KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
Seeks long-term growth of capital by investing in stocks of small companies.
Dear Shareholder:
We are reporting to you on the performance of Keystone Institutional Small
Capitaliziation Growth Fund for the eight-month period ended February 28, 1997.
Due to a change in fiscal year-end, from June 30 to the last day in February, we
are now reporting to you on the Fund's annual performance. From now on, the
Fund's annual report will close on the last day of February. We would also like
to take this opportunity to inform you of the recent changes made to Keystone's
small company stock team, the management of your Fund.
PERFORMANCE
You will notice that the performance of Keystone Institutional Small
Capitalization Growth Fund for the eight-month period ended February 28, 1997
reflects the volatility that has been a characteristic of the small company
stock market for close to a year. We believe the Fund performed in line with its
peers in the small company asset class during the eight-month period ended
February 28, 1997. Your Fund returned (1.75%). For the same time period, the
Russell 2000 Growth Index returned (4.34%). Additionally, the Russell 2000 Index
returned 5.07% for the eight-month period. Large capitalization stocks continued
to outpace smaller stocks in 1996 and into 1997 as reflected in Standard and
Poor's 500 Index gain of 19.59% for the eight-month period.
Small-cap stocks faltered last summer after a series of earnings
disappointments, especially in the technology sector. We believe that turned
many investors away from small company stocks, and many began putting their
investment dollars into well known, large company stocks.
CURRENT OUTLOOK
Despite recent short-term setbacks in the small company stock market, our
outlook for this asset class for the 12-month horizon is positive. We continue
to believe that small company stocks will gain favor in the U.S. as the
valuation of small company stocks relative to large company stocks is at a
historically attractive level. We believe P/E multiples have become low,
especially relative to large capitalization stocks. Also, small company earnings
outlooks for 1997 are favorable compared to large company earnings estimates.
Usually, small-cap stocks have more risk of downside volatility, and sell for
higher multiple ratios than large-cap stocks. Development of strong price
momentum has periodically resulted in strong gains over short periods. We are
currently seeing this type of price behavior in the larger blue chip stocks,
even as the relative valuation of smaller capitalization stocks becomes
increasingly attractive. This divergence is creating an opportunity to obtain
small-cap stocks when price risk is lower, and long-term potential is higher,
than we have seen in recent years.
<PAGE>
We believe a positive economic environment remains in place for small company
stocks. The U.S. economy remains healthy, which should provide a supportive
environment, also inflation is tame and the U.S. dollar continues to strengthen.
In our search for companies with sustainable, above-average growth prospects, we
are currently favoring oil service companies and selected areas of high
technology, business services and specialty retail.
FOUR-MEMBER SMALL CAP TEAM ASSEMBLED
We are very excited about the changes that have been put in place during the
past several months. We have assembled a talented small company stock team
comprised of J. Gary Craven, Margery C. Parker, Thomas L. Holman and Craig S.
Lewis. The team is supported by a group of analysts with in-depth knowledge of
various industries and small-cap companies.
Leading small-cap stock manager J. Gary Craven joined Keystone on November 4,
1996 to head Keystone's Small Company Stock Team. Craven, a professional with
more than 13 years' experience, previously was a portfolio manager at Invista
Capital Management, Inc., a subsidiary of The Principal Financial Group. At
Invista, he managed an $860 million small company growth pension account and
co-managed Princor Emerging Growth Fund and Princor Growth Fund, all of which
had attractive performance records relative to small-cap benchmarks while under
his management.
Thomas Holman joined Keystone in January as vice president and portfolio
manager. Holman worked closely with Craven at Invista Capital Management as an
investment officer and securities analyst specializing in small company stock
investments. Holman has been appointed lead portfolio manager of your fund.
Margery Parker, a vice president and portfolio manager with more than 10 years'
investment experience, has been with Keystone since 1988. Craig Lewis, a vice
president and analyst, is a specialist in the areas of telecommunications,
insurance, business materials and forest products.
KEYSTONE ACQUIRED BY FIRST UNION CORPORATION
On another note, we are pleased to inform you that Keystone has been acquired by
First Union Corporation. First Union, based in Charlotte, North Carolina, is the
nation's sixth largest bank holding company with assets of approximately $130
billion. Keystone Investment Management Company will continue to be the
investment adviser responsible for managing your Fund's portfolio. First Union
is also the parent company of the investment advisers to another mutual fund
family, the Evergreen Family of Funds. Together, the investment advisers to the
Evergreen and Keystone Fund families manage approximately $30 billion in mutual
fund assets. Some services will now be conducted under the "Evergreen Keystone
Funds" umbrella.
We believe the partnership between Evergreen and Keystone will strengthen our
ability to offer you outstanding investment management services.
We look forward to serving your investment needs for many years to come. If you
have any questions or comments about your investment, please feel free to
contact your Evergreen Keystone representative at 1-800-633-4200.
<PAGE>
Sincerely,
Albert H. Elfner, III
CHAIRMAN
KEYSTONE INVESTMENT MANAGEMENT COMPANY
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
<PAGE>
GROWTH OF AN INVESTMENT IN KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH
FUND
(Graph appears here with the following plot points.)
Keystone Institutional Small Cap
06/28/96 11.48 10,000 10,000 0 871 10,000 0 10,000
07/31/96 10.18 10,000 0 871 8,868 0 8,868
08/30/96 10.87 10,000 0 871 9,469 0 9,469
09/30/96 11.55 10,000 0 871 10,061 0 10,061
10/31/96 11.59 10,000 0 871 10,096 0 10,096
11/26/96 11.55 0.17 10,000 148 884 10,061 148 10,209
11/29/96 11.75 10,000 0 884 10,235 151 10,386
12/31/96 11.87 10,000 0 884 10,340 152 10,492
01/31/97 12.07 10,000 0 884 10,514 155 10,669
02/28/97 11.28 10,000 0 884 9,826 145 9,970
Cumulative Return--.30%
A $10,000 investment in Keystone Institutional Small Capitalization Growth Fund
made on December 28, 1995 with all distributions reinvested was worth $11,446 on
February 28, 1997.
Past performance is no guarantee of future results.
PERFORMANCE FROM JULY 1, 1996 TO FEBRUARY 28, 1997
Total return (1.75%)
Net asset value 6/30/96 $11.65
Net asset value 2/28/97 $11.28
Dividends None
Capital gains $0.17
HISTORICAL RECORD AS OF FEBRUARY 28, 1997
Cumulative total returns
One-year 4.24%
Since inception 14.46%
The Fund commenced investment operations on December 28, 1995. The investment
return and principal value will fluctuate so that your shares, when redeemed,
may be worth more or less than the original cost.
<PAGE>
(Graph Goes Here)
<PAGE>
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Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
SCHEDULE OF INVESTMENTS -- February 28, 1997
Number Market
of Shares Value
- --------------------------------------------------------------------------
COMMON STOCKS (96.9%)
Advertising & Publishing(2.0%)
Outdoor Systems, Inc. (a) 1,900 $56,644
- ----------------------------------------------------------------------------
Automotive (3.8%)
Dura Automotive Systems, Inc. (a) 2,300 54,913
Team Rent Group, Inc. (a) 1,900 53,438
- ----------------------------------------------------------------------------
108,351
- ----------------------------------------------------------------------------
Building Materials (2.8%)
Toll Brothers, Inc. (a) 2,200 42,625
Oakwood Homes Corp. 2,000 39,500
- ----------------------------------------------------------------------------
82,125
- ----------------------------------------------------------------------------
Business Services (13.8%)
Alternative Resource Corp. (a) 2,800 42,875
Barret Business Services, Inc. (a) 2,900 52,381
Billing Information Concepts Corp. (a) 1,500 39,938
Equity Corporation International (a) 2,550 49,725
G&K Services, Class A 2,000 64,375
Newpark Resources, Inc. (a) 1,800 81,900
Norrell Corp. 900 24,075
Thermo Cardiosystems, Inc. (a) 1,500 42,000
- ----------------------------------------------------------------------------
397,269
- ----------------------------------------------------------------------------
Chemicals (1.3%)
OM Group, Inc. 1,340 38,860
- ----------------------------------------------------------------------------
Consumer Goods (5.8%)
Action Performance Companies, Inc. (a) 3,000 64,875
Family Golf Centers, Inc. (a) 1,100 30,525
Furniture Brands International, Inc. (a) 2,100 30,975
USA Detergents, Inc. (a) 1,800 40,388
- ----------------------------------------------------------------------------
166,763
- ----------------------------------------------------------------------------
Drugs (4.9%)
Amylin Pharmaceuticals, Inc. (a) 2,400 35,400
Gilead Sciences, Inc. (a) 1,000 30,375
Idexx Labs, Inc. (a) 1,700 62,900
Neurogen Corp. (a) 700 11,988
- ----------------------------------------------------------------------------
140,663
- ----------------------------------------------------------------------------
Electronics Products (8.4%)
Electroglas, Inc. (a) 1,500 27,656
ESS Technology, Inc. (a) 1,900 49,994
Lattice Semicoductor Corp. (a) 600 28,538
Memtec Ltd. 900 17,831
Microchip Technology, Inc. (a) 2,500 93,438
Silicon Valley Group, Inc. (a) 1,200 25,725
- ----------------------------------------------------------------------------
243,182
- ----------------------------------------------------------------------------
Page 4
<PAGE>
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Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
SCHEDULE OF INVESTMENTS -- February 28, 1997 (Continued)
Number Market
of Shares Value
- ------------------------------------------------------------------------------
Finance (11.8%)
BISYS Group, Inc. (The) (a)(d) 1,800 $55,800
First Alliance Co. (a) 2,000 54,000
Hubco, Inc. 2,300 59,944
Investors Financial Services Corp. 2,400 76,800
Legg Mason, Inc. 900 40,050
Sovereign Bancorp, Inc. 4,320 54,270
- ------------------------------------------------------------------------------
340,864
- ------------------------------------------------------------------------------
Health Care Services (2.6%)
Cardiothoracic Systems, Inc. (a) 500 11,000
Heartport, Inc. (a) 1,000 29,688
Pediatrix Medical Group (a) 900 33,750
- ------------------------------------------------------------------------------
74,438
- ------------------------------------------------------------------------------
Insurance (0.0%)
HCC Insurance Holdings, Inc. 50 1,231
- ------------------------------------------------------------------------------
Miscellaneous(0.1%)
McLeod, Inc. (a) 200 3,555
- ------------------------------------------------------------------------------
Oil Services (8.7%)
Basin Exploration, Inc. (a) 6,700 41,038
Denbury Resources, Inc. (a) 3,100 38,169
Falcon Drilling, Inc. (a) 1,600 54,200
Flores & Rucks, Inc. (a) 1,000 45,000
Nuevo Energy Co. (a) 1,600 66,400
Stone Energy Corp. (a) 300 6,600
- ------------------------------------------------------------------------------
251,407
- ------------------------------------------------------------------------------
Restaurants (1.8%)
Applebees International, Inc. 2,000 50,500
- ------------------------------------------------------------------------------
Retail (6.6%)
Black Box Corp. (a) 2,400 71,700
Gadzooks, Inc. (a) 2,500 61,250
Loehmanns, Inc. (a) 1,700 26,988
Pacific Sunwear of California (a) 1,100 31,213
- ------------------------------------------------------------------------------
191,151
- ------------------------------------------------------------------------------
Software Services (15.8%)
BDM International, Inc. (a) 1,300 54,113
Ciber, Inc. (a) 1,500 42,188
Cognex Corp. (a) 2,100 38,063
Epic Design Technology, Inc. (a) 2,200 58,300
Geoworks, Inc. (a) 2,900 54,194
INSO Corp. (a) 1,700 58,756
National Instruments Corp. (a) 1,500 56,625
Natural Microsystems Corp. (a) 1,400 40,600
Project Software & Development, Inc. (a) 1,500 52,781
- ------------------------------------------------------------------------------
455,620
- ------------------------------------------------------------------------------
Page 5
<PAGE>
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Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
SCHEDULE OF INVESTMENTS -- February 28, 1997 ( Continued)
Number Market
of Shares Value
- ------------------------------------------------------------------------------
Telecommunications (3.4%)
Aspect Telecommunications Corp. (a) 2,500 62,180
Smartalk Teleservices, Inc. (a) 2,100 29,269
Winstar Communications, Inc. (a) 600 8,063
- ------------------------------------------------------------------------------
99,512
- ------------------------------------------------------------------------------
Textiles (1.8%)
St. John Knits, Inc. 1,300 $53,300
- ------------------------------------------------------------------------------
Transportation (1.5%)
Railtex, Inc. (a) 2,400 43,350
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost - $2,945,156) $2,798,785
- ------------------------------------------------------------------------------
Maturity
Value
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.4%)
Investments in repurchase agreements, in a joint trading
account, purchased 2/28/97, 5.413%, maturing 3/3/97(b) $99,045 99,000
- -------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENT (Cost - $99,000) 99,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost - $3,044,156) (c) 2,897,785
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- NET (-0.3%) (9,653)
- -------------------------------------------------------------------------------
NET ASSETS (100%) $2,888,132
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(a) Non-income-producing security.
(b) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at February 28, 1997.
(c) The cost of investments for federal income tax purposes is $3,058,780. Gross
unrealized appreciation and depreciation of investments, based on identified
tax cost, at February 28, 1997 are as follows:
Gross unrealized appreciation $71,880
Gross unrealized depreciation (232,875)
-----------
Net unrealized depreciation ($160,995)
-----------
(d) At February 28, 1997, the Fund owned 2,000 shares of common stock of the
BISYS Group, Inc., the Fund's sub-administrator, at a cost of $55,604.
During the period from July 1, 1996 to February 28, 1997, the Fund earned no
income from this investment. This investment was purchased by the Fund prior
to BISYS becoming the Fund's sub-administrator.
See Notes to Financial Statements.
Page 6
<PAGE>
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Period from July 1, 1996 [ZW]
Period from December 28, 1995
to [ZW]
(Commencement of Operations)
February 28, 1997 (d) [ZW]
to June 30, 1996
<S> <C> [ZW]
<C>
- --------------------------------------------------------------------------------------------------------
Net asset value beginning of period [ZW]
$11.65 $10.00
- ------------------------------------------------------------------------------------------
Income from investment operations
Net investment loss [ZW]
(0.04)(c) (0.03)
Net realized and unrealized gain (loss) [ZW]
(0.16) 1.68
- ------------------------------------------------------------------------------------------
Total from investment operations [ZW]
(0.20) 1.65
- ------------------------------------------------------------------------------------------
Less distributions from:
Net realized gain on investments [ZW]
(0.17) 0.00
- ------------------------------------------------------------------------------------------
Net asset value end of period [ZW]
$11.28 $11.65
- ------------------------------------------------------------------------------------------
Total return [ZW]
(1.75%) 16.50%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a)(b) [ZW]
1.00% 1.00%
Net investment loss (a) [ZW]
(0.57%) (0.45%)
Portfolio turnover rate [ZW]
123% 57%
Average commission rate paid [ZW]
$0.0509 $0.0847
Net assets end of period (thousands) [ZW]
$2,888 $2,446
- ------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
annualized ratio of total expenses to average net assets would have been
2.53% for the eight-months ended February 28, 1997, and 2.81% for the
period from December 28, 1995 (Commencement of Operations) to June 30,
1996.
(c) Computed using average shares outstanding throughout the period.
(d) The Fund changed its fiscal year end from June 30 to the last day of
February, effective February 28, 1997.
See Notes to Financial Statements.
Page 7
<PAGE>
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997
- ------------------------------------------------------------------------------
Assets
Investments at market value (identified
cost - $3,044,156) $2,897,785
Cash 323
Receivable for:
Investments sold 66,529
Interest and dividends 44
Deferred organization cost 15,245
- -------------------------------------------------------------------------------
Total assets 2,979,926
- -------------------------------------------------------------------------------
Liabilities
Payable for:
Investments purchased 63,787
Accrued expenses and other liabilities 28,007
- -------------------------------------------------------------------------------
Total liabilities 91,794
- -------------------------------------------------------------------------------
Net assets $2,888,132
- -------------------------------------------------------------------------------
Net assets represented by
Paid-in capital $2,651,354
Accumulated net realized gain on investments 383,149
Net unrealized depreciation on investments (146,371)
- -------------------------------------------------------------------------------
Total net assets 2,888,132
- -------------------------------------------------------------------------------
Net Asset Value
Net assets of $2,888,132/ 256,052 shares
outstanding $11.28
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
Page 8
<PAGE>
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
STATEMENT OF OPERATIONS
Period from July 1, 1996 to February 28, 1997
<TABLE>
<CAPTION>
<S> [ZW]
<C> <C>
- -------------------------------------------------------------------------------------------------
Investment income
[ZW]
Dividends [ZW]
$2,178
[ZW]
Interest [ZW]
4,939
- -------------------------------------------------------------------------------------------------
Total [ZW]
income 7,117
- -------------------------------------------------------------------------------------------------
Expenses (Note 4)
Management fee $13,266
Custodian fee 11,183
Audit fee 8,654
Legal fee 3,863
Transfer Agent fee 1,000
Registration fees 1,000
Miscellaneous expense 467
Organization expense 2,656
- -------------------------------------------------------------------------------------------------
Total expenses 42,089
Reimbursement from Investment Adviser (25,490)
- -------------------------------------------------------------------------------------------------
Net [ZW]
expenses 16,599
- -------------------------------------------------------------------------------------------------
Net investment [ZW]
loss (9,482)
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
(Notes 1 and 3)
Realized gain on [ZW]
investments 398,376
Net change in unrealized depreciation on [ZW]
investments (462,663)
- -------------------------------------------------------------------------------------------------
Net realized and unrealized loss on [ZW]
investments (64,287)
- -------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from [ZW]
operations ($73,769)
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
Page 9
<PAGE>
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period [ZW]
from July 1, 1996 Period from December 28,1995
[ZW]
to Commencement of Operations)
[ZW]
February 28, 1997 to June 30, 1996
<S> [ZW]
<C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Operations
Net investment [ZW]
loss [ZW]
($9,482) ($5,309)
Net realized gain on [ZW]
investments [ZW]
398,376 34,918
Net change in unrealized appreciation
(depreciation) on [ZW]
investments (462,663) [ZW]
316,292
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from [ZW]
operations (73,769) 345,901
- ----------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from
Net realized gains on [ZW]
investments [ZW]
(35,700) 0
- ----------------------------------------------------------------------------------------------------------------------------
Capital share transactions(Note 2)
Proceeds from shares [ZW]
sold [ZW]
517,700 2,100,000
Net asset value of shares issued in
Reinvestment of dividends and [ZW]
distributions 34,000 0
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from capital share [ZW]
transactions 551,700 2,100,000
- ----------------------------------------------------------------------------------------------------------------------------
Total increase in net [ZW]
assets 442,231 [ZW]
2,445,901
- ----------------------------------------------------------------------------------------------------------------------------
Net assets
Beginning of [ZW]
period [ZW]
2,445,901 0
- ----------------------------------------------------------------------------------------------------------------------------
End of period (Including undistributed net investment income at
June 30, 1996 - [ZW]
$36,922) [ZW]
$2,888,132 $2,445,901
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
Page 10
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Institutional Trust (the "Trust") is a Massachusetts business
trust for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone was formerly a wholly-owned subsidiary
of Keystone Investments, Inc. ("KII"). On December 11, 1996, KII, and indirectly
each of its subsidiaries, was acquired by First Union National Bank of North
Carolina.
The Trust is authorized to issue more than one series of shares. At
this time, the Trust issues one series of shares called Keystone Institutional
Small Capitalization Growth Fund (the "Fund"). The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified,
open-end investment company. The Fund's investment objective is long-term growth
of capital by investing in stocks of small companies.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles, which require management to make estimates and assumptions that
affect amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net assets
of the Fund.
A. VALUATION OF SECURITIES
Investments are usually valued at the closing sales price, or, in the
absence of sales and for over-the-counter securities, the mean of bid and asked
quotations. Management values the following securities at prices it deems in
good faith to be fair under the direction of the Fund's Board of Trustees: (1)
securities (including restricted securities) for which complete quotations are
not readily available and (2) listed securities if, in the opinion of
management, the last sales price does not reflect a current value or if no sale
occurred.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by
the custodian on the Fund's behalf. The Fund monitors the adequacy of the
collateral daily and will require the seller to provide additional collateral in
the event the market value of the securities pledged falls below the carrying
value of the repurchase agreement.
Page 11
<PAGE>
C. FUTURES CONTRACTS
In order to gain exposure to, or protect against, changes in security
values, the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (I) the possibility of
an illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill its obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
D. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for on the trade date. Realized
gains and losses are computed on the identified cost basis. Interest income is
recorded on the accrual basis and includes amortization of discounts and
premiums. Dividend income is recorded on the ex-dividend date.
E. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
F. DISTRIBUTIONS
The Fund intends to distribute net investment income and net capital
gains, if any, at least annually. Distributions to shareholders are recorded at
the close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined
in accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to net
operating losses generated by the Fund.
Page 12
<PAGE>
2. CAPITAL SHARE TRANSACTIONS
The Trust's Declaration of Trust authorizes the issuance of an
unlimited number of shares of beneficial interest with no par value.
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Period from July 1, 1996 Period from [ZW]
December 28, 1995
to (Commencement of [ZW]
Operations) to
February 28, 1997 June 30, 1996
<S> <C> <C>
--------------- [ZW]
- --------------------------
Shares sold 43,108 [ZW]
210,000
Shares issued in reinvestment
of dividends and distributions 2,944 -
--------------- [ZW]
- -------------------------
Net Increase 46,052 [ZW]
210,000
============== [ZW]
=========================
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities
(excluding short-term securities) for the period from July 1, 1996 to February
28, 1997 were $3,436,551 and $2,968,321, respectively.
4. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
Under the terms of the Investment Advisory and Management Agreement
between Keystone and the Fund, Keystone provides investment management and
administrative services to the Fund. In return Keystone is paid a management fee
that is computed and paid daily. The management fee is calculated by applying
percentage rates to the aggregate net asset value of the Fund's shares as
follows: 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.
During the period from July 1, 1996 to February 28, 1997, the Fund paid
or accrued to Keystone investment management and administrative service fees of
$13,266, which represent 0.80% of the Fund's average daily net asset value
during the period.
During the period from July 1, 1996 to February 28, 1997, the Fund paid
or accrued $1,000 to Evergreen Keystone Service Company for transfer agent fees.
Evergreen Keystone has voluntarily agreed to limit the expenses of the
Fund to 1.0% annually of average net assets through February 28, 1997. In
connection with the voluntary expense limitation Keystone reimbursed the Fund
$25,490. Keystone does not intend to seek repayment of this amount.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
5. CHANGE OF FISCAL YEAR
The Fund changed its fiscal year end from June 30 to the last day in
February, effective February 28, 1997.
Page 13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Institutional Trust
We have audited the accompanying statement of assets and liabilities of Keystone
Institutional Small Capitalization Growth Fund, a series of Keystone
Institutional Trust, including the schedule of investments, as of February 28,
1997, and the related statement of operations for the period from July 1, 1996
to February 28, 1997 and the statements of changes in net assets and financial
highlights for the periods from July 1, 1996 to February 28, 1997 and from
December 28, 1995 (Commencement of Operations) to June 30, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Institutional Small Capitalization Growth Fund as of February 28, 1997,
the results of its operations for the period from July 1, 1996 to February 28,
1997, and the changes in its net assets and financial highlights for the periods
from July 1, 1996 to February 28, 1997 and from December 28, 1995 to June 30,
1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 31, 1997
<PAGE>
OTHER INFORMATION (UNAUDITED)
Shareholders of the Fund considered and acted upon the proposals listed below at
a special meeting of shareholders held Monday, December 9, 1996. Below are the
results of that vote:
1. To elect the following Trustees:
Affirmative Withhold
Frederick Amling 210,000 -0-
Laurence B. Ashkin 210,000 -0-
Charles A. Austin III 210,000 -0-
Foster Bam 210,000 -0-
George S. Bissell 210,000 -0-
Edwin D. Campbell 210,000 -0-
Charles F. Chapin 210,000 -0-
K. Dun Gifford 210,000 -0-
James S. Howell 210,000 -0-
Leroy Keith, Jr. 210,000 -0-
F. Ray Keyser, Jr. 210,000 -0-
Gerald M. McDonell 210,000 -0-
Thomas L. McVerry 210,000 -0-
William Walt Pettit 210,000 -0-
David M. Richardson 210,000 -0-
Russell A. Salton, III MD 210,000 -0-
Michael S Scofield 210,000 -0-
Richard J. Shima 210,000 -0-
Andrew J. Simons 210,000 -0-
2. To approve an Investment Advisory and Management Agreement between
the Fund and Keystone Investment Management Company.
Affirmative 210,000
Against -0-
Abstain -0-
Total 210,000
<PAGE>
