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PROSPECTUS July 1, 1998
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EVERGREEN SELECT EQUITY TRUST
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LOGO
EVERGREEN SELECT SMALL CAP GROWTH FUND
(THE "FUND")
INSTITUTIONAL SHARES
This prospectus explains important information about the Institutional
Shares of the Fund, including information on how the Fund invests and services
available to shareholders. Please read this prospectus before investing, and
keep it for future reference.
When you consider investing in a fund, remember that the higher the risk
of losing money, the higher the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
By itself, no fund is a complete investment plan. When considering an
investment in the Fund, remember to consider your overall investment
objectives and any other investments you own. You should also carefully
evaluate your ability to handle the risks posed by your investment in the
Fund. You can find information on the risks associated with investing in the
Fund under the section called "Fund Description."
To learn more about the Fund, call 1-800-343-2898 for a free copy of the
Fund's statement of additional information ("SAI"). The Fund has filed the SAI
with the Securities and Exchange Commission and has incorporated it by
reference (legally included it) into this prospectus.
PLEASE REMEMBER THAT SHARES OF THE FUND ARE:
. NOT DEPOSITS OR OBLIGATIONS OF ANY BANK.
. NOT ENDORSED OR GUARANTEED BY ANY BANK.
. NOT INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
. SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSES................................ 3
FINANCIAL HIGHLIGHTS.................... 4
FUND DESCRIPTION........................ 5
Investment Objective................. 5
Securities and Investment Practices
Used By the Fund.................... 5
BUYING AND SELLING SHARES............... 7
How to Buy Shares.................... 7
How to Redeem Shares................. 7
</TABLE>
<TABLE>
<S> <C>
Additional Transaction Policies.. 8
Exchanges........................ 8
Dividends........................ 9
Taxes............................ 9
Shareholder Services............. 9
FUND DETAILS........................ 10
Fund Organization and Service
Providers....................... 10
Other Information and Policies... 11
Fund Performance................. 11
</TABLE>
2
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EXPENSES
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The tables and examples below are designed to help you understand the
various expenses that you will bear, directly or indirectly, when you invest
in the Fund. Shareholder transaction expenses are fees paid directly from your
account when you buy or sell shares of the Fund. There are no shareholder
transaction expenses.
Annual operating expenses reflect the normal operating expenses of the
Fund, and include costs such as management, distribution and other fees. The
table below shows the Fund's estimated annual operating expenses for the
fiscal period ending June 30, 1998. The example shows what you would pay if
you invested $1,000 over the periods indicated. The example assumes that you
reinvest all of your dividends and that the Fund's average annual return will
be 5%. The example is for illustration purposes only and should not be
considered a representation of past or future expenses or annual return. The
Fund's actual expenses and returns will vary. For a more complete description
of the various costs and expenses borne by the Fund see "Fund Details."
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES(1)
(AS A PERCENTAGE OF
AVERAGE DAILY NET MANAGEMENT 12B-1 OTHER TOTAL OPERATING
ASSETS) FEES FEES EXPENSES EXPENSES
--------------------- ---------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C>
0.80% None 0.10% 0.90%
<CAPTION>
EXAMPLE OF FUND EXPENSES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
$9 $29 $50 $111
</TABLE>
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3
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FINANCIAL HIGHLIGHTS
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The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report thereon are incorporated by reference into the SAI.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 28, 1995
FEBRUARY 28, (COMMENCEMENT OF
------------------ OPERATIONS)
1998 1997* TO JUNE 30, 1996
------- ------- ----------------- ---
<S> <C> <C> <C> <C>
Net asset value beginning of year.. $ 11.28 $ 11.65 $ 10.00
------- ------- -------
Income (loss) from investment
operations
Net investment loss............... (0.06)** (0.04)** (0.03)
Net realized and unrealized gain
(loss) on investments............ 2.48 (0.16) 1.68
------- ------- -------
Total from investment operations... 2.42 (0.20) 1.65
------- ------- -------
Distributions to shareholders
From net realized gain on
investments...................... (0.47) (0.17) 0
------- ------- -------
Net asset value end of year........ $ 13.23 $ 11.28 $ 11.65
------- ------- -------
Total return....................... 21.67% (1.75)% 16.50%
Ratios/supplemental data
Ratios to average net assets:
Total expenses.................... 0.92% 1.00%+ 1.00%+
Total expenses, excluding fee
waiver & expense reimbursement... 0.95% 2.53%+ 2.81%+
Net investment loss............... (0.48)% (0.57)%+ (0.45)%+
Portfolio turnover rate............ 166% 123% 57%
Average commission rate paid....... $0.0493 $0.0509 $0.0847
Net assets end of year
(thousands)....................... $47,524 $ 2,888 $ 2,446
</TABLE>
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+ 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.
4
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FUND DESCRIPTION
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INVESTMENT OBJECTIVE
The Fund seeks to provide shareholders with long-term growth of capital.
Under normal circumstances, the Fund invests at least 65% of its total assets
in equity securities of companies with small market capitalizations.
Generally, the Fund intends to invest at least 80% of its net assets in the
stocks of companies with market capitalizations that are generally less than
$1 billion and more than $100 million ("small companies") at the time of the
Fund's investment. Companies whose capitalization falls outside this range
after the purchase continue to be considered small companies for this purpose;
however, the Fund intends to sell securities of companies whose
capitalizations fall below $50 million or rise above $2 billion.
Under normal economic conditions, the Fund's strategy is to remain
essentially fully invested with cash reserves below 5% of its market value.
However, if market conditions warrant, the Fund may adopt a more defensive
strategy to preserve shareholders' capital by investing in money market
investments. Such instruments, which must mature within one year of their
purchase, consist of United States ("U.S.") government securities;
instruments, including certificates of deposit, demand and time deposits and
bankers' acceptances, of banks that are members of the Federal Deposit
Insurance Corporation and have at least $1 billion in assets as of the date of
their most recently published financial statements; and prime commercial
paper. When the Fund invests for defensive purposes, it seeks to limit the
risk of loss of principal and is not pursuing its investment objective.
The Fund's investment objective is nonfundamental. As a result, the Fund
may change its objective without a shareholder vote. The Fund has also adopted
certain fundamental investment policies which are mainly designed to limit the
Fund's exposure to risk. The Fund's fundamental policies cannot be changed
without a shareholder vote. See the SAI for more information regarding the
Fund's fundamental investment policies or other related investment policies.
SECURITIES AND INVESTMENT PRACTICES USED BY THE FUND
You can find more information about the types of securities in which the Fund
may invest, the types of investment techniques the Fund may employ in pursuit
of its objective and a summary of related risks set forth below. The Fund's
SAI contains additional information about these investments and investment
techniques.
Equity Securities. The Fund invests primarily in common stocks. A common stock
represents an equity (ownership) interest in a corporation. The Fund expects
to profit from stocks primarily by (1) selling shares at a higher price than
it paid and (2) earning dividends.
Investments in stocks are subject to market risk, which is the
possibility that stock prices in general will decline over short or even
extended periods. Stock markets tend to move in cycles, with periods of rising
stock prices and periods of falling stock prices. Also, investing in small
companies involves greater risk than investing in larger companies. Small
company 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 such companies on limited product lines, markets, and financial
and management resources. These and other factors may make small 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 companies may be less marketable than larger
companies.
Futures Contracts and Options Transactions. The Fund may invest in futures
contracts and options transactions. Futures contracts provide for the future
sale by one party and purchase by another party of a specified amount of a
specified security at a specified future time and at a specified price.
An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. A put option on a
security gives the purchaser of the option the right to sell, and the writer
of the option the obligation to buy, the underlying security at any time
during the option period. A call option on a security gives the purchaser of
the option the right to buy, and the writer of the option the obligation to
sell the underlying security at any time during the option period.
5
<PAGE>
These transactions are used to maintain cash reserves while remaining
fully invested, facilitate trading, reduce transaction costs or seek higher
investment returns when the contract is priced more attractively than the
underlying equity security or index.
The Fund may not use futures contracts or options transactions to
leverage its net assets for speculative purposes. See "Futures Transactions
and Related Options Transactions" in the SAI.
U.S. Government Securities. U.S. government securities are debt securities
that are issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Some U.S. government securities, such
as Treasury bills, notes and bonds, are supported by the full faith and credit
of the U.S. Others, however, are supported only by the credit of the
instrumentality or by the right of the instrumentality to borrow from the U.S.
government.
While U.S. government securities are guaranteed as to principal and
interest, their market value is not guaranteed. Generally, U.S. government
securities are subject to the same interest rate and credit risks as other
fixed-income securities. However, since U.S. government securities are of the
highest credit quality, the credit risk is minimal. THE U.S. GOVERNMENT DOES
NOT GUARANTEE THE NET ASSET VALUE OF THE FUND'S SHARES.
Derivatives. Derivatives are financial contracts whose value is based on an
underlying asset, such as a stock or a bond, or an underlying economic factor,
such as an index or an interest rate. The Fund may purchase put and call
options, write covered put and call options, enter into futures contracts and
use options on futures contracts. All of these investments are forms of
derivative instruments. The Fund may use futures and options for hedging
purposes only, not for speculation.
Losses from derivatives can sometimes be substantial. This is true partly
because small price movements in the underlying asset can result in immediate
and substantial gains or losses in the value of the derivative. Derivatives
can also cause the Fund to lose money if the Fund fails to correctly predict
the direction in which the underlying asset or economic factor will move.
Borrowing. The Fund may borrow from banks in an amount up to 33 1/3% of its
total assets, taken at market value. The Fund may only borrow as a temporary
measure for extraordinary or emergency purposes such as the redemption of Fund
shares. The Fund will not purchase securities while borrowings are outstanding
except to exercise prior commitments and to exercise subscription rights.
Securities Lending. To generate income and offset expenses, the Fund may lend
securities to broker-dealers and other financial institutions. While
securities are on loan, the borrower will pay the Fund any income accruing on
the security. Also, the Fund may invest any collateral it receives in
additional securities.
Gains or losses in the market value of a lent security will affect the
Fund and its shareholders. When the Fund lends its securities, it runs the
risk that it could not retrieve the securities on a timely basis, possibly
losing the opportunity to sell the securities at a desirable price. Also, if
the borrower files for bankruptcy or becomes insolvent, the Fund's ability to
dispose of the securities may be delayed.
Repurchase Agreements. The Fund may enter into repurchase agreements. A
repurchase agreement is an agreement by the Fund to purchase a security and
sell it back for a specified price. The repurchase price reflects an agreed-
upon interest rate for the time period of the agreement. The Fund's risk is
the inability of the seller to pay the agreed-upon price at delivery date.
However, such risk is tempered by the ability of the Fund to sell the security
in the open market in case of default. In such a case, the Fund may incur
costs in disposing of the security which would increase Fund expenses.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement is an agreement by the Fund to sell
a security and repurchase it at a specified time and price. The Fund could
lose money if the market value of the securities it sold declines below their
repurchase price. Reverse repurchase agreements may be considered a form of
borrowing, and, therefore, a form of leverage. Leverage may magnify gains or
losses of the Fund.
Investing in Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies. As a shareholder of another
investment company, the Fund would pay its portion of the other investment
company's expenses. These expenses would be in addition to the expenses that
the Fund currently bears concerning its own operations and may result in some
duplication of fees.
6
<PAGE>
When-Issued, Delayed-Delivery and Forward Commitment Transactions. The Fund
may enter into transactions whereby it commits to buying a security, but does
not pay for or take delivery of the security until some specified date in the
future. The value of these securities is subject to market fluctuation during
this period and no income accrues to the Fund until settlement. At the time of
settlement, a when-issued security may be valued at less than its purchase
price. When entering into these transactions, the Fund relies on the other
party to consummate the transaction; if the other party fails to do so, the
Fund may be disadvantaged.
Temporary Defensive Investments. The Fund may invest for temporary defensive
purposes up to 100% of its assets in short-term obligations. Such obligations
may include U.S. government securities, master demand notes, commercial paper
and notes, bank deposits and other financial institution obligations.
Other Investment Restrictions. The Fund has adopted additional investment
restrictions and guidelines that are set forth in the SAI.
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BUYING AND SELLING SHARES
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HOW TO BUY SHARES
Institutional investors may buy Institutional Shares of the Fund through
broker-dealers, banks and certain other financial intermediaries, or directly
through the Fund's distributor, Evergreen Distributor, Inc. Investors may
purchase Institutional Shares at the public offering price, which equals the
class's net asset value per share ("NAV"). See "Offering Price and Other
Purchase Information" below.
Minimum Investment. The minimum initial investment in Institutional Shares is
$1 million, which may be waived in certain situations. There is no minimum
amount required for subsequent purchases.
Opening an Account. You may open an account by mailing a signed account
application to the Fund c/o Evergreen Service Company, P.O. Box 2121, Boston,
Massachusetts 02106-2121. You may get an account application by calling 1-800-
343-2898.
Except as provided below, you can only purchase shares by wiring federal
funds to Evergreen Service Company (the "Service Company"). You may obtain
wiring instructions by calling 1-800-343-2898. When you call, the Service
Company representative will ask you for the following information: name of
authorized person; shareholder name; shareholder account number; name of the
Fund and share class; amount being wired; and wiring bank name.
Offering Price and Other Purchase Information. When you buy the Fund's shares,
you pay its NAV next determined after the Fund receives and accepts your
order. To receive that day's offering price, the Fund must receive and accept
your order by the close of regular trading (currently 4:00 p.m. Eastern time);
otherwise, you will receive the next day's offering price. For more
information, see "How the Fund Calculates its NAV."
You may, at the Fund's discretion, pay for shares of the Fund with
securities instead of cash. Additionally, if you want to buy the Fund's shares
equal in amount to $5 million or more, the Fund may require you to pay for
those shares with securities instead of cash. The Fund will only accept
securities that are consistent with its investment objective, policies and
restrictions. Also, the Fund will value the securities in the manner described
under "How the Fund Calculates its NAV." Investors who receive the Fund's
shares for securities instead of cash may pay such transaction costs as
broker's commissions, taxes or governmental fees.
HOW TO REDEEM SHARES
You may redeem shares of the Fund by mail, telephone or other types of
telecommunication.
Mail Redemptions. You may redeem shares on each day that the New York Stock
Exchange ("NYSE") is open by mailing a written request to the Service Company
at the following address:
Evergreen Service Company
P.O. Box 2121
Boston, Massachusetts 02106-2121
The signatures on the written request must be properly guaranteed, as
described below.
7
<PAGE>
How to Redeem by Telephone. You may redeem your shares by calling 1-800-343-
2898 between the hours of 9:00 a.m. and 5:00 p.m. (Eastern time) on each
business day. You may also redeem shares by sending a facsimile to 617-210-
2708 or by other means of wire communication. You must state the Fund and
class from which you want to redeem, the number or dollar amount of shares you
want to redeem and your account number. The telephone redemption service is
not available to you automatically. You must elect to do so on your account
application.
If you are unable to reach the Fund, or the Service Company by telephone,
you should redeem by mail.
The Service Company will wire your redemption proceeds to the commercial
bank account designated on the account application. If the Service Company
deems it appropriate, it may require additional documentation. Although at
present the Service Company pays the wire costs involved, it reserves the
right at any time to require the shareholder to pay such costs.
Redemption Value and Other Redemption Policies. When you sell shares, you
receive the NAV computed at the close of the NYSE on the day that the Fund
receives your request, if your request is received before 4:00 p.m. Eastern
time. If the Fund receives your redemption request after 4:00 p.m. Eastern
time, you will receive the next day's NAV. Generally, the Fund pays redemption
proceeds within seven days. The Fund may, at any time, change, suspend or
terminate any of the redemption methods described in this prospectus, except
redemptions by mail. For more information, see "How the Fund Calculates its
NAV."
The Fund may, at its discretion, pay your redemption proceeds with
securities instead of cash. However, the Fund is obligated to redeem shares
solely in cash, up to the lesser of $250,000 or 1% of the Fund's total net
assets during any ninety day period for any one shareholder. See the SAI for
further details.
Except as otherwise noted, neither the Fund, the Service Company nor the
Fund's distributor assumes responsibility for the authenticity of any
instructions received by any of them from a shareholder by telephone. The
Service Company will employ reasonable procedures to confirm that instructions
received over the telephone or otherwise are genuine. Neither the Fund, the
Service Company nor the Fund's distributor will be liable when following
instructions received by telephone or otherwise that the Service Company
reasonably believes to be genuine.
Shareholders may only change information contained in their account
registration (such as the bank account designated to receive wire redemption
proceeds) by writing to the Service Company. Signatures on such written
instructions must be guaranteed, as described below.
ADDITIONAL TRANSACTION POLICIES
How the Fund Calculates its NAV. The Fund's NAV equals the value of its shares
without sales charges. The Fund calculates its NAV by adding up the total
value of its investments and other assets, subtracting its liabilities and
then dividing the result by the number of shares outstanding. The Fund
computes its NAV as of the close of regular trading (generally 4:00 p.m.
Eastern time) on each day that the NYSE is open.
The Fund's assets are valued primarily on the basis of market quotations.
Short-term securities with remaining maturities of sixty days or less for
which quotations are not readily available are valued on the basis of
amortized cost. In addition, securities for which quotations are not readily
available or do not reflect current market value are valued by a method that
the Board of Trustees believes accurately reflects fair value.
Signature Guarantee. For your protection, signatures on stock powers, and
written orders or authorizations must have a signature guarantee. A signature
guarantee can be provided by a U.S. stock exchange member, a bank, or other
persons eligible to guarantee signatures under the Securities Exchange Act of
1934 and the Service Company's policies. The Service Company may waive this
requirement or may require additional documentation in certain cases.
EXCHANGES
You may exchange Institutional Shares of the Fund for Institutional
Shares of any other Evergreen Select Fund. You may exchange your shares
through your broker-dealer, by mail or by telephone. All exchange orders must
comply with the applicable requirements for purchases and redemptions and must
include your account number, the number or value of shares to be exchanged,
the class of shares, and the funds to and from which you wish to exchange.
8
<PAGE>
Signatures on exchange orders must be guaranteed, as described above.
The Fund reserves the right to change or revoke the exchange privilege of
any shareholder or to limit or revoke any exchange. Currently, you may not
make more than five exchanges in a year or three exchanges in a calendar
quarter.
Please read the prospectus of the fund that you want to exchange into
before requesting your exchange.
For federal income tax purposes, an exchange is treated as a sale for
taxable investors.
DIVIDENDS
As a shareholder, you are entitled to your share of earnings on the
Fund's investments. You receive such earnings as either an income dividend or
a capital gains distribution. Income dividends come from the dividends that
the Fund earns from its stocks plus any interest it receives from its bonds.
The Fund realizes a capital gain whenever it sells a security for a higher
price than its tax basis.
Dividend Schedule. The Fund pays shareholders its net investment income at
least annually. The Fund pays shareholders its net capital gains at least once
a year.
Payment Options. Unless you select another option on your account application,
your dividends and capital gains will be reinvested in additional shares of
the Fund.
You may elect to receive some or all of your dividends and capital gains
in cash. Should you select this option, a check will be mailed to you or your
agent or trustee no later than seven days after the payment date.
TAXES
The Fund intends to qualify as a regulated investment company (a "RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended. As long
as the Fund qualifies as a RIC and distributes substantially all of its net
investment income and capital gains, it will not pay federal income taxes on
the earnings it distributes to shareholders.
Distributions to shareholders, whether taken in cash or reinvested in
shares, are generally considered taxable for federal income tax purposes as
follows:
. Income distributions and net short-term capital gains are taxable as
ordinary income.
. Long-term capital gains distributions are taxable as capital gains,
regardless of how long you have held your shares.
After each calendar year, the Service Company will mail you a statement
indicating which of that year's distributions you should treat as ordinary
income and which you should treat as capital gains. Distributions of income or
capital gains may also be subject to state and local taxes. You should always
consult your tax adviser for specific guidance as to the tax consequences of
your investment in the Fund.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from the Service
Company by calling toll free 1-800-633-2700 or by writing to the Service
Company.
Subaccounts. Special processing has been arranged with the Service Company for
banks and other institutions that wish to open multiple accounts (a master
account and subaccounts). An investor wishing to avail himself or herself of
the Service Company's subaccounting facilities will be required to enter into
a separate agreement, with the charges to be determined on the basis of the
level of services to be rendered. Subaccounts may be opened with the initial
investment or at a later date and may be established by an investor with
registration either by name or by number.
9
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FUND DETAILS
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FUND ORGANIZATION AND SERVICE PROVIDERS
Fund Structure. The Fund is an investment pool, which invests shareholders'
money towards a specified goal. The Fund is a diversified series of an open-
end, investment management company, called "Evergreen Select Equity Trust"
(the "Trust"). The Trust is a Delaware business trust organized on September
18, 1997.
Board of Trustees. The Trust is supervised by a Board of Trustees that is
responsible for representing the interests of shareholders. The Trustees meet
periodically throughout the year to oversee the Fund's activities, reviewing,
among other things, the Fund's performance and its contractual arrangements
with various service providers.
Shareholder Rights. All shareholders have equal voting, liquidation and other
rights. Each share is entitled to one vote for each dollar of net asset value
applicable to such share. Shareholders may exchange shares as described under
"Exchanges," but will have no other preference, conversion, exchange or
preemptive rights. When issued and paid for, your shares will be fully paid
and nonassessable. Shares of the Fund are redeemable, transferable and freely
assignable as collateral. The Trust may establish additional classes or series
of shares.
The Fund does not hold annual shareholder meetings; the Fund may,
however, hold special meetings for such purposes as electing or removing
Trustees, changing fundamental policies and approving investment advisory
agreements or 12b-1 plans. In addition, the Fund is prepared to assist
shareholders in communicating with one another for the purpose of convening a
meeting to elect Trustees.
Adviser. The adviser to the Fund is Keystone Investment Management Company
("Keystone") located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
an indirect wholly-owned subsidiary of First Union National Bank ("FUNB").
FUNB is a subsidiary of First Union Corporation ("First Union"). First Union
is located at 301 South College Street, and FUNB at 201 South College Street,
Charlotte, North Carolina 28288-0630. First Union and its subsidiaries provide
a broad range of financial services to individuals and businesses throughout
the U.S.
The Fund pays Keystone a fee for its services as set forth below. Annual
advisory fees are expressed as a percentage of average net assets.
<TABLE>
<CAPTION>
AGGREGATE
NET ASSET VALUE
OF THE SHARES
MANAGEMENT FEE OF THE FUND
-------------- ------------------
<S> <C>
0.80% of the first $100,000,000, plus
0.75% of the next $150,000,000, plus
0.65% of amounts over $250,000,000
</TABLE>
Portfolio Manager. Thomas Holman has been the Portfolio Manager of the Fund
since joining Keystone in January, 1997. Prior to joining Keystone, Mr. Holman
was an investment officer and securities analyst at Invista Capital
Management, Inc. ("Invista"), Des Moines, Iowa, from 1993 to 1997. Mr. Holman
manages the Fund in conjunction with the Keystone Small Cap Growth Team. The
Small Cap Growth Team is headed by J. Gary Craven, a Keystone Senior Vice
President. Prior to joining Keystone in 1996, Mr. Craven was Vice President
and Portfolio Manager of Invista. He joined Invista in 1987 as a Securities
Analyst.
Distributor. Evergreen Distributor, Inc. ("EDI") is the Fund's distributor.
EDI is located at 125 West 55th Street, New York, New York 10019 and is a
subsidiary of The BISYS Group, Inc. EDI markets the Fund and distributes its
shares through broker-dealers, financial planners and other financial
representatives. EDI is not affiliated with First Union.
Transfer Agent. Evergreen Service Company (the "Service Company") is the
Fund's transfer agent. The Service Company is a subsidiary of First Union and
is located at 200 Berkeley Street, Boston, MA 02116-5034. The Service Company
handles shareholder services, including record keeping and account statements,
distribution of dividends and capital gains and processing of transactions.
10
<PAGE>
OTHER INFORMATION AND POLICIES
Banking Laws. The Glass-Steagall Act and other banking laws and regulations
presently prohibit a bank holding company or its affiliates (a "Bank") from
sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company such as the Fund. However, a Bank may
act as investment adviser, transfer agent or custodian to a registered open-
end investment company. A Bank may also purchase shares of such company and
pay third parties for performing these functions.
Securities Transactions. Under policies established by the Trust's Board of
Trustees, the Fund's investment adviser selects broker-dealers to execute
portfolio transactions subject to the receipt of best execution. In so doing,
the Fund's investment adviser may select broker-dealers who are affiliated
with the adviser. Moreover, the Fund may pay higher commissions to broker-
dealers that provide research services, which the adviser may use in advising
the Fund or its other clients.
Portfolio Turnover. The Fund's annual portfolio turnover rate for the fiscal
period ended February 28, 1998 was 166%.
A high rate of portfolio turnover (100% or more) may involve
correspondingly greater brokerage commissions and other transaction costs,
which the Fund and its shareholders must bear. It may also result in the
realization of larger amounts of net short-term capital gains, distributions
from which are taxable to shareholders as ordinary income.
Code of Ethics. The Fund and its investment adviser have adopted a code of
ethics incorporating policies on personal securities trading. In general, these
codes of ethics require that certain personnel of the Fund and its investment
adviser (1) abstain from engaging in certain personal trading practices and
(2) report certain personal trading activities.
Year 2000 Risks. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Fund's investment adviser and the
Fund's other service providers do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." The Fund's investment adviser is taking
steps to address the Year 2000 Problem with respect to the computer systems
that it uses and to obtain assurances that comparable steps are being taken by
the Fund's other major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse impact
on the Fund.
FUND PERFORMANCE
Total Return. Total return is the change in value of an investment in the Fund
over a given period, assuming that dividends and capital gains are reinvested
and that recurring charges are deducted. A cumulative total return reflects
actual performance over a stated period of time. An average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same cumulative total return if performance had been constant
over the entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.
Yield. Yield is the income generated by an investment in the Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
General. The Fund may include comparative performance information in
advertising or in marketing the Fund's shares. Such information could include
data from Lipper Analytical Services, Inc., Morningstar, Inc., CDA
Weisenberger and Value Line, or other industry publications or various indexes
such as the S&P 500 Index.
11
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INVESTMENT ADVISER
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Service Company, 200 Berkeley Street, Boston, Massachusetts 02116-5034
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C. 20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Distributor, Inc., 125 West 55th Street, New York, New York 10019
541909Rv1
<PAGE>
EVERGREEN SELECT EQUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
STATEMENT OF ADDITIONAL INFORMATION
July 1, 1998
EVERGREEN SELECT SMALL CAP GROWTH FUND
(THE "FUND")
THE 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 Fund. It is not a prospectus and
you should read it in conjunction with the prospectus of the Fund, dated July 1,
1998, as supplemented from time to time. You may obtain a copy of the prospectus
from Evergreen Distributor, Inc.
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TABLE OF CONTENTS
INVESTMENT POLICIES..........................................................3
Fundamental Investment Policies.....................................3
Additional Information on Securities and Investment Practices.......5
MANAGEMENT OF THE TRUST.....................................................15
PRINCIPAL HOLDERS OF FUND SHARES............................................18
INVESTMENT ADVISORY AND OTHER SERVICES......................................18
Investment Adviser.................................................18
Distributor........................................................20
Additional Service Providers.......................................20
BROKERAGE ALLOCATION AND OTHER PRACTICES....................................21
Selection of Brokers...............................................21
Brokerage Commissions..............................................21
General Brokerage Policies.........................................21
TRUST ORGANIZATION..........................................................21
Form of Organization...............................................21
Description of Shares..............................................22
Voting Rights......................................................22
Limitation of Trustees' Liability..................................22
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES.............................22
Exchanges..........................................................22
How and When the Fund Calculates its Net Asset
Value Per Share ("NAV")...........................................22
How the Fund Values the Securities it Owns.........................23
Shareholder Services...............................................23
PRINCIPAL UNDERWRITER.......................................................24
ADDITIONAL TAX INFORMATION..................................................25
Requirements for Qualification as a Regulated Investment Company...25
Taxes on the Sale or Exchange of Fund Shares.......................25
Taxes on Distributions.............................................26
Other Tax Considerations...........................................26
CALCULATION OF PERFORMANCE DATA.............................................26
ADDITIONAL INFORMATION......................................................27
FINANCIAL STATEMENTS........................................................27
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INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). Where necessary, an explanation beneath a fundamental policy describes
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. DIVERSIFICATION
The Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
FURTHER EXPLANATION OF DIVERSIFICATION POLICY:
To remain classified as a diversified investment company under the 1940
Act, the Fund must conform with the following: With respect to 75% of its total
assets, a diversified investment company may not invest more than 5% of its
total assets, determined at market or other fair value at the time of purchase,
in the securities of any one issuer, or invest in more than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These limitations do not apply to investments in securities issued or
guaranteed by the United States ("U.S.") government or its agencies or
instrumentalities.
2. CONCENTRATION
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than securities that
are issued or guaranteed by the U.S.
government or its agencies or instrumentalities).
FURTHER EXPLANATION OF CONCENTRATION POLICY:
The Fund may not invest more than 25% of its total assets, taken at
market value , in the securities of issuers primarily engaged in any particular
industry (other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
3. ISSUING SENIOR SECURITIES
Except as permitted under the 1940 Act, the Fund may not issue senior
securities.
4. BORROWING
The Fund may not borrow money, except to the extent permitted by
applicable law.
FURTHER EXPLANATION OF BORROWING POLICY: The Fund may borrow from banks
in an amount up to 33 1/3% of its total assets, taken at market value. The Fund
may also borrow up to an additional 5% of its total assets from banks or others.
The Fund may borrow only as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. The Fund
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may not purchase securities while borrowings are outstanding except to exercise
prior commitments and to exercise subscription rights (as defined in the 1940
Act) or enter into reverse repurchase agreements, in amounts up to 33 1/3 % of
its total assets (including the amount borrowed). The Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities. The Fund may purchase securities on margin and engage
in short sales to the extent permitted by applicable law
5. UNDERWRITING
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. REAL ESTATE
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a) securities that
are directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. COMMODITIES
The Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may engage in financial futures
contracts and related options and currency contracts and related options and may
otherwise do so in accordance with applicable law and without registering as a
commodity pool operator under the Commodity Exchange Act.
8. LENDING
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The acquisition
of investment securities or other investment instruments shall not be deemed to
be the making of a loan.
FURTHER EXPLANATION OF LENDING POLICY:
To generate income and offset expenses, the Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay the Fund any income accruing on the security. The
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Gains or losses in
the market value of a security lent will affect the Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
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ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES
The investment objective of the Fund and a description of the
securities in which the Fund may invest is set forth in the Fund's prospectus.
The following expands upon the discussion in the prospectus regarding certain
investments of the Fund.
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. 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.
The Fund can use derivatives to earn income, to enhance returns, to
hedge or adjust the
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risk profile of the portfolio, in place of more traditional direct investments
or to obtain exposure to otherwise inaccessible markets. The Fund's use of
derivatives for non-hedging purposes entails greater risks than if the Fund were
to use derivatives solely for hedging purposes.
Derivatives are a valuable tool which, when used properly, can provide
significant benefit to the Fund's shareholders. The Fund's investment adviser is
not an aggressive user of derivatives with respect to the Fund. However, the
Fund may take positions in those derivatives that are within its investment
policies if, in the Adviser's (as hereinafter defined) 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 the 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 the 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 the Fund's interest.
Management Risk -- Derivative products are highly specialized
instruments that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions. Because derivatives are complex, the Fund and
its Adviser must (1) maintain controls to monitor the transactions entered into,
(2) assess the risk that a derivative adds to the Fund's portfolio and (3)
forecast price, interest rate or currency exchange rate movements correctly.
Credit Risk -- This is the risk that the 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, the Fund
considers the creditworthiness of each counter party to a privately negotiated
derivative in evaluating potential credit risk.
Liquidity Risk -- Liquidity risk is the possibility that the 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), the 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
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valued subjectively. Improper valuations can result in increased cash payment
requirements to counter parties or a loss of value to the Fund. Derivatives do
not always perfectly or even highly correlate or track the value of the assets,
rates or indices they are designed to closely track. Consequently, the Fund's
use of derivatives may not always be an effective means of, and sometimes could
be counterproductive to, furthering the Fund's investment objective.
Options Transactions
Writing Covered Options. The Fund may write (i.e., sell) covered call
and put options. By writing a call option, the Fund becomes obligated during the
term of the option to deliver the securities underlying the option upon payment
of the exercise price. 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. The Fund also may write
straddles (combinations of covered puts and calls on the same underlying
security).
The Fund may only write "covered" options. This means that while the
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 the 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 Fund does not expect,
however, that this will occur. The 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. The Fund receives a premium from writing a
call or put option, which it retains whether or not the option is exercised. By
writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and, by writing a put option, the
Fund might become obligated to purchase the underlying security for more than
its current market price upon exercise.
Purchasing Options. The Fund may purchase put or call options,
including put or call options for offsetting previously written put or call
options of the same series. Once the 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 the 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 the Fund's ability to
use such options to achieve its investment objective.
Options Trading Markets. The Fund trades in options that are generally
listed on national
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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 the Fund. Certain state authorities may limit the use
of options traded in the over-the-counter market.
The 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 Fund may 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 Fund or as a hedge against changes in the
prices of securities held by the Fund or to be acquired by the Fund. The 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 the 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 the 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, the 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 Fund intends 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 Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does 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 specified
commodity at the specified future time for the specified price. In contrast, a
spot transaction
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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 the 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 the 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,
U.S. Treasury notes and GNMA certificates are backed by the full faith and
credit of the U.S. government, 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 Fund may sell interest rate index and other index
based futures contracts to hedge against changes which are expected to affect
the Fund's portfolio.
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 the 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
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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 the 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 the
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 the 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, the 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 the 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 the 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. f 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 the 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 the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
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Options on Financial Futures. The Fund may 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 on 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 Fund intends to use options on financial futures contracts in
connection with hedging strategies. In the future the Fund 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 the 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 the Fund is not fully invested.
Use of New Investment Techniques Involving Financial Futures Contracts
or Related Options. The Fund may employ new investment techniques involving
financial futures contracts and related options. The Fund intends 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 Fund in the foreseeable future other than those described above.
Limitations on Purchase and Sale of Futures Contracts and Related
Options on Such Futures Contracts. The 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 Fund intends 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 the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
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<PAGE>
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents equal to the market value of the futures
contracts will be deposited in a segregated account 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 various circumstances, such as
variations in speculative market demand for futures contracts and for
securities, including technical influences in futures contracts trading; and
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 the
Fund's portfolio. In addition, futures contract transactions involve the remote
risk that a party may 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 was then
closed out at a total decrease of 15% of the futures contract, it 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, the 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 the 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
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<PAGE>
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. The 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 the 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 the 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.
Investment Company Securities
Securities of other investment companies may be acquired by the Fund 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. As a shareholder of another investment company, the Fund 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 Fund bears directly in connection with its
own operations. However, the Fund may invest all of its investable assets in
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, polices and limitations as the Fund.
Repurchase Agreements
The Fund 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 by the
Fund's Adviser to be creditworthy. A repurchase agreement is an agreement by
which a person (e.g., the 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.
The 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 the Fund might
be delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Fund and allow retention or disposition of such securities.
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<PAGE>
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.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase agreement,
the Fund transfers possession of a portfolio instrument to another person, such
as a financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in securities
that are illiquid. A security is illiquid when the Fund cannot dispose of it in
the ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
The Fund may invest in "restricted" securities, i.e., securities
subject to restrictions on resale under federal securities laws. Rule 144A under
the Securities Act of 1933 ("Rule 144A") allows certain restricted securities to
trade freely among qualified institutional investors. Since Rule 144A securities
may have limited markets, the Board of Trustees will determine whether such
securities should be considered illiquid for the purpose of determining a Fund's
compliance with the limit on illiquid securities indicated above. In determine
the liquidity of Rule 144A securities, the Trustees will consider: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) dealer undertakings to make a market in the security; and (4) the
nature of the security and the nature of the marketplace trades.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Fund may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. These
transactions involve the purchase of debt obligations with delivery and payment
normally taking place within a month or more after the date of commitment to
purchase. The Fund 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.
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<PAGE>
Segregated accounts will be established and the Fund will maintain
liquid assets in an amount at least equal in value to the Fund's commitments to
purchase when-issued securities. If the value of these assets declines, the 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.
The 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 the 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 the 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 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.
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.
<TABLE>
<CAPTION>
NAME POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant;
(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) former Director, Executive Vice President and
Treasurer, State Street Research & Management
Company (investment advice); Director, The Andover
Companies (Insurance); and Trustee, Arthritis
Foundation of New England
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<PAGE>
NAME POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- ------------------------- -----------------------------------------------------------------
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/38) Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chairman and President, Oldways
Preservation and Exchange Trust (education); former Chairman
of the Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive Officer, Gifford Gifts
of Fine Foods; and former Chair man, Gifford, Drescher &
Associates (environmental consulting)
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, Carson
(DOB: 2/14/39) Products Company; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund;
and former President, Morehouse College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel
(DOB: 7/14/39) producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President, DHR
(DOB: 9/14/41) International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health
(DOB: 6/2/47) Services; former Managed Health Care Consultant;
and former President, Primary Physician Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
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<PAGE>
NAME POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- ------------------------- -----------------------------------------------------------------
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut Natural Gas
Corporation, Hartford Hospital, Old State House Association,
Middlesex Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Greater Hartford YMCA; former
Director, Vice Chairman and Chief Investment Officer, The
Travelers Corporation; former Trustee, Kingswood-Oxford
School; and former Managing Director and Consultant, Russell
Miller, Inc.
William J. Tomko* President and Senior Vice President and Operations Executive,
(DOB: 8/30/58) Treasurer BISYS Fund Services.
Nimish S. Bhatt* Vice President and Vice President, Tax, BISYS Fund Services; former
(DOB: 6/6/63) Assistant Treasurer Assistant Vice President, Evergreen Asset
Management Corp./First Union National Bank; former
Senior Tax Consulting/Acting Manager, Investment
Companies Group, Price Waterhouse LLP, New York.
Bryan Haft* Vice President Team Leader, Fund Administration, BISYS Fund
(DOB: 1/23/65) Services.
D'Ray Moore* Secretary Vice President, Client Services, BISYS Fund Services.
(DOB: 3/30/59)
</TABLE>
*Address: BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-8001
Listed below is the estimated Trustee compensation for the fiscal year
ended February 28, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS TOTAL COMPENSATION
COMPENSATION ACCRUED AS PART ESTIMATED ANNUAL FROM REGISTRANT AND
FROM OF FUND BENEFITS UPON FUND COMPLEX PAID TO
NAME OF PERSON REGISTRANT EXPENSES RETIREMENT DIRECTORS
<S> <C> <C> <C> <C>
Laurence B. Ashkin $812.14 $0 $0 $70,838.040
Charles A. Austin $817.36 $0 $0 $44,134.96
K. Dun Gifford $779.81 $0 $0 $56,386.06
James S. Howell $1,136.37 $0 $0 $110,819.46
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<PAGE>
COMPENSATION TABLE
Leroy Keith Jr. $738.08 $0 $0 $40,427.31
Gerald M. McDonnell $816.06 $0 $0 $96,987.58
Thomas L. McVerry $958.48 $0 $0 $98,502.35
William Walt Pettit $780.46 $0 $0 $94,266.18
David M. Richardson $784.38 $0 $0 $43,719.44
Russell A. Salton, III $840.44 $0 $0 $97,526.26
Michael S. Scofield $871.35 $0 $0 $100,289.50
Richard J. Shima $781.77 $0 $0 $64,560.08
</TABLE>
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, the officers and Trustees of the Trust
owned as a group less than 1% of the outstanding shares of any class of the
Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of the
Fund's outstanding shares as of May 31, 1998
EVERGREEN SELECT SMALL CAP GROWTH FUND
INSTITUTIONAL CLASS
First Union National Bank 72.112%
RE-Invest Account
ATTN: Trust Operations Fund Group
401 South Tryon Street, 3rd FL
Charlotte, NC 28202-1911
Worcester County Retirement 18.964%
System
ATTN: Michael J. Donoghue
Chairman & Treasurer
2 Main St., Room 3 Courthouse
Worcester, MA 01608-1116
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Keystone Investment Management Company ("Keystone") is the investment
adviser (the "Adviser") to the Fund. Keystone, located at 200 Berkeley Street,
Boston, Massachusetts 02116- 5034, is an indirect wholly-owned subsidiary of
First Union National Bank ("FUNB"). FUNB is a subsidiary of First Union
Corporation ("First Union"), a bank holding company. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States. First Union is located at 301 South
College Street, and FUNB at 201 South College Street, Charlotte North Carolina
28288-0630.
Pursuant to the advisory agreement (the "Advisory Agreement") between
the Trust and the Adviser, and subject to the supervision of the Trust's Board
of Trustees, the Adviser furnishes to the Fund investment advisory, management
and administrative services, office facilities, and equipment in connection with
its services for managing the investment and reinvestment of the Fund's assets.
The Adviser pays for all of the expenses incurred in connection with the
provision of its services.
The Fund pays 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 independent 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 the Fund and its shares with the Securities and Exchange
Commission ("SEC") or under state or other securities laws; (11) expenses of
preparing, printing and mailing prospectuses, SAIs, notices, reports and proxy
materials to shareholders of the Fund; (12) expenses of shareholders' and
Trustees' meetings; (13) charges and expenses of legal counsel for the Fund and
for the Independent Trustees of the Trust on matters relating to the Fund; (14)
charges and expenses of filing annual and other reports with the SEC and other
authorities; and (15) all extraordinary charges and expenses of the Fund.
The Fund has agreed to pay the Adviser a fee for its services,
expressed as a percentage of average net assets, as set forth below.
Aggregate Net Asset Value
Management Fee Of the Shares of the Fund
-------------------- -------------------------
0.80% of the first $100,000,000, plus
0.75% of the next $150,000,000, plus
0.65% of amounts over $250,000,000
For each of the Fund's fiscal periods, the table below lists the total
dollar amounts paid by the Fund to Keystone for investment advisory services
rendered.
Period Fee Paid to Keystone for % of Fund
Services Rendered under Average Net
the Advisory Agreement Assets
- ---------------------------------------- -------------------------- ------------
Fiscal Period of March 1, 1997
to February 28, 1998 $223,252 0.80%
Fiscal Period of July 1, 1996
to February 28, 1997 $13,266 0.80%
Fiscal Period of
December 25, 1995 (Commencement of
Operations) to June 30, 1996 $9,209 0.80%
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<PAGE>
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 the
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 Fund
through broker-dealers and other financial representatives. Its address is 125
W. 55th Street, New York, N.Y. 10019.
ADDITIONAL SERVICE PROVIDERS
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union, is the
Fund's 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 02116-5034
Independent Auditors
KPMG Peat Marwick LLP audits the Fund's financial statements. Their
address is 99 High Street, Boston, Massachusetts 02110.
Custodian
State Street Bank and Trust Company is the Fund's custodian. The bank
keeps custody of the Fund's securities and cash and performs other related
duties. The custodian's address is P.O.
Box 9021, Boston, Massachusetts 02205-9827.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Fund. Its address
is 1025 Connecticut Avenue, N.W., Washington, D.C. 20036
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<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund, the
Adviser seeks the best execution of orders at the most favorable prices. The
Adviser determines whether a broker has provided the 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, the Fund expects to purchase and sell its equity portfolio
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.
The Fund expects to buy and sell its fixed-income securities through
principal transactions, that is, directly from the issuer or from an underwriter
or market maker for the securities. Generally, the Fund will not pay brokerage
commissions for such purchases. Usually, when the Fund buys a security from an
underwriter, the purchase price will include an underwriting commission or
concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. 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.
During the fiscal periods ended February 28, 1998, February 28, 1997
and the year ended June 30, 1996, the Fund paid $86,041, $6,100 and $8,908,
respectively, in brokerage commissions.
GENERAL BROKERAGE POLICIES
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 18, 1997
(the "Declaration of Trust"). A copy of the Declaration of Trust is on file at
the SEC as an exhibit to the
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<PAGE>
Trust's Registration Statement, of which this SAI 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
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. At meetings called for the initial election of Trustees
or to consider other matters, each share is entitled to one vote for each dollar
of net asset value applicable to such share. Shares generally vote together as
one class on all matters. Classes of shares of 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 votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining shares voting will not
be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, 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 the Fund for shares of the same class
of any other Evergreen "Select" fund, as described under "Exchanges" in the
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.
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HOW AND WHEN THE FUND CALCULATES ITS NET ASSET VALUE PER SHARE
("NAV")
The Fund computes its NAV once daily on Monday through Friday, as
described in the prospectus. The Fund will not compute its NAV on days on which
there have been no purchases or sales of its shares. Also, the 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.
Each class of shares of the Fund calculates its NAV 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 FUND VALUES THE SECURITIES IT OWNS
Current values for the 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 such quotations;
(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 SERVICES
As described in the Fund's prospectus, a shareholder may elect to
receive his or her 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 his or her address. Therefore, no interest will accrue on
amounts represented by uncashed distribution or redemption checks.
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<PAGE>
PRINCIPAL UNDERWRITER
The Distributor, a subsidiary of The BISYS Group, Inc., is the
principal underwriter for the Trust and each class of shares of the Fund. The
Trust has entered into a Principal Underwriting Agreement ("Underwriting
Agreement") with the Distributor with respect to each class of the Fund.
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 SAI. All orders are subject to acceptance by the Fund and the Fund 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 SEC and
auditing.
The Distributor has agreed that it will, in all respects, duly comply
with all state and federal laws applicable to the sale of the Fund's shares. The
Distributor and the Fund have both agreed to indemnify and hold each other
harmless 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.
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<PAGE>
ADDITIONAL TAX INFORMATION
REQUIREMENTS FOR QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has qualified and intends to qualify for and elect the tax
treatment applicable to regulated investment companies ("RIC") under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). (Such
qualification does not involve supervision of management or investment practices
or policies by the Internal Revenue Service.) In order to qualify as a RIC, the
Fund must, among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to proceeds from securities loans,
gains from the sale or other disposition of securities or foreign currencies and
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such securities; (ii)
derive less than 30% of its gross income from the sale or other disposition of
securities, options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the RIC's principal business of
investing in securities (or options and futures with respect thereto) held for
less than three months (this requirement is repealed for Fund fiscal years
beginning after August 5, 1997); and (iii) diversify its holdings so that, at
the end of each quarter of its taxable year, (a) at least 50% of the market
value of the Fund's total assets is represented by cash, U.S. government
securities and other securities limited in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
government securities and securities of other regulated investment companies).
By so qualifying, the Fund is not subject to federal income tax if it timely
distributes its investment company taxable income and any net realized capital
gains. A 4% nondeductible excise tax will be imposed on the Fund to the extent
it does not meet certain distribution requirements by the end of each calendar
year. The Fund anticipates meeting such distribution requirements.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
Upon a sale or exchange of Fund shares, a shareholder may realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Also, a shareholder must treat as long-term
capital gains or losses any capital gains or losses on Fund shares held for more
than one year. Capital gain on assets held for more than eighteen months is
generally subject to a maximum federal income tax rate of 20% for an individual.
The maximum capital gains tax rate for capital assets held by an individual for
more than twelve months but not more than eighteen months is generally 28%.
Generally, the Code will not allow a shareholder to realize a loss on shares he
or she has sold or exchanged and replaced within a sixty-one-day period
beginning thirty days before and ending thirty days after he or she sold or
exchanged the shares. The Code will not allow a shareholder to realize a loss on
the sale of Fund shares held by the shareholder for six months or less to the
extent the shareholder received exempt-interest dividends on such shares.
Moreover, the Code will treat a shareholder's loss on shares held for six months
or less as a long-term capital loss to the extent the shareholder received
distributions of net capital gains on such shares.
Shareholders who fail to furnish their taxpayer identification numbers
to the Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal
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<PAGE>
income tax backup withholding requirement on dividends, distributions of capital
gains and redemption proceeds paid to them by the Fund. If the withholding
provisions are applicable, any such dividends or capital gain distributions to
these shareholders, whether taken in cash or reinvested in additional shares,
and any redemption proceeds will be reduced by the amounts required to be
withheld. Investors may wish to consult their own tax advisers about the
applicability of the backup withholding provisions.
TAXES ON DISTRIBUTIONS
Distributions will be taxable to shareholders whether made in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date.
To calculate ordinary income for federal income tax purposes,
shareholders must generally include dividends paid by the Fund from its
investment company taxable income (net investment income plus net realized
short-term capital gains, if any). Since none of the Fund's income will consist
of corporate dividends, no distributions will qualify for the 70% corporate
dividends received deduction.
From time to time, the Fund will distribute the excess of its net
long-term capital gains over its short-term capital losses to shareholders. For
federal tax purposes, shareholders must include such distributions when
calculating their long-term capital gains. The Fund will inform its shareholders
of the portion if any of a long-term capital gain distribution which is subject
to tax at the maximum 28% rate and the portion if any of long-term capital gain
distribution which is subject to tax at the maximum 20% rate. Distributions of
long-term capital gains are taxable as such to a shareholder, no matter how long
the shareholder has held the shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
OTHER TAX CONSIDERATIONS
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisers regarding specific questions
relating to federal, state and local tax consequences of investing in shares of
the Fund. Each shareholder who is not a U.S. person should consult his or her
tax adviser regarding the U.S. and foreign tax consequences of ownership of
shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under a
tax treaty) on amounts treated as income from U.S. sources under the Code.
CALCULATION OF PERFORMANCE DATA
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return
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<PAGE>
over one-, five- and ten-year periods, or the time periods for which such class
of shares has been outstanding, whichever is relevant, on a hypothetical $1,000
investment that would equate the initial amount invested in the class to the
ending redeemable value. All dividends and distributions are added to the
initial investment and all recurring fees charged to all shareholder accounts
are deducted. The ending redeemable value assumes a complete redemption at the
end of the relevant periods.
The annual total returns of the Fund as of February 28, 1998 are as
follows:
One Year Five Years Ten Years or Since Inception Date
Inception
- --------------- -------------- ------------------- -------------------
21.67% -- 16.49% December 25, 1998
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 the 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 the Fund's yield or total return for any future period.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, the
Trust reserves the right to change the terms of the offer stated in its
prospectus for the Fund without shareholder approval, including the right to
impose or change fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, SAI or in supplemental sales literature issued by the Trust or the
Distributor, and no person is entitled to rely on any information or
representation not contained therein.
The Fund's prospectus and this SAI omit certain information contained
in the Trust's registration statement, which may be obtained for a fee from the
SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements and the independent auditors' report thereon
are hereby incorporated by reference to the Fund's Annual Report, a copy of
which may be obtained without charge from ESC by calling toll-free
1-800-633-2700 or by writing to ESC at P.O. Box 2121, Boston, Massachusetts
02106-2121.
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