
Management Agreement between the Registrant's Post-Effective
Registrant and Mentor Perpetual Amendment No. 17 filed on September 29, 1999.
Advisors LLC
(e) Not applicable
(f) Not applicable
(g)(1) Custodian Agreement between the Incorporated by reference to
Registrant and State Street Bank Registrant's Post-Effective
and Trust Company Amendment No. 6 filed on April 28, 1998.
(g)(2) Letter Amendment to Custodian Incorporated by reference to
Agreement between Registrant and Registrant's Post-Effective
State Street Bank and Trust Amendment No. 16 filed on September 28, 1999.
Company (VA Equity Index Fund
and VA Special Equity Fund)
(g)(3) Letter Amendment to Custodian Incorporated by reference to
Agreement between Registrant and Registrant's Post-Effective
State Street Bank and Trust Amendment No. 17 filed on
Company (VA Capital Growth Fund, September 29, 1999.
VA Growth Fund, VA High Income
Fund and VA Perpetual
International Fund)
(g)(4) Form of Letter Amendment to Contained herein.
Custodian Agreement between
Registrant and State Street Bank
and Trust Company (VA Blue Chip
Fund)
(h)(1) Administration Services Agreement Incorporated by reference to
between Evergreen Investment Registrant's Post-Effective
Services, Inc. and the Amendent No. 17 filed on
Registrant (VA Capital Growth September 29, 1999.
Fund, VA Equity Index Fund, VA
Fund, VA Foundation Fund, VA
Global Leaders Fund, VA Growth
and Income Fund, VA Growth Fund,
VA High Income Fund, VA
International Growth Fund, VA
Masters Fund, VA Omega Fund, VA
Perpetual International Fund,
VA Strategic Income Fund, VA
Special Equity Fund)
(h)(2) Form of Administration Services Contained herein.
Agreement between Evergreen
Investment Services, Inc. and
the Registrant (VA Blue Chip Fund)
(h)(3) Transfer Agent Agreement Incorporated by reference to
between the Registrant and Registrant's Post-Effective
Evergreen Service Company Amendment No. 6 filed on April 28, 1998.
(h)(4) Letter Amendment to Transfer Incorporated by reference to
Agent Agreement between the Registrant's Post-Effective
Registrant and Evergreen Service Amendment No. 16 filed on September 28, 1999.
Company (VA Equity Index Fund
and VA Special Equity Fund)
(h)(5) Letter Amendment to Transfer Incorporated by reference to
Agent Agreement between the Registrant's Post-Effective
Registrant and Evergreen Service Amendment No. 17 filed on September 29, 1999.
Company (VA Capital Growth Fund,
and VA Growth Fund, VA High Income
Fund and VA Perpetual International
Fund)
(h)(6) Form of Letter Amendment to Contained herein.
Transfer Agent Agreement between
the Registrant and Evergreen
Service Company (VA Blue Chip Fund)
(i) Opinion and Consent of Sullivan Incorporated by reference to
& Worcester LLP Registrant's Post-Effective
Amendment No. 5 filed on March 20, 1998.
(j) Consent of KPMG LLP Incorporated by reference to
(Evergreen VA Aggressive Registrant's Post-Effective
Growth Fund, Evergreen VA Amendment No. 9 filed on February 26, 1999
Fund, Evergreen VA Foundation
Fund, Evergreen VA Global
Leaders Fund, Evergreen VA
Growth and Income Fund,
Evergreen VA International
Growth Fund, Evergreen VA
Small Cap Equity Income
Fund and Evergreen VA
Strategic Income Fund)
(k) Not applicable
(l) Not applicable
(m) Not applicable
(n) Not applicable
(o) Not applicable
</TABLE>
Item 24. Persons Controlled by or Under Common Control with
Registrant.
None
Item 25. Indemnification
Registrant has obtained from a major insurance carrier and trustees and
officers liability policy covering certain types of errors and omissions.
Provisions for the indemnification of the Registrant's Trustee and
officers are also contained in the Registrant's Declaration of Trust.
Provisions for the indemnification of Registrant's Investment Advisors
are contained in their respective Investment Advisory and Management Agreements.
Provisions for the indemnification of Evergreen Distributor, Inc., the
Registrant's principal underwriter, are contained in each Principal Underwriting
Agreement between Evergreen Distributor, Inc. and the Registrant.
Provisions for the indemnification of Evergreen Service Company, the
Registrant's transfer agent, are contained in the Master Transfer and
Recordkeeping Agreement between Evergreen Service Company and the Registrant.
Provisions for the indemnification of State Street Bank and Trust
Company, the Registrant's custodian, are contained in the Custodian Agreement
between State Street Bank and Trust Company and the Registrant.
Item 26. Business or Other Connections of Investment Adviser.
The Directors and principal executive officers of First Union National
Bank are:
Edward E. Crutchfield, Jr. Chairman and Chief Executive Officer,
First Union Corporation; Chief Executive
Officer and Chairman, First Union National
Bank
G. Kennedy Thompson President and Director, First Union
Corporation and First Union National Bank
Mark C. Treanor Executive Vice President, Secretary &
General Counsel, First Union Corporation;
Secretary and Executive Vice President,
First Union National Bank
Robert T. Atwood Executive Vice President and Chief Financial
Officer, First Union Corporation; Chief
Financial Officer and Executive Vice
President
All of the above persons are located at the following address: First
Union National Bank, One First Union Center, Charlotte, NC 28288.
The information required by this item with respect to Evergreen Asset
Management Corp. is incorporated by reference to the Form ADV (File No.
801-46522) of Evergreen Asset Management Corp.
The information required by this item with respect to Evergreen
Investment Management Company (formerly Keystone Investment Management Company)
is incorporated by reference to the Form ADV (File No. 801-8327) of Evergreen
Investment Management Company.
Item 27. Principal Underwriters.
Evergreen Distributor, Inc., acts as principal underwriter for each
registered investment company or series thereof that is a part of the Evergreen
"fund complex" as such term is defined in Item 22(a) of Schedule 14A under the
Securities Exchange Act of 1934.
The Directors and principal executive officers of Evergreen
Distributor, Inc. are:
Dennis Sheehan Director, Chief Financial Officer
Maryann Bruce President
Kevin J. Dell Vice President, General Counsel and Secretary
Messrs. Sheehan and Dell are located at the following address:
Evergreen Distributor, Inc., 90 Park Avenue, New York, New York 10019.
Ms. Bruce is located at 201 South College Street, Charlotte, NC 28288.
Item 28. Location of Accounts and Records.
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Evergreen Investment Services, Inc., Evergreen Service Company and
Evergreen Investment Management Company (formerly Keystone Investment Management
Company), all located at 200 Berkeley Street, Boston, Massachusetts 02110
First Union National Bank, One First Union Center, 301 S. College
Street, Charlotte, North Carolina 28288
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase,
New York 10577
Meridian Investment Company, 55 Valley Stream Parkway, Malvern,
Pennsylvania 19355
Mentor Investment Advisors LLC, 901 East Byrd Street, Richmond,
Virginia 23219.
Mentor Perpetual Advisors LLC, 901 East Byrd Street, Richmond, Virginia
23219.
Iron Mountain, 3431 Sharp Slot Road, Swansea, Massachusetts 02777
State Street Bank and Trust Company, 2 Heritage Drive, North Quincy,
Massachusetts 02171
Item 29. Management Services.
Not Applicable
Item 30. Undertakings.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York, and State of New York, on the 2nd day of
February, 2000.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ Anthony J. Fischer
---------------------------
Name: Anthony J. Fischer
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 2nd day of February, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Anthony J. Fischer /s/ Laurence B. Ashkin /s/ Charles A. Austin, III
- ---------------------- --------------------- -------------------------
Anthony J. Fischer Laurence B. Ashkin* Charles A. Austin III *
President and Treasurer Trustee Trustee
(Principal Financial and
Accounting Officer)
/s/ K. Dun Gifford /s/ Arnold H. Dreyfuss /s/ William Walt Pettit
- ------------------ ---------------------- ------------------------
K. Dun Gifford* Arnold H. Dreyfuss* William Walt Pettit*
Trustee Trustee Trustee
/s/ Gerald M. McDonnell /s/ Thomas L. McVerry /s/ Michael S. Scofield
- ---------------------- --------------------- ----------------------
Gerald M. McDonnell* Thomas L. McVerry* Michael S. Scofield*
Trustee Trustee Chairman of the Board
and Trustee
/s/ David M. Richardson /s/ Russell A. Salton, III MD /s/ Leroy Keith, Jr.
- ---------------------- ---------------------------- ----------------------
David M. Richardson* Russell A. Salton, III MD* Leroy Keith, Jr.*
Trustee Trustee Trustee
/s/ Richard J. Shima /s/ Louis W. Moelchert, Jr. /s/ Richard K. Wagoner
- -------------------- ---------------------------- ----------------------
Richard J. Shima* Louis W. Moelchert, Jr.* Richard K. Wagoner*
Trustee Trustee Trustee
</TABLE>
*By: /s/ Beth Werths
- --------------------------------
Beth Werths
Attorney-in-Fact
*Beth Werths, by signing her name hereto, does hereby sign this document on
behalf of each of the above-named individuals pursuant to powers of attorney
duly executed by such persons.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
(d)(5) Form of Investment Advisory and
Management Agreement between the
Registrant and Evergreen
Investment Management Company
(formerly Keystone Investment
Management Company)
(g)(4) Form of Letter Amendment to
Custodian Agreement between
Registrant and State Street Bank
and Trust Company (VA Blue Chip
Fund)
(h)(2) Form of Administration Services
Agreement between Evergreen
Investment Services, Inc. and
the Registrant (VA Blue Chip Fund)
(h)(6) Form of Letter Amendment to
Transfer Agent Agreement between
the Registrant and Evergreen
Service Company (VA Blue Chip Fund)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
AGREEMENT made the 23rd day of December 1997, by and between EVERGREEN
VARIABLE ANNUITY TRUST, a Delaware business trust (the "Trust") and KEYSTONE
INVESTMENT MANAGEMENT COMPANY, a Delaware corporation (the "Adviser").
WHEREAS, the Trust and the Adviser wish to enter into an Agreement
setting forth the terms on which the Adviser will perform certain services for
the Trust, its series of shares as listed on Schedule 1 to this Agreement and
each series of shares subsequently issued by the Trust (each singly a "Fund" or
collectively the "Funds").
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Trust and the Adviser agree as follows:
1. (a) The Trust hereby employs the Adviser to manage and administer
the operation of the Trust and each of its Funds, to supervise the provision of
the services to the Trust and each of its Funds by others, and to manage the
investment and reinvestment of the assets of each Fund of the Trust in
conformity with such Fund=s investment objectives and restrictions as may be set
forth from time to time in the Fund=s then current prospectus and statement of
additional information, if any, and other governing documents, all subject to
the supervision of the Board of Trustees of the Trust, for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
and agrees during such period, at its own expense, to render the services and to
assume the obligations set forth herein, for the compensation provided herein.
The Adviser shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
(b) In the event that the Trust establishes one or more Funds, in
addition to the Funds listed on Schedule 1, for which it wishes the Adviser to
perform services hereunder, it shall notify the Adviser in writing. If the
Adviser is willing to render such services, it shall notify the Trust in writing
and such Fund shall become a Fund hereunder and the compensation payable to the
Adviser by the new Fund will be as agreed in writing at the time.
2. The Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of each Fund with broker-dealers selected
by the Adviser. In executing portfolio transactions and selecting
broker-dealers, the Adviser will use its best efforts to seek best execution on
behalf of each Fund. In assessing the best execution available for any
transaction, the Adviser shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (all for the specific transaction and
on a continuing basis). In evaluating the best execution available, and in
selecting the broker-dealer to execute a particular transaction, the Adviser may
also consider the brokerage and research services (as those terms are used in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act")) provided
to a Fund and/or other accounts over which the Adviser or an affiliate of the
Adviser exercises investment discretion. The Adviser is authorized to pay a
broker-dealer who provides such brokerage and research services a commission for
executing a portfolio transaction for a Fund which is in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction if, but only if, the Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised.
3. The Adviser, at its own expense, shall furnish to the Trust office
space in the offices of the Adviser or in such other place as may be agreed upon
by the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Trust, for members of the Adviser=s organization to serve without
salaries from the Trust as officers or, as may be agreed from time to time, as
agents of the Trust. The Adviser assumes and shall pay or reimburse the Trust
for:
(a) the compensation (if any) of the Trustees of the Trust who are
affiliated with the Adviser or with its affiliates, or with any adviser retained
by the Adviser, and of all officers of the Trust as such; and
(b) all expenses of the Adviser incurred in connection with its
services hereunder.
The Trust assumes and shall pay all other expenses of the Trust and its
Funds, including, without limitation:
(a) all charges and expenses of any custodian or depository appointed
by the Trust for the safekeeping of the cash, securities and other property of
any of its Funds;
(b) all charges and expenses for bookkeeping and auditors;
(c) all charges and expenses of any transfer agents and registrars
appointed by the Trust;
(d) all fees of all Trustees of the Trust who are not affiliated with
the Adviser or any of its affiliates, or with any adviser retained by the
Adviser;
(e) all brokers= fees, expenses, and commissions and issue and transfer
taxes chargeable to a Fund in connection with transactions involving securities
and other property to which the Fund is a party;
(f) all costs and expenses of distribution of shares of its Funds
incurred pursuant to Plans of Distribution adopted under Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act");
(g) all taxes and trust fees payable by the Trust or its Funds to
Federal, state, or other governmental agencies; (h) all costs of certificates
representing shares of the Trust or its Funds;
(i) all fees and expenses involved in registering and maintaining
registrations of the Trust, its Funds and of their shares with the Securities
and Exchange Commission (the ACommission@) and registering or qualifying the
Funds= shares under state or other securities laws, including, without
limitation, the preparation and printing of registration statements,
prospectuses, and statements of additional information for filing with the
Commission and other authorities;
(j) expenses of preparing, printing, and mailing prospectuses and
statements of additional information to shareholders of each Fund of the Trust;
(k) all expenses of shareholders= and Trustees= meetings and of
preparing, printing, and mailing notices, reports, and proxy materials to
shareholders of the Funds;
(l) all charges and expenses of legal counsel for the Trust and its
Funds and for Trustees of the Trust in connection with legal matters relating to
the Trust and its Funds, including, without limitation, legal services rendered
in connection with the Trust and its Funds= existence, trust, and financial
structure and relations with its shareholders, registrations and qualifications
of securities under Federal, state, and other laws, issues of securities,
expenses which the Trust and its Funds have herein assumed, whether customary or
not, and extraordinary matters, including, without limitation, any litigation
involving the Trust and its Funds, its Trustees, officers, employees, or agents;
(m) all charges and expenses of filing annual and other reports with
the Commission and other authorities; and (n) all extraordinary expenses and
charges of the Trust and its Funds.
In the event that the Adviser provides any of these services or pays
any of these expenses, the Trust and any affected Fund will promptly reimburse
the Adviser therefor.
The services of the Adviser to the Trust and its Funds hereunder are
not to be deemed exclusive, and the Adviser shall be free to render similar
services to others.
4. As compensation for the Adviser=s services to the Trust with respect
to each Fund during the period of this Agreement, the Trust will pay to the
Adviser a fee at the annual rate set forth on Schedule 2 for such Fund.
The Adviser's fee is computed as of the close of business on each
business day.
A pro rata portion of the Trust=s fee with respect to a Fund shall be
payable in arrears at the end of each day or calendar month as the Adviser may
from time to time specify to the Trust. If and when this Agreement terminates,
any compensation payable hereunder for the period ending with the date of such
termination shall be payable upon such termination. Amounts payable hereunder
shall be promptly paid when due.
5. The Adviser may enter into an agreement to retain, at its own
expense, a firm or firms ("SubAdviser") to provide the Trust with respect to all
or any of its Funds all of the services to be provided by the Adviser hereunder,
if such agreement is approved as required by law. Such agreement may delegate to
such SubAdviser all of Adviser's rights, obligations, and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Trust or any of its Funds in connection
with the performance of this Agreement, except a loss resulting from the
Adviser=s willful misfeasance, bad faith, gross negligence, or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, Director, partner, employee, or agent of the
Adviser, who may be or become an officer, Trustee, employee, or agent of the
Trust, shall be deemed, when rendering services to the Trust or any of its Funds
or acting on any business of the Trust or any of its Funds (other than services
or business in connection with the Adviser=s duties hereunder), to be rendering
such services to or acting solely for the Trust or any of its Funds and not as
an officer, Director, partner, employee, or agent or one under the control or
direction of the Adviser even though paid by it.
7. The Trust shall cause the books and accounts of each of its Funds to
be audited at least once each year by a reputable independent public accountant
or organization of public accountant or organization of public accountants who
shall render a report to the Trust.
8. Subject to and in accordance with the Declaration of Trust of the
Trust, the governing documents of the Adviser and the governing documents of any
SubAdviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Trust or any Adviser are or may be interested in the Adviser
(or any successor thereof) as Directors and officers of the Adviser or its
affiliates, as stockholders of First Union Corporation or otherwise; that
Directors, officers and agents of the Adviser and its affiliates or stockholders
of First Union Corporation are or may be interested in the Trust or any Adviser
as Trustees, Directors, officers, shareholders or otherwise; that the Adviser
(or any such successor) is or may be interested in the Trust or any SubAdviser
as shareholder, or otherwise; and that the effect of any such adverse interests
shall be governed by the Declaration of Trust of the Trust, governing documents
of the Adviser and governing documents of any SubAdviser.
9. This Agreement shall continue in effect for two years from the date
set forth above and after such date (a) such continuance is specifically
approved at least annually by the Board of Trustees of the Trust or by a vote of
a majority of the outstanding voting securities of the Trust, and (b) such
renewal has been approved by the vote of the majority of Trustees of the Trust
who are not interested persons, as that term is defined in the 1940 Act, of the
Adviser or of the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
10. On sixty days= written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Trust or by vote of the holders of a majority of the outstanding
voting securities of any Fund with respect to that Fund; and on sixty days=
written notice to the Trust, this Agreement may be terminated at any time
without the payment of any penalty by the Adviser with respect to a Fund. This
Agreement shall automatically terminate upon its assignment (as that term is
defined in the 1940 Act). Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postage prepaid, to the other party
at the main office of such party.
11. This Agreement may be amended at any time by an instrument in
writing executed by both parties hereto or their respective successors, provided
that with regard to amendments of substance such execution by the Trust shall
have been first approved by the vote of the holders of a majority of the
outstanding voting securities of the affected Funds and by the vote of a
majority of Trustees of the Trust who are not interested persons (as that term
is defined in the 1940 Act) of the Adviser, any predecessor of the Adviser, or
of the Trust, cast in person at a meeting called for the purpose of voting on
such approval. A Amajority of the outstanding voting securities@ of the Trust or
the affected Funds shall have, for all purposes of this Agreement, the meaning
provided therefor in the 1940 Act.
12. Any compensation payable to the Adviser hereunder for any period
other than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed, and
enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ William J. Tomko
----------------------------
Name: William J. Tomko
Title: President
KEYSTONE INVESTMENT MANAGEMENT COMPANY
By: /s/ Albert H. Elfner, III
----------------------------
Name: Albert H. Elfner, III
Title: Chief Executive Officer
<PAGE>
Schedule 1
Date: April , 2000
Evergreen VA Strategic Income Fund
Evergreen VA International Growth Fund
Evergreen VA Omega Fund
(formerly Evergreen VA Aggressive Growth Fund)
Evergreen VA Blue Chip Fund
<PAGE>
Schedule 2
Date: April , 2000
As compensation for the Adviser's services to the Fund during the
period of this Agreement, each Fund will pay to the Adviser a fee at the annual
rate of:
I. Evergreen VA Strategic Income Fund
----------------------------------
Aggregate Net Asset Value
Management Fee Of the Shares of the Fund
2.0 % of gross dividend and interest income plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000.
computed as of the close of business on each business day.
II. Evergreen VA International Growth Fund
--------------------------------------
Aggregate Net Asset Value
Management Fee Of the Shares of the Fund
0.75% of the first $200,000,000, plus
0.65% of the next $200,000,000, plus
0.55% of the next $200,000,000, plus
0.45% of the next $600,000,000.
computed as of the close of business on each business day.
III. Evergreen VA Omega Fund (formerly Evergreen VA Aggressive
Growth Fund)
---------------------------------------------------------
0.60% of 1% of Average Daily Net Assets of the Fund
IV. Evergreen VA Blue Chip Fund
---------------------------
Aggregate Net Asset Value
Management Fee Of the Shares of the Fund
0.61% of the first $100,000,000
0.56% of the next $100,000,000
0.51% of the next $100,000,000
0.46% of the next $100,000,000
0.41% of the next $100,000,000
0.36% of the next $500,000,000
0.31% of the next $500,000,000
0.265 of the next $1,500,000,000
computed as of the close of business on each business day.
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Re: EVERGREEN VA BLUE CHIP FUND
To: Elizabeth B. Solomon
This is to advise you that Evergreen Variable Annuity Trust ("the Trust") has
established a new series of shares to be known as EVERGREEN VA BLUE CHIP FUND.
In accordance with the Additional Funds provision of Section 18 of the Custodian
Contract dated 9/18/97 between the Evergreen Funds and State Street Bank and
Trust Company, the Trust hereby requests that you act as Custodian for the two
new series under the terms of the contract.
Please indicate your acceptance of the foregoing by executing two copies of this
Letter Agreement, returning one to the Funds and retaining one copy for your
records.
Evergreen Variable Annuity Trust
By:
--------------------------
Title:
-----------------------
Agreed to this ___ day of April, 2000.
State Street Bank and Trust Company
By:
---------------------------
Title:
-------------------------
ADMINISTRATIVE SERVICES AGREEMENT
EVERGREEN VARIABLE ANNUITY TRUST
This Administrative Services Agreement is made as of this ___ day of
April, 2000 between Evergreen Variable Annuity Trust, a Delaware business
trust (herein called the "Trust") on behalf of its Evergreen VA Blue Chip Fund
series (the "Fund"), and Evergreen Investment Services, Inc., a Delaware
corporation (herein called "EIS").
W I T N E S S E T H:
WHEREAS, the Trust is a Delaware business trust consisting of one or
more portfolios which operates as an open-end management investment company and
is so registered under the Investment Company Act of 1940; and
WHEREAS, the Trust desires to retain EIS as its Administrator to
provide it with administrative services, and EIS is willing to render such
services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. APPOINTMENT OF ADMINISTRATOR. The Trust hereby appoints EIS as
administrator of the Trust and the Fund subject to the terms and conditions set
forth in this Agreement; and EIS hereby accepts such appointment and agrees
to perform the services and duties set forth in Section 2 of this Agreement in
consideration of the compensation provided for in Section 4 hereof.
2. SERVICES AND DUTIES. As Administrator, and subject to the supervision and
control of the Trustees of the Trust, EIS will hereafter provide facilities,
equipment and personnel to carry out the following administrative services for
operation of the business and affairs of the Trust and the Fund:
(1) prepare, file and maintain the Trust's governing documents,
including the Declaration of Trust (which has previously been
prepared and filed), the By-laws, minutes of meetings of
Trustees and shareholders, and proxy statements for meetings
of shareholders;
(2) prepare and file with the Securities and Exchange Commission
and the appropriate state securities authorities the
registration statements for the Trust and the Trust's shares
and all amendments thereto, reports to regulatory authorities
and shareholders, prospectuses, proxy statements, and such
other documents as may be necessary or convenient to enable
the Trust to make a continuous offering of its shares;
(3) prepare, negotiate and administer contracts on behalf of the
Trust with, among others, the Trust=s distributor, custodian
and transfer agent;
(4) supervise the Trust's fund accounting agent in the maintenance
of the Trust's general ledger and in the preparation of the
Trust's financial statements, including oversight of expense
accruals and payments and the determination of the net asset
value of the Trust's assets and of the Trust's shares, and of
the declaration and payment of dividends and other
distributions to shareholders;
(5) calculate performance data of the Trust for dissemination to
information services covering the investment company industry;
(6) prepare and file the Trust's tax returns;
(7) examine and review the operations of the Trust's custodian and transfer
agent;
(8) coordinate the layout and printing of publicly disseminated
prospectuses and reports;
(9) prepare various shareholder reports;
(10) assist with the design, development and operation of new portfolios of
the Trust;
(11) coordinate shareholder meetings;
(12) provide general compliance services; and
(13) advise the Trust and its Trustees on matters concerning the Trust and
its affairs.
The foregoing, along with any additional services that EIS shall agree
in writing to perform for the Trust hereunder, shall hereafter be referred to as
"Administrative Services." Administrative Services shall not include any duties,
functions, or services to be performed for the Trust by the Trust's investment
adviser, distributor, custodian or transfer agent pursuant to their agreements
with the Trust.
3. EXPENSES. EIS shall be responsible for expenses incurred in providing office
space, equipment and personnel as may be necessary or convenient to provide the
Administrative Services to the Trust. The Trust shall be responsible for all
other expenses incurred by EIS on behalf of the Trust, including without
limitation postage and courier expenses, printing expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees who are not EIS employees, and trade
association dues.
4. COMPENSATION. For the Administrative Services provided, the Trust hereby
agrees to pay and EIS hereby agrees to accept as full compensation for its
services rendered hereunder an administrative fee, calculated daily and payable
monthly, at an annual rate of 0.10%.
5. RESPONSIBILITY OF ADMINISTRATOR. EIS shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection
with the matters to which this Agreement relates, except a loss resulting from
wilful misfeasance, bad faith or gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and duties
under this Agreement. EIS shall be entitled to rely on and may act upon advice
of counsel (who may be counsel for the Trust) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. Any person, even though also an officer, director, partner, employee or
agent of EIS, who may be or become an officer, trustee, employee or agent of the
Trust, shall be deemed, when rendering services to the Trust or acting on any
business of the Trust (other than services or business in connection with the
duties of EIS hereunder) to be rendering such services to or acting solely for
the Trust and not as an officer, director, partner, employee or agent or one
under the control or direction of EIS even though paid by EIS.
6. DURATION AND TERMINATION.
(1) This Agreement shall continue in effect from year to year
thereafter, provided it is approved, at least annually, by a
vote of a majority of Trustees of the Trust including a
majority of the disinterested Trustees.
(2) This Agreement may be terminated at any time, without payment
of any penalty, on sixty (60) day's prior written notice by a
vote of a majority of the Trust's Trustees or by EIS.
7. AMENDMENT. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
8. NOTICES. Notices of any kind to be given to the Trust hereunder by EIS shall
be in writing and shall be duly given if delivered to the Trust and to its
investment adviser at the following address: First Union National Bank, One
First Union Center, Charlotte, North Carolina 28288. Notices of any kind to be
given to EIS hereunder by the Trust shall be in writing and shall be duly given
if delivered to EIS at 200 Berkeley Street, Boston, Massachusetts 02116.
Attention: Chief Administrative Officer.
9. LIMITATION OF LIABILITY. EIS is hereby expressly put on notice of the
limitation of liability as set forth in the Declaration of Trust and agrees that
the obligations pursuant to this Agreement of a particular portfolio and of the
Trust with respect to that particular portfolio be limited solely to the assets
of that particular portfolio, and EIS shall not seek satisfaction of any such
obligation from the assets of any other portfolio, the shareholders of any
portfolio, the Trustees, officers, employees or agents of the Trust, or any of
them.
10. MISCELLANEOUS. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Section 5 hereof, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by Delaware law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Administrative
Services Agreement to be executed by their officers designated below as of the
day and year first above written.
EVERGREEN VARIABLE ANNUITY TRUST
By:
--------------------------------
Name:
Title:
EVERGREEN INVESTMENT SERVICES, INC.
By:
--------------------------------
Name:
Title:
EVERGREEN VARIABLE ANNUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
April , 1999
Evergreen Service Company
200 Berkeley Street
Boston, Massachusetts 02116
To Whom It May Concern:
Pursuant to Paragraph 1 of the Master Transfer and Recordkeeping Agreement dated
September 18, 1997 between Evergreen Service Company and various Funds (the
"Agreement"), as defined in the Agreement, this is to notify Evergreen Service
Company that the Evergreen VA Blue Chip Fund, a series of Evergreen Variable
Annuity Trust, hereby elects to become a Fund party to such Agreement.
EVERGREEN VARIABLE ANNUITY TRUST
on behalf of:
Evergreen VA Blue Chip Fund
By:
------------------------
Accepted and Agreed:
EVERGREEN SERVICE COMPANY
By:
----------------------------
Name:
Title:
Dated as of April , 2000
