EVERGREEN SELECT EQUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
STATEMENT OF ADDITIONAL INFORMATION
November 17, 1997
EVERGREEN SELECT STRATEGIC VALUE FUND
EVERGREEN SELECT DIVERSIFIED VALUE FUND
EVERGREEN SELECT LARGE CAP BLEND FUND
EVERGREEN SELECT COMMON STOCK FUND
EVERGREEN SELECT STRATEGIC GROWTH FUND
EVERGREEN SELECT EQUITY INCOME FUND
EVERGREEN SELECT SMALL COMPANY VALUE FUND
EVERGREEN SELECT SOCIAL PRINCIPLES FUND
EVERGREEN SELECT BALANCED FUND
(EACH A "FUND" TOGETHER THE "FUNDS")
Each Fund is a series of an open-end
management investment company,
known as "Evergreen Select Equity
Trust" (the "Trust").
This statement of additional information ("SAI") provides additional
information about all classes of shares of the Funds listed above. It is not a
prospectus and you should read it in conjunction with the prospectus of the
Funds dated November 17, 1997, as supplemented from time to time. You may obtain
a copy of the prospectus from, Evergreen Distributor, Inc.
TABLE OF CONTENTS
INVESTMENT POLICIES..........................................................3
Additional Information on Securities and Investment Practices.......3
Investment Restrictions And Guidelines.............................13
MANAGEMENT OF THE TRUST.....................................................16
INVESTMENT ADVISORY AND OTHER SERVICES......................................18
Investment Advisers................................................18
Distributor . . . . . . . . . . . . . . . . . . . .. . . . . . . .20
Distribution Plan..................................................20
Additional Service Providers.......................................20
BROKERAGE ALLOCATION AND OTHER PRACTICES....................................21
Selection of Brokers...............................................21
Brokerage Commissions..............................................21
General Brokerage Policies.........................................21
TRUST ORGANIZATION..........................................................22
Form of Organization...............................................22
Description of Shares..............................................22
Voting Rights......................................................22
Limitation of Trustees' Liability..................................23
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES.............................23
Exchanges..........................................................23
How The Funds Value Their Shares...................................23
Shareholder Services...............................................24
PRINCIPAL UNDERWRITER.......................................................24
CALCULATION OF PERFORMANCE DATA.............................................25
ADDITIONAL INFORMATION......................................................25
FINANCIAL STATEMENTS........................................................25
INVESTMENT POLICIES
The investment objectives of each Fund and a description of the securities
in which each Fund may invest is set forth in the Funds' prospectus. The
following expands upon the discussion in the prospectus regarding certain
investments of the Funds.
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES
Equity Securities
Equity securities consist primarily of common stocks and securities
convertible into common stocks. Investing in common stocks, particularly those
having growth characteristics, frequently involves greater risks (and possibly
greater rewards) than investing in other types of securities. Common stock
prices tend to be more volatile and companies having growth characteristics may
sometimes be unproven.
Investing in companies with medium market capitalizations involves greater
risk than investing in larger companies. The stock prices of mid-cap companies
can rise quickly and drop substantially in a short period of time. This
volatility results from a number of factors, including reliance by these
companies on relatively limited product lines, markets, and financial resources.
These and other factors may make mid-cap companies more susceptible to setbacks
or downturns.
Investing in companies with small market capitalizations involves greater
risk than investing in larger companies. Their stock prices can rise very
quickly and drop dramatically in a short period of time. This volatility results
from a number of factors, including reliance by these companies on limited
product lines, markets, and financial and management resources. These and other
factors may make small cap companies more susceptible to setbacks or downturns.
These companies may experience higher rates of bankruptcy or other failures than
larger companies. They may be more likely to be negatively affected by changes
in management. In addition, the stock of small cap companies may be thinly
traded.
Derivatives
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 may
be standardized, exchange-traded contracts or 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. 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. See
"Indexed Commercial Paper" and "Structured Securities" below. 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 Related Securities," "Collateralized Mortgage
Obligations," "Adjustable Rate Mortgage Securities," "Stripped Mortgage
Securities," "Mortgage Securities - Special Considerations," and "Other
Asset-Backed Securities."
The Funds can use derivatives to earn income, to enhance returns, to hedge
or adjust the risk profile of the portfolio, in place of more traditional direct
investments or to obtain exposure to otherwise inaccessible markets. A Fund's
use derivatives for non-hedging purposes entails greater risks than if a Fund
were to derivatives solely for hedging purposes.
Derivatives are a valuable tool which, when used properly, can provide
significant benefit to a Fund's shareholders. The Funds' investment adviser is
not an aggressive user of derivatives with respect to the Funds. However, a Fund
may take positions in those derivatives that are within its investment policies
if, in the Adviser's judgment, this represents an effective response to current
or anticipated market conditions. the Adviser's use of derivatives is subject to
continuous risk assessment and control from the standpoint of a Fund's
investment objective and policies. While the judicious use of derivatives by
experienced investment managers, such as the Adviser, 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 a Fund.
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 detrimental to a Fund's interest.
Management Risk -- Derivative products are highly specialized
instruments that require investment techniques and risk analyses
different from those associated with stocks and bonds. The use of a
derivative requires an understanding not only of the underlying
instrument, but also of the derivative itself, without the benefit of
observing the performance of the derivative under all possible market
conditions. Because derivatives are complex, the Funds and the Adviser
must (1) maintain controls to monitor the transactions entered into,
(2) assess the risk that a derivative adds to a Fund's portfolio and
(3) forecast price, interest rate or currency exchange rate movements
correctly.
Credit Risk -- This is the risk that a Fund may lose money because the
other party to a derivative (usually called a "counter party") failed
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 counter party to each exchange-traded derivative, guarantees
performance. This guarantee is supported by a daily payment system
(i.e., margin requirements) operated by the clearing house to reduce
overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, a Fund considers the
creditworthiness of each counter party to a privately negotiated
derivative in evaluating potential credit risk.
Liquidity Risk -- Liquidity risk exists is the possibility that a Fund
will have difficulty buying or selling a particular instrument. If a
derivative transaction is particularly large or if the relevant market
is illiquid (as is the case with many privately negotiated
derivatives), a Fund may not be able 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 counter parties or a loss of
value to a Fund. Derivatives do not always perfectly or even highly
correlate or track the value of the assets, rates or indices they are
designed to closely track. Consequently, a Fund's use of derivatives
may not always be an effective means of, and sometimes could be
counterproductive to, furthering a Fund's investment objective.
Options Transactions
Writing Covered Options. The Funds may write (i.e., sell) covered call and
put options. By writing a call option, a Fund becomes obligated during the term
of the option to deliver the securities underlying the option upon payment of
the exercise price. Writing a put option obligates the Fund during the term of
the option to purchase the securities underlying the option at the exercise
price if the option buyer exercises the option. A Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Funds may only write "covered" options. This means that while a Fund is
obligated as the writer of a call option it will own the underlying securities
subject to the option or, with call options on U.S. Treasury bills, it might own
similar U.S. Treasury bills. If a Fund has written options against all of its
securities that are available for writing options, the Fund may be unable to
write additional options unless it sells some of its portfolio holdings to
obtain new securities against which it can write options. If this were to occur,
higher portfolio turnover and correspondingly greater brokerage commissions and
other transaction costs may result. The Funds do not expect, however, that this
will occur. A Fund will be considered "covered" with respect to a put option it
writes if, while it is obligated as the writer of the put option, it deposits
and maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through
a receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and, by writing a put option, a Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
Purchasing Options. The Funds may purchase put or call options, including
put or call options for offsetting previously written put or call options of the
same series. Once a Fund has written a covered option, it will continue to hold
the segregated securities or assets until it effects a closing purchase
transaction. If the Fund is unable to close the option position, it must hold
the segregated securities or assets until the option expires or is exercised. An
option position may be closed out only in a secondary market for an option of
the same series. Although a Fund generally writes only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any particular
time, and, for some options, no secondary market may exist. In such event,
effecting a closing transaction for a particular option might not be possible.
Options on some securities are relatively new, and predicting how much
trading interest there will be for such options is impossible. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair a Fund's ability to
use such options to achieve its investment objective.
Options Trading Markets. The Funds trade in options that are generally
listed on national securities exchanges, currently including the Chicago Board
Options Exchange and the New York, American, Pacific and Philadelphia Stock
Exchanges. Options on some securities are traded in the over-the-counter market,
and may not be listed on any exchange. Options traded in the over-the-counter
market involve a greater risk that the securities dealers participating in the
transactions could fail to meet their obligations to a Fund. Certain state
authorities may limit the use of options traded in the over-the-counter market.
A Fund will include the premiums it has paid for the purchase of unlisted
options and the value of securities used to cover options it has written for
purposes of calculating whether the Fund has complied with its policies on
illiquid securities.
Futures Transactions and Related Options Transactions
The Funds intend to enter into financial futures contracts as a hedge
against changes in prevailing levels of interest rates to seek relative
stability of principal and to establish more definitely the effective return on
securities held or intended to be acquired by the Funds or as a hedge against
changes in the prices of securities held by a Fund or to be acquired by a Fund.
A Fund's hedging may include sales of futures as an offset against the effect of
expected increases in interest rates or securities prices and purchases of
futures as an offset against the effect of expected declines in interest rates.
For example, when a Fund anticipates a significant market or market sector
advance, it will purchase a stock index futures contract as a hedge against not
participating in such advance at a time when a Fund is not fully invested. The
purchase of a futures contract serves as a temporary substitute for the purchase
of individual securities which may then be purchased in an orderly fashion. As
such purchases are made, an equivalent amount of index based futures contracts
would be terminated by offsetting sales. In contrast, a Fund would sell stock
index futures contracts in anticipation of or in a general market or market
sector decline that may adversely affect the market value of the Fund's
portfolio. To the extent that the Fund's portfolio changes in value in
correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Funds intend to engage in options transactions which are related to
financial futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures contracts and
related options transactions could be used to reduce the Funds' exposure to
interest rate and/or market fluctuations, the Funds may be able to hedge their
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Funds do not intend to
take delivery of the instruments underlying futures contracts they hold, the
Funds do not intend to engage in such futures contracts for speculation.
Futures Contracts
Futures contracts are transactions in the commodities markets rather than
in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify financial instruments or financially
based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
Interest Rate Futures Contracts. The sale of an interest rate futures
contract creates an obligation by a Fund, as seller, to deliver the type of
financial instrument specified in the contract at a specified future time for a
specified price. The purchase of an interest rate futures contract creates an
obligation by a Fund, as purchaser, to accept delivery of the type of financial
instrument specified at a specified future time for a specified price. The
specific securities delivered or accepted, respectively, at settlement date, are
not determined until at or near that date. The determination is in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
(GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
Index Based Futures Contracts, Other Than Stock Index Based. It is expected
that bond index and other financially based index futures contracts will be
developed in the future. It is anticipated that such index based futures
contracts will be structured in the same way as stock index futures contracts
but will be measured by changes in interest rates, related indexes or other
measures, such as the consumer price index. In the event that such futures
contracts are developed, the Funds will sell interest rate index and other index
based futures contracts to hedge against changes which are expected to affect
the Funds' portfolios.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by a Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when a
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, a Fund may elect to close the position. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the Broker, and the Fund realizes a loss or gain.
The Trust intends to enter into arrangements with its custodian and with
Brokers to enable the initial margin of a Fund and any variation margin to be
held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which a Fund enters into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument or index and same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which a Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to a Fund.
There can be no assurance, however, that a Fund will be able to enter into
an offsetting transaction with respect to a particular contract at a particular
time. If a 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.
Options on Financial Futures. The Funds intend to purchase call and put
options on financial futures contracts and sell such options to terminate an
existing position. Options on futures are similar to options on stocks except
that an option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
rather than to purchase or sell stock at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account. This amount represents the amount by which the market
price of the futures contract at exercise exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and value of the futures
contract.
The Funds intend to use options on financial futures contracts in
connection with hedging strategies. In the future the Funds may use such options
for other purposes.
Purchase of Put Options on Futures Contracts. The purchase of protective
put options on financial futures contracts is analogous to the purchase of
protective puts on individual stocks, where an absolute level of protection is
sought below which no additional economic loss would be incurred by a Fund. Put
options may be purchased to hedge a portfolio of stocks or debt instruments or a
position in the futures contract upon which the put option is based.
Purchase of Call Options on Futures Contracts. The purchase of call options
on financial futures contracts represents a means of obtaining temporary
exposure to market appreciation at limited risk. It is analogous to the purchase
of a call option on an individual stock, which can be used as a substitute for a
position in the stock itself. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
underlying financial instrument or index itself, purchase of a call option may
be less risky than the ownership of the interest rate or index based futures
contract or the underlying securities. Call options on commodity futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when a Fund is not fully invested.
Use of New Investment Techniques Involving Financial Futures Contracts or
Related Options. The Funds may employ new investment techniques involving
financial futures contracts and related options. The Funds intend to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Trust
believes that no additional techniques have been identified for employment by
the Funds in the foreseeable future other than those described above.
Limitations on Purchase and Sale of Futures Contracts and Related Options
on Such Futures Contracts. A Fund will not enter into a futures contract if, as
a result thereof, more than 5% of the Fund's total assets (taken at market value
at the time of entering into the contract) would be committed to margin deposits
on such futures contracts, including any premiums paid for options on futures.
The Funds intend that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns, or futures contracts will be purchased to protect a
Fund against an increase in the price of securities it intends to purchase. The
Funds do not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Trust's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
Risks of Futures Contracts. Financial futures contracts prices are volatile
and are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in a Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, a Fund would presumably have sustained comparable losses if, instead of
entering into the futures contract, it had invested in the underlying financial
instrument. Furthermore, in order to be certain that a Fund has sufficient
assets to satisfy its obligations under a futures contract, the Fund will
establish a segregated account in connection with its futures contracts which
will hold cash or cash equivalents equal in value to the current value of the
underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Risks of Options on Futures Contracts. In addition to the risks described
above for financial futures contracts, there are several special risks relating
to options on futures contracts. The ability to establish and close out
positions on such options will be subject to 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. A Fund will
not purchase options on any futures contract unless and until it believes that
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
the futures contracts. Compared to the use of futures contracts, the purchase of
options on such futures involves less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the use of an option on a
futures contract would result in a loss to a Fund, even though the use of a
futures contract would not, such as when there is no movement in the level of
the futures contract.
Corporate Bond Ratings (Evergreen Select Balanced Fund)
Higher yields are usually available on securities that are lower rated or
that are unrated. Bonds rated Baa by Moody's Investor Service ("Moody's") are
considered as medium grade obligations, which are neither highly protected nor
poorly secured. Debt rated BBB by Standard & Poor's Ratings Group ("S&P") is
regarded as having an adequate capacity to pay interest and repay principal,
although adverse economic conditions are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories. Lower rated securities, commonly known as "junk bonds,"
are usually defined as Baa or lower by Moody's or BBB or lower by S&P. The Fund
may purchase unrated securities, which are not necessarily of lower quality than
rated securities but may not be attractive to as many buyers. Debt rated BB, B,
CCC, CC and C by S&P is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. Debt rated CI by S&P is debt (income
bonds) on which no interest is being paid. Debt rated D by S&P is in default and
payment of interest and/or repayment of principal is in arrears. The Fund
intends to invest in D-rated debt only in cases where, in the judgment of a
Fund's investment adviser, there is a distinct prospect of improvement in the
issuer's financial position as a result of the completion of reorganization or
otherwise. Bonds that are rated Ca by Moody's are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest. Bonds that are rated Ca by Moody's represent obligations
which are speculative in a high degree. Such issues are often in default or have
other market shortcomings. Bonds that are rated C by Moody's 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.
Convertible Securities
Convertible securities include bonds, debentures, corporate notes,
preferred stocks and other securities. Convertible securities are securities
that the holder can convert into common stock. Convertible securities rank
senior to common stock in a corporation's capital structure and, therefore,
entail less risk than a corporation's common stock. The value of a convertible
security is a function of its investment value (Its market worth without a
conversion privilege) and its conversion value (its market worth if exchanged).
If a convertible security's investment value is greater than its conversion
value, its price primarily will reflect its investment value and will tend to
vary inversely with interest rates (the issuer's creditworthiness and other
factors may also affect its value). If a convertible security's conversion value
is greater than its investment value, its price will tend to be higher than its
conversion value and it will tend to fluctuate directly with the price of the
underlying equity security.
Investment Company Securities
Securities of other investment companies may be acquired by each of the
Funds to the extent permitted under the Investment Company Act of 1940, as
amended (the "1940 Act"). These limits require that, as determined immediately
after a purchase is made, (i) not more than 5% of the Fund's total assets will
be invested in the securities of any one investment company, (ii) not more than
10% of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund's. As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that the Portfolio bears directly in
connection with its own operations.
Loans of Securities
To generate income and offset expenses, the Funds may lend portfolio
securities to broker-dealers and other financial institutions. Loans of
securities by a Fund may not exceed 30% of the value f the Fund's total assets.
While securities are on loan, the borrower will pay the Fund any income accruing
on the security. The Fund may invest any collateral it receives in additional
portfolio securities, such as U.S. Treasury notes, certificates of deposit,
other high-grade, short-term obligations or interest bearing cash equivalents.
Gains or losses in the market value of a security lent will affect the Fund and
its shareholders.
When a Fund lends its securities, it will require the borrower to give the
Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Funds have 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.
Although voting rights attendant to securities lent pass to the borrower,
the Funds may call such loans at any time and may vote the securities if it
believes a material event affecting the investment is to occur. The Funds may
experience a delay in receiving additional collateral or in recovering the
securities lent or may even suffer a loss of rights in the collateral should the
borrower of the securities fail financially. The Funds may only make loans to
borrowers deemed to be of good standing, under standards approved by the Board
of Trustees, when the income to be earned from the loan justifies the attendant
risks.
Master Demand Notes
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Funds at varying rates of interest pursuant to direct
arrangements between a Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. A Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by a Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days' notice). Notes acquired by a Fund may have maturities of more than one
year, provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days' notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals, which normally will
not exceed 31 days, but may extend up to one year. The notes are deemed to have
a maturity equal to the longer of the period remaining to the next interest rate
adjustment or the demand notice period. Because these types of notes are direct
lending arrangements between the lender and borrower, such instruments are not
normally traded and there is no secondary market for these notes, although they
are redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, a Fund's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. In connection
with master demand note arrangements, a Fund's investment adviser considers,
under standards established by the Board of Trustees, earning power, cash flow
and other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, a Fund may invest in them only if
at the time of an investment the issuer meets the criteria established for
commercial paper discussed in the statement of additional information (which
limits such investments to commercial paper rated A-1 by S&P, Prime-1 by Moody's
or F-1 by Fitch Investors Service, L.P.).
Obligations of Foreign Branches of United States Banks
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such securities
may be held outside the U.S. and the Fund may be subject to the risks associated
with the holding of such property overseas. Examples of governmental actions
would be the imposition of currency controls, interest limitations, withholding
taxes, seizure of assets or the declaration of a moratorium. Various provisions
of federal law governing domestic branches do not apply to foreign branches of
domestic banks.
Obligations of United States Branches of Foreign Banks
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
Repurchase Agreements
The Funds may enter into repurchase agreements with entities that are
registered 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 a Fund's
Adviser to be creditworthy. A repurchase agreement is an agreement by which a
person (e.g., a Fund) obtains a security and simultaneously commits to return
the security to the seller (a member bank of the Federal Reserve System or
recognized securities dealer) at an agreed upon price (including principal and
interest) on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security.
A Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from 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 a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a 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 Adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Restricted and Illiquid Securities
Pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A"), the
Board of Trustees the Trusts determines the liquidity of certain restricted
securities Rule 144A is a non-exclusive, safe-harbor for certain secondary
market transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for sale under Rule 144A. In determining the liquidity
of certain restricted securities the Trustees consider: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (iii)
dealer undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades.
Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. Reverse
repurchase agreements involve the risk that the market value of the securities
the Fund is obligated to repurchase may decline below the repurchase price.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Funds may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. These
transactions involve the purchase of debt obligations with delivery and payment
normally take place within a month or more after the date of commitment to
purchase. The Funds will only make commitments to purchase obligations on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date. The when-issued securities are subject
to market fluctuation, and no interest accrues on the security to the purchaser
during this period. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the purchaser enters into
the commitment.
Segregated accounts will be established with the custodian, and the Funds
will maintain liquid assets in an amount at least equal in value to a Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, a Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
Purchasing obligations on a when-issued basis is a form of leveraging and
can involve a risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. In that case there could be an unrealized loss at the time of delivery.
A Fund uses when-issued, delayed-delivery and forward commitment
transactions to secure what it considers to be an advantageous price and yield
at the time of purchase. When a Fund engages in when- issued, delayed-delivery
and forward commitment transactions, it relies on the buyer or seller, as the
case may be, to consummate the sale. If the buyer or seller fails to complete
the sale, then the Fund may miss the opportunity to obtain the security at a
favorable price or yield.
Typically, no income accrues on securities a Fund has committed to purchase
prior to the time delivery of the securities is made, although the Fund may earn
income on securities it has deposited in a segregated account. When purchasing a
security on a when-issued, delayed delivery, or forward commitment basis, the
Fund assumes the rights and risks of ownership of the security, including the
risk of price and yield fluctuations, and takes such fluctuations into account
when determining its net asset value. Because the Fund is not required to pay
for the security until the delivery date, these risks are in addition to the
risks associated with the Fund's other investments.
INVESTMENT RESTRICTIONS AND GUIDELINES
Fundamental Policies
Each Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the "1940
Act"). Unless otherwise stated, all references to the assets of a Fund are in
terms of current market value.
Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the Investment Company
Act of 1940, as amended (the "1940 Act").
Concentration
Each Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities that are
issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
Underwriting Securities Issued by Other Persons
Each Fund may not underwrite securities of other issuers, except insofar as
each Fund may be deemed to be an underwriter in connection with the disposition
of its portfolio securities.
Real Estate
Each Fund may not purchase or sell real estate, except that, to the extent
permitted by law each Fund may invest in (a) securities that are directly or
indirectly secured by real estate, or (b) securities issued by companies that
invest in real estate.
Commodities
Each Fund may not purchase or sell commodities or contracts on commodities,
except to the extent that each Fund may engage in financial futures contacts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
Loans to Other Persons
Each Fund may not make loans to other persons, except that a Fund may lend
its portfolio securities in accordance with applicable law. The acquisition of
investment securities or other investment instruments shall not be deemed to be
the making of a loan.
GUIDELINES
Unlike the Fundamental Policies above, to the extent permitted by law, the
following guidelines may be changed by the Trust's Board of Trustees without
shareholder approval. Unless otherwise stated, all references to the assets of
a Fund are in terms of current market value.
Diversification
To remain classified as a diversified investment company under the 1940
Act, each Fund must conform with the following: With respect to the 75% of its
total assets, a diversified investment company may not invest more than 5% of
its total assets, determined at market or other fair value at the time of
purchase, in the securities of any one issuer, or invest in more than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These limitations do not apply to investments in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Borrowings
Each Fund may borrow money from banks or enter into reverse repurchase
agreements in an amount up to one third of its total assets. Each Fund may also
borrow an additional 5% of its total assets from banks or others. Each Fund may
borrow only as a temporary measure for extraordinary or emergency purposes. Each
Fund will not purchase securities while borrowings are outstanding except to
exercise prior commitments and to exercise subscription rights. Each Fund may
obtain such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. Each Fund may purchase securities on margin
and engage in short sales to the extent permitted by applicable law.
Illiquid securities
Each Fund may not invest more than 15% of its net assets in securities that
are Illiquid. A security is Illiquid when a fund may not dispose of it in the
ordinary course of business within seven days at approximately the value at
which a Fund has the investment on its books.
Investment in other investment companies
Each Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, each Fund may not (1) own more
than 3% of the outstanding voting stock of another investment company, (2)
invest more than 5% of its assets in the securities of any single investment
company, and (3) invest more than 10% of its assets in investment companies.
However, each Fund may invest all of its investable assets in securities of a
single open-end management investment company with substantially the same
fundamental investment objectives, policies and limitations as each Fund.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts, 02116. Each Trustee is also a Trustee of
each of the other Trusts in the Evergreen Fund complex, other than Evergreen
Variable Trust, of which Messrs. Howell, Salton and Scofield are the only
Trustees.
<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;
(DOB: 2/2/28) and President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) and former Managing Director, Seaward
Management Corporation (investment advice).
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance
(DOB: 10/12/38) Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of
the Board, Director, and Executive Vice President,
The London Harness Company; former Managing
Partner, Roscommon Capital Corp.; former Chief
Executive Officer, Gifford Gifts of Fine Foods;
former Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments, Inc.
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer,
(DOB: 2/14/39) Carson Products Company; Director of Phoenix
Total Return Fund and Equifax, Inc.; Trustee of
Phoenix Series Fund, Phoenix Multi-Portfolio Fund,
and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc.
(DOB: 7/14/39) (steel producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
*William Walt Pettit Trustee Partner in the law firm of Holcomb and Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President,
(DOB: 9/14/41) DHR International, Inc. (executive recruitment);
former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director,
Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health
(DOB: 6/2/47) Services; and former Managed Health Care
Consultant; former President, Primary Physician
Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
Richard J. Shima Trustee Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance
Financial Services, Inc.; Chairman, Board of
Trustees, Hartford Graduate Center; Trustee,
Greater Hartford YMCA; former Director, Vice
Chairman and Chief Investment Officer, The
Travelers Corporation; former Trustee, Kingswood-
Oxford School; and former Managing Director and
Consultant, Russell Miller, Inc.
John J. Pileggi President and Senior Managing Director, Furman Selz LLC since
Treasurer 1992; Managing Director from 1984 to 1992;
230 Park Avenue, Consultant to BISYS Fund Services since 1996;
Suite 910 New York, 230 Park Avenue, Suite 910, New York, NY.
New York
George O. Martinez Secretary Senior Vice President and Director of
Administration and Regulatory Services, BISYS
3435 Stezer Road Fund Services; Vice President/Assistant General
Columbus, Ohio Counsel, Alliance Capital Management from 1988
to 1995; 3435 Stelzer Road, Columbus, Ohio.
</TABLE>
*This Trustee may be considered an interested trustee within the meaning of
the 1940 Act.
The officers of the Trust are all officers and/or employees of The BISYS
Group, Inc. ("BISYS"), except for Mr. Pileggi, who is a consultant to BISYS.
Listed below is the estimated Trustee compensation for the twelve-month
period ended June 30, 1998.
COMPENSATION TABLE
Total
Compensation
Aggregate From Registrant
Compensation And Fund Complex
Trustee From Registrant Paid To Directors
Laurence B. Ashkin $4,987 $68,252
Charles A.Austin $4,993 $55,639
K. Dun Gifford $4,658 $51,160
James S. Howell $6,308 $97,924
Leroy Keith Jr. $4,662 $52,641
Gerald M. McDonnell $4,662 $79,369
Thomas L. McVerry $5,714 $87,132
William Walt Petit $4,659 $78,184
David M. Richardson $4,993 $55,639
Russell A. Salton, III $4,658 $78,592
Michael S. Scofield $4,660 $79,776
Richard J. Shima $4,660 $65,188
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISERS
The First Capital Group of FUNB is the investment adviser (the "Adviser")
to each Fund other than the Evergreen Select Small Company Fund. FUNB is a
subsidiary of First Union Corporation, a bank holding company headquartered in
Charlotte, North Carolina. First Union Corporation and its subsidiaries provide
a broad range of financial services to individuals and businesses throughout the
United States. First Union Corporation and FUNB are located at 201 South College
Street, Charlotte North Carolina 28288.
Evergreen Asset Management Corp. ("Evergreen Asset") is the investment
adviser to Evergreen Select Small Company Value Fund. Evergreen Asset is located
at 2500 Westchester Avenue, Purchase, New York 10577 and is also a subsidiary of
First Union.
Pursuant to the advisory agreement (the "Advisory Agreement" or,
collectively, the "Advisory Agreements") between the Trust and each Adviser, and
subject to the supervision of the Trust's Board of Trustees, each Adviser
furnishes to each Fund investment advisory, management and administrative
services, office facilities, and equipment in connection with its services for
managing the investment and reinvestment of each Fund's assets. Each Adviser
pays for all of the expenses incurred in connection with the provision of its
services.
Each Fund pays for all charges and expenses, other than those specifically
referred to as being borne by the Adviser, including, but not limited to, (1)
custodian charges and expenses; (2) bookkeeping and auditors' charges and
expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees; (5) brokerage commissions, brokers' fees and expenses; (6)
issue and transfer taxes; (7) costs and expenses under the Distribution Plan;
(8) taxes and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
such Fund and its shares with the Securities and Exchange Commission or under
state or other securities laws; (11) expenses of preparing, printing and mailing
prospectuses, statements of additional information, notices, reports and proxy
materials to shareholders of such Fund; (12) expenses of shareholders' and
Trustees' meetings; (13) charges and expenses of legal counsel for such Fund and
for the Independent Trustees of the Trust on matters relating to such Fund; and
(14) charges and expenses of filing annual and other reports with the Securities
and Exchange Commission and other authorities; and all extraordinary charges and
expenses of such Fund.
Each Fund pays its respective Adviser a fee for its services, expressed as
a percentage of average net assets, as set forth below. In addition, each
Adviser has voluntarily agreed to reduce its advisory fee by 0.10%, resulting in
the net advisory fees that are also indicated in the table below.
Fund Advisory Fee Net Advisory Fee
Evergreen Select Strategic Value Fund 0.70% 0.60%
Evergreen Select Diversified Value Fund 0.60% 0.50%
Evergreen Select Large Cap Fund 0.70% 0.60%
Evergreen Select Common Stock Fund 0.70% 0.60%
Evergreen Select Strategic Growth Fund 0.70% 0.60%
Evergreen Select Equity Income Fund 0.70% 0.60%
Evergreen Select Social Principles Fund 0.80% 0.70%
Evergreen Small Company Value Fund 0.90% 0.80%
Evergreen Select Balanced Fund 0.60% 0.50%
Under the Advisory Agreement, any liability of the Adviser in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
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 a Fund's
outstanding shares (as defined in the 1940 Act). In either case, the terms of
the Advisory Agreement and continuance thereof must be approved by the vote of a
majority of the Independent Trustees (Trustees who are not interested persons of
the Fund, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the Fund's Distribution Plan or any agreement related
thereto) 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.
DISTRIBUTOR
Evergreen Distributor, Inc. (the "Distributor") markets the Funds through
broker-dealers and other financial representatives. Its address is, 25 55th
Street, New York, N.Y. 10019.
DISTRIBUTION PLAN
Rule 12b-1 under the 1940 Act permits investment mutual funds to use their
assets to pay for distributing their shares. However, to take advantage of Rule
12b-1, the 1940 Act requires that mutual funds comply with various conditions,
including adopting a distribution plan. The Funds have adopted a distribution
plan for their Institutional Service Shares (the "Plan") that permits a Fund to
deduct up to 0.25% of the Institutional Service class' average net assets to pay
for shareholder services. The Board of Trustees, including a majority of the
Independent Trustees has approved the plan.
The National Association of Securities Dealers, Inc. ("NASD") limits the
amount that a mutual fund may pay annually in distribution costs for sale of its
shares and shareholder service fees. The NASD limits annual expenditures to
1.00% of the aggregate average daily net asset value of its shares, of which
0.75% may be used to pay such distribution costs and 0.25% may be used to pay
shareholder service fees. The NASD also limits the aggregate amount that a Fund
may pay for such distribution costs to 6.25% of gross share sales since the
inception of the distribution plan, plus interest at the prime rate plus 1.00%
on such amounts remaining unpaid from time to time.
The Independent Trustees or a majority of the outstanding voting shares of
a Fund's Institutional Service Class may terminate the Plan.
A Fund cannot change the Plan in a way that materially increases the
distribution expenses of the Institutional Service Class without obtaining
shareholder approval. Otherwise, the Trustees may amend the Plan.
Management must report the amounts and purposes of expenditures under the
Plan to the Independent Trustees quarterly.
While the Institutional Service Distribution Plan is in effect, a Fund will
be required to commit the selection and nomination of candidates for Independent
Trustees to the discretion of the Independent Trustees.
The Independent Trustees of the Funds have determined that the Funds will
benefit from the Institutional Service shares distribution plan.
ADDITIONAL SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to each
Fund, subject to the supervision and control of the Trust's Board of Trustees.
EIS provides the Funds with facilities, equipment and personnel and is entitled
to receive a fee based on the aggregate average daily net assets of the Funds
based on the total assets of all mutual funds advised by First Union
subsidiaries. EIS' fee is calculated in accordance with the following schedule:
0.60% on the first $7 billion; 0.0425% on the next $3 billion; 0.035% on the
next $5 billion; 0.025% on the next $10 billion; 0.019% on the next $5 billion
and 0.014% on assets in excess of $30 billion.
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union Corporation,
is the Funds' transfer agent. The transfer agent issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is 200 Berkeley Street,
Boston, Massachusetts 02116.
Independent auditors
KPMG Peat Marwick audits each Fund's financial statement. The auditor's
address is 99 High Street, Boston, Massachusetts 02110.
Custodian
State Street Bank and Trust Company is the Funds' custodian. The bank keeps
custody of the Fund's securities and cash and performs other related duties. The
custodian's address is Box 9021, Boston, Massachusetts 02205-9827.
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Funds, the
Adviser seeks the best execution of orders at the most favorable prices. The
Adviser determines whether a broker has provided a Fund with best execution and
price in the execution of a securities transaction by evaluating, among other
things, the broker's ability to execute large or potentially difficult
transactions, and the financial strength and stability of the broker.
BROKERAGE COMMISSIONS
Generally, each Fund expects to purchase and sell its securities 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 dealers' markdown. Where transactions are made in the
over-the-counter market, each Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
The Funds expect to buy and sell their fixed-income securities through
principal transactions that is directly from the issuer or from an underwriter
or market maker for the securities. Generally, the Funds will not pay brokerage
commissions for such purchases. Usually, when a Fund buys a security from an
underwriter, the purchase price will include 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 Funds execute transactions in the over-the-counter market,
they will deal with primary market makers unless more favorable prices are
otherwise obtainable.
GENERAL BROKERAGE POLICIES
Generally, the Fund expects to purchase and sell its securities 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 markdown. 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.
The Adviser makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that the Adviser
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, the Adviser will
allocate the transactions according to a formula that is equitable to each of
its clients. Although, in some cases, this system could have a detrimental
effect on the price or volume of the Fund's securities, the Fund believes that
in other cases its ability to participate in volume transactions will produce
better executions. In order to take advantage of the availability of lower
purchase prices, the Fund may occasionally participate in group bidding for the
direct purchase from an issuer of certain securities.
The Board of Trustees periodically reviews the Fund's brokerage policy.
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the Board of Trustees
may change, modify or eliminate any of the foregoing practices.
TRUST ORGANIZATION
FORM OF ORGANIZATION
The Trust was formed as a Delaware business trust on September 17, 1997
(the "Declaration of Trust"). A copy of the Declaration of Trust is on file as
an exhibit to the Trust's Registration Statement, of which this statement of
additional information is a part. This summary 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 a
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. However, the Trust intends to hold meetings at least
annually. At meetings called for the initial election of Trustees or to consider
other matters, shares are entitled to one vote per share. Shares generally vote
together as one class on all matters. Classes of shares of a 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
shares of that class. Shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees to be elected at a meeting and, in such event,
the holders of the remaining 50% or less of the shares voting will not be able
to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, 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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
EXCHANGES
Investors may exchange shares of any Fund for shares of the same class of
any other Evergreen "Select" fund, as described under "Exchanges" in each Fund's
prospectus. Before you make an exchange, you should read the prospectus of the
"Select" fund into which you wish to exchange. The Trust reserves the right to
discontinue, alter or limit the exchange privilege at any time.
HOW THE FUNDS VALUE THEIR SHARES
How and When the Funds Calculate Their Net Asset Value Per Share ("NAV")
Each Fund computes its net asset value once daily on Monday through Friday,
as described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
A Fund calculates its net asset value per share by adding up its
investments and other assets, subtracting its liabilities and then dividing the
result by the number of shares outstanding.
How the Funds Value The Securities They Own
Current values for a Fund's portfolio securities are determined in the
following manner:
(1) securities that are traded on a national 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 NMS
prior to the time of the valuation, provided that a sale has occurred;
(2) securities traded in the over-the-counter market, other than on NMS
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 (including
all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates
market;
(5) short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount), which, when combined
with accrued interest, approximates market; and
(6) securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS
if, in the Fund's opinion, the last sales price does not reflect a
current market value or if no sale occurred; and other assets are
valued at prices deemed in good faith to be fair under procedures
established by the Board of Trustees.
SHAREHOLDER SERICES
As described in the prospectus, a shareholder may elect to receive their
dividends and capital gains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Fund
will hold the returned distribution or redemption proceeds in a non
interest-bearing account in the shareholder's name until the shareholder updates
their address. Therefore, no interest will accrue on amounts represented by
uncashed distribution or redemption checks
PRINCIPAL UNDERWRITER
The Distributor is the principal underwriter for the Trust and with respect
to each class of each Fund. The Trust has entered into a Principal Underwriting
Agreement ( "Underwriting Agreement") with the Distributor with respect to each
class of each Fund. The Distributor is a subsidiary of The BISYS Group, Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the shares. The Distributor may retain and employ representatives
to promote distribution of the shares and may obtain orders from broker-dealers,
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Distributor will bear the expense of preparing,
printing, and distributing advertising and sales literature and prospectuses
used by it.
All subscriptions and sales of shares by the Distributor are at the public
offering price of the shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and statement of additional information. All orders are subject to acceptance by
the respective Trust and each Trust reserves the right, in its sole discretion,
to reject any order received. Under the Underwriting Agreement, the Trust is not
liable to anyone for failure to accept any order.
The Trust has agreed under the Underwriting Agreement to pay all expenses
in connection with the registration of its shares with the Securities and
Exchange Commission and auditing.
The Distributor has agreed that it will, in all respects, duly conform with
all state and federal laws applicable to the sale of the shares. The Distributor
has also agreed that it will indemnify and hold harmless the Trust and each
person who has been, is, or may be a Trustee or officer of the Trust against
expenses reasonably incurred by any of them in connection with any claim,
action, suit, or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Distributor or any other person for whose acts
the Distributor is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually (i) by a vote of a majority
of the Trust's Independent Trustees, and (ii) by vote of a majority of the
Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. The Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Distributor's judgment, it could benefit the
sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
CALCULATION OF PERFORMANCE DATA
Total return quotations for a class of shares of a 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.
Current yield quotations as they may appear, from time to time, in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period.
Any given yield or total return quotation should not be considered
representative of a Fund's yield or total return for any future period.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, a 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 a Fund's prospectus, statement of
additional information or in supplemental sales literature issued by such Fund
or the Distributor, and no person is entitled to rely on any information or
representation not contained therein.
Each Fund's prospectus and SAI omit certain information contained in its
registration statement, which may be obtained for a fee from the SEC in
Washington, D.C.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and the reports thereon of
KPMG Peat Marwick for each Fund will be filed by amendment.
