EVERGREEN
SELECT SMALL CAP GROWTH FUND
ANNUAL REPORT
FEBRUARY 28, 1998
[Evergreen Logo appears here]
Evergreen Funds(SM)
Since 1932
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EVERGREEN SELECT SMALL CAP GROWTH FUND
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C>
SELECT SMALL CAP Letter to Shareholders.................................. 1
GROWTH FUND Portfolio Manager Commentary............................ 2
Financial Highlights.................................... 4
Schedule of Investments................................. 5
Statement of Assets and Liabilities..................... 7
Statement of Operations................................. 8
Statements of Changes in Net Assets..................... 9
Notes to Financial Statements........................... 10
Additional Information.................................. 12
Independent Auditors' Report............................ 13
</TABLE>
<PAGE>
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
LETTER TO SHAREHOLDERS
April 1998
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to announce that the Keystone Institutional Small Capitalization
Growth Fund has been renamed the Evergreen Select Small Cap Growth Fund and has
joined our new institutional fund family, Evergreen Select Funds. The Evergreen
Select Funds are a family of 19 equity, fixed income, and money market funds.
The Select Small Cap Growth Fund will be changing its fiscal year end to June
30th and will be included with the other Select Equity Funds at their next
annual report for the fiscal year ending June 30, 1998.
A combination of moderate economic growth and relatively low inflation and
interest rates provided a favorable environment for small company stocks during
the fiscal year. While Evergreen Select Small Cap Growth Fund's twelve-month
return is relatively strong, the road for small caps was bumpy. As so often
happens in the investment world, U.S. small company stocks were affected by
forces beyond their control. The currency and financial crises that erupted in
Asia in late summer rattled financial markets around the world. And uncertainty
over how Asia's woes would be resolved sent investors back to the familiarity
and liquidity of large company stocks. This resulted in a short-term decline in
small company stock prices. While small company stocks ended the twelve-month
period on an upturn, the price swings they experienced during the period
emphasize the volatility that is inherent in small-cap investing.
As you know, volatility is one of the characteristics of a small-cap fund.
Nevertheless, long-term investors who remain invested during market corrections
have the potential to earn outstanding returns. Historically, small companies
have outperformed larger company stocks, bonds and cash1. This superior
performance record has occurred over a long period of time, and it is the result
of being fully invested. Research has shown that "being in the market" is
critical for investors who want to capture the excellent performance potential
of small company stocks. By being out of the market for just a few months during
the market's advance, a potentially outstanding total return can end up being an
average return. As a result, small-cap investors should always take a long-term
approach in evaluating fund performance.
We are optimistic about the investment environment for small companies and your
Fund. We believe your Fund should benefit from a positive U.S. economic
environment of moderate economic growth and relatively low inflation and
interest rates. In addition, small company stocks are much more attractively
priced relative to their future earnings potential than large company stocks.
What's more, your Fund has a distinctly domestic bent, and the companies in the
portfolio are less dependent on overseas markets for their earnings. Should
problems arise in foreign markets, the risk to your Fund should be relatively
minimal.
Thank you for your continued investment in Evergreen Select Small Cap Growth
Fund.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
EVERGREEN FUNDS
/s/ David C. Francis
David C. Francis, CFA
CHIEF INVESTMENT OFFICER
FIRST CAPITAL GROUP
- ------------------------------------
1 Source: Ibbotson Associates: Of these investment classes, small company stocks
offer the greatest risk of price fluctuation, whereas bonds offer a fixed rate
of return on principal if held to maturity. The comparison is based on small
company stocks as represented by the fifth capitalization quintile of stocks
on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors
(DFA) Small Company Fund thereafter; large company stock as represented by the
S & P 500 index, bonds as represented by the 20-year U.S. Long Term Government
Bonds, and Cash as represented by the U.S. 30-day Treasury Bill. Past
performance is no guarantee of future results.
1
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EVERGREEN SELECT SMALL CAP GROWTH FUND
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PORTFOLIO MANAGER COMMENTARY
PORTFOLIO MANAGEMENT
The Evergreen Select Small Cap Growth Fund is managed by Thomas L. Holman. Mr.
Holman is a member of the Small Cap Growth Team at Keystone Investment
Management Co. where he manages the Fund and separately-managed, small-cap
growth accounts. His research responsibilities include real estate, capital
goods and telecommunications. Prior to joining Keystone in 1997, Mr. Holman was
a Portfolio Manager and securities analyst at Invista Capital Management. He
developed quantitative models and had co-management responsibility for several
small- and mid-cap portfolios. As an analyst, he was a generalist, covering a
wide variety of industries including technology, telecommunications equipment,
media services, basic industry, consumer staples, and retail. Mr. Holman
received his B.S. and M.B.A. from Iowa State University.
PERFORMANCE
The Evergreen Select Small Cap Growth Fund produced a total return of 21.7% for
the twelve-month period ended February 28, 1998. This return lagged the 25.6%
return of the Fund's benchmark, the Russell 2000 Growth Index. After getting off
to a slow start in March and April of 1997, small company stocks surged ahead
during the summer. Their upward momentum was interrupted, however, when economic
problems in several Asian countries reverberated throughout the world's
financial markets. As Asia's troubles created uncertainty, investors favored the
quality and liquidity offered by large company stocks.
INVESTMENT STRATEGY
Over the fiscal year, our investment strategy centered on reducing portfolio
risk by eliminating some of the more volatile companies in the portfolio and
replacing them with companies that we believe have predictable and consistent
earnings growth potential and attractive valuations. In light of the Asian
financial crisis, we reviewed the Fund's holdings with an eye to reducing its
exposure to foreign markets. This resulted in developing a more defensive
portfolio, one composed primarily of domestically-oriented companies.
SECTOR ALLOCATION ADJUSTMENTS
The most notable adjustment to the portfolio came in the area of technology.
Because many technology companies depend on sales in Asia for a significant
percentage of their profits, we reduced the portfolio's weighting in technology
stocks from 36% of net assets on August 31, 1997, to 24% of net assets (7%
software and 17% hardware) on February 28, 1998. We used some of the proceeds
from the sale of technology holdings to invest in consumer and business services
stocks. We emphasized stocks that are benefiting from a strong domestic economy.
In the consumer area, we invested in well-known food companies such as
Smucker's, but we also added two education companies to the portfolio-- Strayer
Education and Bright Horizons Children, Inc. Strayer Education operates nine
colleges in the Washington D.C. and northern Virginia area. These colleges cater
to part-time students who have full-time jobs. The company is reaping the
rewards of a trend toward life-long learning and retraining. With Bright
Horizons, a company that operates day care centers at work sites, we
participated in the initial public offering.
Among business services companies, we added Hearst Argyle Television, an owner
of 15 network-affiliated television stations and two radio stations. The strong
economy has significantly boosted broadcaster's advertising revenues, and as a
result, Hearst Argyle has experienced strong cash flow growth.
We increased the number of small industrial companies in the portfolio, and at
the end of the fiscal year they accounted for 11% of net assets. These are
cyclical businesses-- companies that are sensitive to economic trends. General
Cable, a manufacturer of wiring systems, and Applied Power, a builder of
hydraulic products are two examples of businesses in this market sector. We
sometimes refer to the small industrial companies in the portfolio as "growth
cyclicals," because we believe they have the potential to be profitable even
during an economic slowdown. Because they have well-defined market niches, high
cash flow levels, and strong earnings, we think that in a slower economy, many
of these businesses have the potential to buy out their competitors and increase
their market share.
2
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EVERGREEN SELECT SMALL CAP GROWTH FUND
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In the telecommunications sector, we found new opportunities in Competitive
Local Exchange Carriers (CLECs), companies that provide consumers with more
choice in selecting their local telephone service supplier. There is increasing
competition in the local exchange area, and these companies have been effective
in taking market share from incumbent providers. Using new technology, CLECs can
provide the same, or enhanced, levels of service at considerably lower cost to
consumers.
CLECs that service U.S. markets have been solid performers over the past year or
two, and newly established CLECs that primarily do business in Europe should
hold just as much, if not more, potential. European countries are in the initial
stages of deregulating their telecommunications industries, and we believe two
companies that should benefit from this are IDT Corporation and Telegroup.
Telephone service is more expensive in Europe, especially for long-distance
calls, and these two businesses specialize in providing relatively low cost and
better long-distance service to customers.
Even though the portfolio's healthcare allocation stayed roughly the same, we
significantly changed the types of healthcare stocks we hold in the portfolio.
We eliminated aggressive and volatile biotechnology companies and start-up
device firms and replaced them with companies that have proven historical
records of consistent earnings growth. These include two steady performers--
Maxxim Medical, a company that makes non-latex gloves and custom procedure trays
for the Healthcare Industry, and Renal Care, owner of 135 kidney dialysis
outpatient centers in 17 states.
OUTLOOK
In reviewing economic fundamentals going forward, we believe economic growth
will continue to be moderate and inflation and interest rates will stay at
relatively low levels. This is a healthy environment for small company stocks.
While we may see more fallout from the Asian economic crisis, we believe its
impact on the portfolio should be reduced by the Fund's domestic orientation and
lower risk profile. Despite the recent focus on turmoil in foreign markets, we
believe it is important to remember that individual stock selection remains the
most important determinant of performance. With that in mind, we continue to
invest in U.S. companies that are attractively priced and have the potential for
consistent earnings growth.
TOP 10 HOLDINGS
(as a percentage of net assets)
<TABLE>
<S> <C>
Roper Industries.................................... 3.6%
Chattem, Inc........................................ 2.6%
First Alliance Co................................... 2.3%
Natural Microsystems Corp........................... 2.2%
Applied Power, Inc.................................. 2.2%
DII Group, Inc...................................... 2.1%
General Cable Corp.................................. 2.1%
Newpark Resources, Inc.............................. 2.1%
Market Facts, Inc................................... 2.1%
Smucker (J.M.) Co., Cl. A........................... 2.0%
</TABLE>
TOP 5 SECTORS
(as a percentage of net assets)
<TABLE>
<S> <C>
Information Services & Technology................... 13.6%
Electrical Equipment & Services..................... 13.4%
Healthcare Products & Services...................... 7.7%
Telecommunication Services & Equipment.............. 7.5%
Consumer Products & Services........................ 6.5%
</TABLE>
PERFORMANCE AND RETURNS
<TABLE>
<S> <C>
Inception Date................................... 12/28/95
Average Annual Returns
1 year......................................... 21.67%
Since Inception................................ 16.49%
12-month capital gains distributions per share... $0.47
</TABLE>
Comparison of a $1,000,000 investment in Evergreen Select Small Cap Growth Fund,
Class I, versus a similar investment in the Russell 2000 Growth Index.
[Performance graph appears here with the following plot points]
<TABLE>
<CAPTION>
12/95 2/96 8/96 2/97 8/97 2/98
<S> <C> <C> <C> <C> <C> <C>
Evergreen Select Small Cap,
Class I 1,000,000 1,098,000 1,087,000 1,144,603 1,319,134 1,392,589
Russell 2000 1,000,000 1,030,056 1,065,689 1,159,406 1,374,251 1,506,676
</TABLE>
Past Performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. The Russell 200 Growth Index is an unmanaged index. The
index does not include transaction costs associated with buying and selling
securities nor any management fees.
FUNDS THAT INVEST IN STOCKS OF SMALL COMPANIES, ALSO CALLED SMALL-CAP STOCKS,
INVOLVE CERTAIN RISKS AND, THEREFORE, MAY NOT BE APPROPRIATE FOR ALL INVESTORS.
ALTHOUGH THEY MAY OFFER THE POTENTIAL FOR GREATER LONG-TERM RETURNS, THEY ALSO
MAY EXPERIENCE GREATER PRICE VOLATILITY DUE TO THEIR LIMITED FOCUS ON A
PARTICULAR INDUSTRY, MARKET, PRODUCT, OR SERVICE, OR BECAUSE THEY INVEST IN
SMALLER, LESS ESTABLISHED COMPANIES.
3
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EVERGREEN SELECT SMALL CAP GROWTH FUND
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FINANCIAL HIGHLIGHTS - CLASS I
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------
1998 1997*
<S> <C> <C>
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NET ASSET VALUE BEGINNING OF YEAR............................................... $ 11.28 $ 11.65
------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment loss........................................................... (0.06)** (0.04)**
Net realized and unrealized gain (loss) on investments........................ 2.48 (0.16)
------- -------
Total from investment operations................................................ 2.42 (0.20)
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DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments......................................... (0.47) (0.17)
------- -------
NET ASSET VALUE END OF YEAR..................................................... $ 13.23 $ 11.28
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Total return.................................................................... 21.67% (1.75)%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................................ 0.92% 1.00%+
Total expenses, excluding fee waiver & expense reimbursement.................. 0.95% 2.53%+
Net investment loss........................................................... (0.48)% (0.57)%+
Portfolio turnover rate......................................................... 166% 123%
Average commission rate paid.................................................... $ 0.0493 $ 0.0509
NET ASSETS END OF YEAR (THOUSANDS).............................................. $ 47,524 $ 2,888
<CAPTION>
PERIOD FROM
December 28, 1995
(COMMENCEMENT OF
OPERATIONS)
TO JUNE 30, 1996
<S> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF YEAR............................................... $ 10.00
-------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment loss........................................................... (0.03)
Net realized and unrealized gain (loss) on investments........................ 1.68
-------
Total from investment operations................................................ 1.65
-------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments......................................... 0
-------
NET ASSET VALUE END OF YEAR..................................................... $ 11.65
-------
Total return.................................................................... 16.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................................ 1.00%+
Total expenses, excluding fee waiver & expense reimbursement.................. 2.81%+
Net investment loss........................................................... (0.45)%+
Portfolio turnover rate......................................................... 57%
Average commission rate paid.................................................... $ 0.0847
NET ASSETS END OF YEAR (THOUSANDS).............................................. $ 2,446
</TABLE>
+ Annualized.
* For the eight month period ended February 28, 1997. The Fund changed its
fiscal year end from June 30 to the last day of February effective, February
28, 1997.
** Net investment income (loss) is based on average shares outstanding during
the period.
SEE NOTES TO FINANCIAL STATEMENTS.
4
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EVERGREEN
SELECT SMALL CAP GROWTH FUND
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SCHEDULE OF INVESTMENTS
February 28, 1998
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
- ------------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- 96.9%
<C> <C> <S> <C>
AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 0.7%
11,400 * Dura Automotive Systems, Inc....... $ 351,975
-----------
BANKS-- 6.0%
25,700 Dime Community Bancorp, Inc........ 644,106
23,190 Hubco, Inc......................... 847,884
20,000 New York Bancorp, Inc.............. 810,000
27,920 Sovereign Bancorp, Inc............. 541,823
-----------
2,843,813
-----------
BUILDING, CONSTRUCTION & FURNISHINGS-- 3.5%
24,500 General Cable Corp................. 1,015,219
16,600 Oakwood Homes Corp................. 657,775
-----------
1,672,994
-----------
BUSINESS EQUIPMENT & SERVICES-- 5.3%
50,500 * Market Facts, Inc.................. 991,062
34,300 Norrell Corp....................... 801,763
27,150 * Vincam Group, Inc.................. 710,991
-----------
2,503,816
-----------
CONSUMER PRODUCTS & SERVICES-- 6.5%
60,400 * Chattem, Inc....................... 1,238,200
44,650 * Equity Corp. International......... 937,650
48,500 * Helen of Troy Ltd.................. 744,172
7,800 * Nutraceutical International
Corp............................. 169,162
-----------
3,089,184
-----------
EDUCATION-- 4.2%
27,400 * Bright Horizons Childrens, Inc..... 590,812
24,100 * Career Education Corp.............. 515,138
26,600 Strayer Education, Inc............. 887,775
-----------
1,993,725
-----------
ELECTRICAL EQUIPMENT & SERVICES-- 13.4%
29,000 Applied Power, Inc. Cl. A.......... 1,044,000
21,700 * Artisan Components, Inc............ 372,969
19,000 * Asyst Technologies, Inc............ 521,312
38,000 * DII Group, Inc..................... 1,016,500
24,300 * Natural Microsystems Corp.......... 1,046,419
29,700 * Parlex Corp........................ 493,763
13,600 * Pri Automation, Inc................ 473,025
17,800 * QLogic Corp........................ 713,112
20,500 * Sipex Corp......................... 707,250
-----------
6,388,350
-----------
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
FINANCE & INSURANCE-- 4.8%
13,800 * Delphi Financial Group, Inc........ $ 607,200
63,400 * First Alliance Co.................. 1,105,537
23,800 * PAULA Financial.................... 562,275
-----------
2,275,012
-----------
FOOD & BEVERAGE PRODUCTS-- 2.0%
36,200 Smucker (J. M.) Co. Cl. A.......... 963,825
-----------
HEALTHCARE PRODUCTS & SERVICES-- 7.7%
15,100 * Agouron Pharmaceuticals, Inc....... 559,644
8,200 * Cytyc Corp......................... 189,625
54,100 * Graham Field Health Products,
Inc.............................. 933,225
24,100 * Maxxim Medical, Inc................ 546,769
9,000 * Perclose, Inc...................... 226,969
16,300 * Renal Care Group, Inc.............. 615,325
16,900 * Wesley Jessen Visioncare, Inc...... 569,318
-----------
3,640,875
-----------
INDUSTRIAL SPECIALTY PRODUCTS & SERVICES-- 4.8%
28,900 * Halter Marine Group, Inc........... 567,163
58,400 Roper Industries, Inc.............. 1,697,250
-----------
2,264,413
-----------
INFORMATION SERVICES & TECHNOLOGY-- 13.6%
22,800 * Avid Technology, Inc............... 790,162
16,600 * Cognicase, Inc..................... 343,413
26,600 * Discreet Logic, Inc................ 598,500
32,500 * Eletronics for Imaging, Inc........ 719,063
17,500 * FileNet Corp....................... 587,344
16,300 * JDA Software Group, Inc............ 788,512
6,000 * Lycos, Inc......................... 247,875
45,000 * Metacreations Corp................. 383,203
32,400 * Project Software & Development,
Inc.............................. 706,725
32,100 * Radiant Systems, Inc............... 603,881
51,300 * Rational Software Corp............. 695,756
-----------
6,464,434
-----------
OIL/ENERGY-- 2.4%
15,000 * Basin Exploration, Inc............. 246,563
10,600 * Ocean Energy, Inc.................. 495,550
13,200 * Seven Seas Petroleum, Inc.......... 389,400
-----------
1,131,513
-----------
OIL FIELD SERVICES-- 4.9%
10,100 * Cal Dive International, Inc........ 273,963
26,300 * Core Laboratories N.V.............. 540,794
26,000 * Maverick Tube Corp................. 507,812
51,500 * Newpark Resources, Inc............. 991,375
-----------
2,313,944
-----------
</TABLE>
(CONTINUED)
5
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EVERGREEN
SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
February 28, 1998
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
PUBLISHING, BROADCASTING & ENTERTAINMENT-- 1.9%
25,900 * Hearst-Argyle Television, Inc...... $ 908,119
-----------
REAL ESTATE-- 1.3%
36,900 * Capital Automotive REIT............ 643,444
-----------
RETAILING & WHOLESALE-- 4.6%
16,200 * Brylane, Inc....................... 868,725
24,600 * Michaels Stores, Inc............... 838,706
12,100 * Stage Stores, Inc.................. 507,444
-----------
2,214,875
-----------
TELECOMMUNICATION SERVICES & EQUIPMENT-- 7.5%
38,500 * Esprit Telecom Group, Plc-ADR...... 678,562
8,600 * Global Telesystems Group, Inc...... 316,050
21,300 * IDT Corp........................... 740,175
7,700 * Intermedia Communications, Inc..... 587,606
48,800 * Telegroup, Inc..................... 850,950
44,100 * Viatel, Inc........................ 394,144
-----------
3,567,487
-----------
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
TRANSPORTATION-- 1.8%
61,100 * Fritz Companies, Inc............... $ 851,581
-----------
TOTAL COMMON STOCKS
(COST $41,248,721)............... 46,083,379
-----------
REPURCHASE AGREEMENT-- 1.1%
514,000 Keystone Joint Repurchase Agreement
Investments in repurchase
agreements, in a joint trading
account, purchased 2/27/98,
5.67%, maturing 3/2/98, maturity
value $514,243
(cost-- $514,000)(a)............. 514,000
-----------
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $41,762,721)........ 98.0% 46,597,379
OTHER ASSETS AND
LIABILITIES-- NET......... 2.0 926,981
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NET ASSETS.................. 100.0% $47,524,360
------- -----------
------- -----------
</TABLE>
* Non-income producing securities.
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices plus accrued interest at February
28, 1998.
LEGEND OF PORTFOLIO ABBREVIATIONS:
ADR American Depository Receipts
REIT Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments at value (identified cost, $41,762,721)............................................................ $46,597,379
Cash........................................................................................................... 881
Receivable for investments sold................................................................................ 1,344,889
Receivable for Fund shares sold................................................................................ 34,000
Interest and dividends receivable.............................................................................. 9,506
Unamortized organization expenses.............................................................................. 11,255
Prepaid expenses and other assets.............................................................................. 6,907
- -------------------------------------------------------------------------------------------------------------------------------
Total assets................................................................................................. 48,004,817
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased.............................................................................. 444,510
Advisory fee payable........................................................................................... 28,641
Accrued expenses and other liabilities......................................................................... 7,306
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities............................................................................................ 480,457
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS....................................................................................................... $47,524,360
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital................................................................................................ $44,514,915
Accumulated net investment loss................................................................................ (320)
Accumulated net realized loss on investments................................................................... (1,824,893)
Net unrealized appreciation on investments..................................................................... 4,834,658
- -------------------------------------------------------------------------------------------------------------------------------
Total net assets............................................................................................. 47,524,360
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Net assets of $47,524,360 4 3,591,709 shares outstanding....................................................... $13.23
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended February 28, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends....................................................................................................... $ 64,120
Interest........................................................................................................ 60,628
- --------------------------------------------------------------------------------------------------------------------------------
Total income.................................................................................................. 124,748
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Advisory fee......................................................................................... $223,252
Administrative service fees.......................................................................... 4,949
Organization expenses................................................................................ 3,990
Trustees fees........................................................................................ 1,407
Transfer agent fees.................................................................................. 130
Other................................................................................................ 32,975
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses................................................................................................ 266,703
- --------------------------------------------------------------------------------------------------------------------------------
Less: Indirectly paid expenses.................................................................................. (856)
Fee waiver and/or reimbursement from Investment Advisor..................................................... (6,907)
- --------------------------------------------------------------------------------------------------------------------------------
Net expenses.................................................................................................. 258,940
- --------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS............................................................................................. (134,192)
- --------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized loss on investments.................................................................................... (415,947)
Net change in unrealized appreciation of investments............................................................ 4,981,029
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments................................................................... 4,565,082
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................................................. $4,430,890
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28,
1995
YEAR ENDED FEBRUARY 28, (COMMENCEMENT OF
------------------------- OPERATIONS)
1998 1997* TO JUNE 30, 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss........................................................... $ (134,192) $ (9,482) $ (5,309)
Net realized gain (loss) on investments....................................... (415,947) 398,376 34,918
Net change in unrealized appreciation (depreciation) on investments........... 4,981,029 (462,663) 316,292
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations............... 4,430,890 (73,769) 345,901
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments......................................... (1,657,057) (35,700) 0
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold..................................................... 42,857,020 517,700 2,100,000
Payment for shares redeemed................................................... (2,634,970) 0 0
Net asset value of shares issued in reinvestment of distributions............. 1,640,345 34,000 0
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from capital share transactions.................. 41,862,395 551,700 2,100,000
- --------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets................................................ 44,636,228 442,231 2,445,901
NET ASSETS
Beginning of year............................................................. 2,888,132 2,445,901 0
- --------------------------------------------------------------------------------------------------------------------------------
End of year (including accumulated net investment income (loss) of ($320), $0
and $36,922, respectively).................................................. $47,524,360 $2,888,132 $2,445,901
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the eight-month period ended February 28, 1997. The Fund changed its
fiscal year end from June 30 to the last day of February effective February
28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The Evergreen Select Small Cap Growth Fund, formerly Keystone Institutional
Small Capitalization Growth Fund, ("the Fund") is a series of Evergreen Select
Equity Trust, a Delaware business trust organized on September 17, 1997. Prior
to September 17, 1997, the Fund was organized as a Massachusetts business trust.
The Fund is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as a diversified, open-end management investment company.
The Fund offers an Institutional Class of shares ("Class I") and an
Institutional Service Class of shares ("Class IS"). Each Class of shares is sold
without a front-end sales charge or contingent deferred sales charge. Class IS
shares pay an ongoing service fee. Class I and IS shares are available only to
institutional investors through broker dealers, banks and financial
intermediaries. No class IS shares have been sold as of February 28, 1998
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES-- The Fund values securities traded on a national
securities exchange or included on the NASDAQ National Market System ("NMS") at
the last reported sales price on the exchange where primarily traded. Securities
traded on an exchange or NMS for which there has been no sale and other
securities traded in the over-the-counter market at the mean between the last
reported bid and asked price. Securities for which valuations are not available
from an independent pricing service, including restricted securities, are valued
at fair value as determined in good faith according to procedures established by
the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS-- The Fund may invest in repurchase agreements.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement, including accrued interest. The Fund will only enter into
repurchase agreements with banks and other financial institutions that are
deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other funds managed by Keystone Investment
Management Company ("Keystone"), may transfer uninvested cash balances into a
joint trading account. These balances are invested in one or more repurchase
agreements that are fully collateralized by U.S. Treasury and/or federal agency
obligations.
C. SECURITY TRANSACTIONS AND INVESTMENT INCOME-- Securities transactions are
accounted for no later than one business day after the trade date. Realized
gains and losses are computed on the identified cost basis. Interest income is
recorded on the accrual basis and includes accretion of discounts and
amortization of premiums. Dividend income is recorded on the ex-dividend date.
D. FEDERAL TAXES-- The Fund has qualified and intends to continue to qualify as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). Thus, the Fund will not incur any federal income tax
liability since it is expected to distribute all of its net investment income
and net capital gains, if any, to its shareholders. The Fund intends to avoid
any excise tax liability by making the required distributions under the Code.
Accordingly, no provision for federal income taxes is required. To the extent
that realized capital gains can be offset by capital loss carryforwards, it is
the Fund's policy not to distribute such gains.
E. DISTRIBUTIONS-- The Fund intends to distribute net investment income and net
capital gains, if any, at least annually. Distributions to shareholders are
recorded at the close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The differences between financial statement amounts
available for distributions and distributions made in accordance with income tax
regulations are primarily due to differing treatment for net operating losses.
F. ORGANIZATION EXPENSES-- Organization expenses are amortized to operations
over a five-year period on a straight-line basis. In the event any of the
initial shares of the Fund are redeemed by any holder during the five-year
amortization period, redemption proceeds will be reduced by any unamortized
organization expenses in the same proportion as the number of initial shares
being redeemed bears to the number of initial shares outstanding at the time of
the redemption.
G. CLASS ALLOCATIONS-- Income, expenses (other than class specific expenses) and
realized and unrealized gains and losses are prorated among the classes based on
the relative net assets of each class. Currently, class specific expenses are
limited to expenses incurred under the Distribution Plan for Class IS.
10
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest, with no par
value, authorized. Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28, 1995
EIGHT MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED OPERATIONS)
CLASS I FEBRUARY 28, 1998 FEBRUARY 28, 1997* TO JUNE 30, 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
Shares sold....... 3,414,877 43,108 210,000
Shares redeemed... (209,509) 0 0
Shares issued in
reinvestment of
dividends and
distributions... 130,289 2,944 0
- ---------------------------------------------------------------------------------
Net increase...... 3,335,657 46,052 210,000
- ---------------------------------------------------------------------------------
</TABLE>
* The Fund changed fiscal year end from June 30 to the last day in February,
effective February 28, 1997.
4. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the year ended February 28, 1998 were $82,545,903
and $43,826,391, respectively. On February 28, 1998, the cost of investments for
federal income tax purposes was $41,930,245, gross unrealized appreciation of
investments was $6,014,394, and gross unrealized depreciation of investments was
$1,347,260 resulting in net unrealized appreciation of $4,667,134 for federal
income tax purposes.
5. DISTRIBUTION PLAN
Evergreen Distributor, Inc. ("EDI"), a wholly owned subsidiary of The BISYS
Group Inc. ("BISYS") serves as principal underwriter to the Fund. The Fund has
adopted a Distribution Plan for Class IS shares, as allowed by Rule 12b-1 of the
1940 Act. The Distribution Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and service
fees to broker-dealers who sell shares of the Fund, are paid by the fund through
expenses called "Distribution Plan expenses". Class IS, currently pays a service
fee equal to 0.25% of the average daily net assets of the class. Distribution
Plan expenses are calculated daily and paid monthly. During the year ended
February 28, 1998, no Distribution Plan expenses were incurred by the Fund.
A vote of either the Independent Trustees or a majority of the outstanding
voting shares of the respective class may terminate the Distribution Plan at any
time.
6. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
The investment advisor to the Fund is Keystone Investment Management Company
("Keystone"). The Fund pays Keystone a fee for its services which is calculated
daily and paid monthly. The fee is calculated by applying percentage rates to
the aggregate net assets of the Fund as follows: 0.80% of the first $100
million, plus 0.75% of the next $150 million, plus 0.65% of amounts in excess of
$250 million. Keystone has voluntarily agreed to reduce its advisory fee and to
reimburse a portion of the Fund's annual operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses). For the period ended
February 28, 1998, the investment advisor voluntarily reduced their fee by
$6,907.
During the year ended February 28, 1998 the Fund paid or accrued $4,949 to
Keystone for certain administrative services. BISYS Fund Services is
sub-administrator to the Fund. As sub-administrator to the Fund, BISYS Fund
Services provides the officers of the Fund. The sub-administrator for the Fund
is entitled to an annual fee which is paid by Keystone and is not an expense of
the Fund. The sub-administration fee is calculated by applying percentage rates,
which start at 0.01% and decline to .004% per annum as net assets increase, to
the average daily net asset value of the Fund.
Evergreen Service Company ("ESC"), a subsidiary of First Union, serves as the
transfer and dividend disbursing agent for the Fund.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
7. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense-offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
11
<PAGE>
EVERGREEN SELECT SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
On December 15, 1997, a special meeting of shareholders was held to consider a
number of proposals. On October 16, 1997, the record date for the meeting, the
Fund had the following shares outstanding and shares represented at the meeting:
Record date shares outstanding...........................3,523,546
Shares represented at meeting............................2,357,307
Percentage of record date shares represented at meeting......66.9%
The votes recorded at the meeting, by proposal, were as follows:
<TABLE>
<S> <C>
PROPOSAL 1-- THE PROPOSED REORGANIZATION OF EACH FUND AS A SERIES OF THE EVERGREEN SELECT EQUITY TRUST, A DELAWARE
BUSINESS TRUST:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 2-- RECLASSIFICATION AS NON-FUNDAMENTAL OF THE INVESTMENT OBJECTIVE CURRENTLY CLASSIFIED AS FUNDAMENTAL:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3-- CHANGES TO FUNDAMENTAL INVESTMENT RESTRICTIONS:
PROPOSAL 3A-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING DIVERSIFICATION OF INVESTMENTS:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3B-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING CONCENTRATION OF A FUND'S ASSETS IN A PARTICULAR
INDUSTRY:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3C-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING THE ISSUANCE OF SENIOR SECURITIES:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3D-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING BORROWING:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3E-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING UNDERWRITING:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3F-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING INVESTMENTS IN REAL ESTATE:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3G-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING COMMODITIES:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
PROPOSAL 3H-- TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING LENDING:
Shares voted "For"................................................................................................. 2,357,307
Shares voted "Against"............................................................................................. 0
Shares voted "Abstain"............................................................................................. 0
</TABLE>
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
During the year ended February 28, 1998, the Fund paid capital gain
distributions of $299,445, all of which is subject to a 28% tax rate.
12
<PAGE>
EVERGREEN
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Evergreen Select Small Cap Growth Fund
We have audited the accompanying statement of assets and liabilities of
Evergreen Select Small Cap Growth Fund, formerly Keystone Institutional Small
Capitalization Growth Fund, including the schedule of investments, as of
February 28, 1998 and the related statements of operations for the year then
ended, the statements of changes in net assets and financial highlights for the
year ended February 28, 1998, the eight-month period ended February 28, 1997 and
the period from December 28, 1995 (commencement of operations) to June 30, 1996.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of February 28, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Evergreen Select Small Cap Growth Fund as of February 28, 1998, the results of
its operations for the year then ended, the changes in its net assets and
financial highlights for each of the years or periods specified in the first
paragraph above in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1998
13
<PAGE>
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen funds, contact your
financial advisor or call Evergreen.
<TABLE>
<C> <C> <S>
ARE NOT
MUTUAL FUNDS: FDIC MAY LOSE VALUE
INSURED ARE NOT BANK GUARANTEED
</TABLE>
Evergreen Distributor, Inc.
EvergreenSM is a Service Mark of Evergreen Investment Services, Inc. Copyright
1998.
