PAGE 1
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Keystone Small Company Growth Fund II
Seeks long-term growth of capital by investing in stocks of small companies.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Small Company
Growth Fund II for the six-month period ending November 30, 1996. Following this
letter, we have included an interview with Keystone's Small Company Stock Team
leader, J. Gary Craven, discussing portfolio strategy. Mr. Craven joined the
Keystone team on November 4.
Performance
For the six-month period and since inception (February 21, 1996) ending November
30, 1996, your Fund produced the following total returns.
Class A shares returned -6.91% for six months and 3.80% since inception.
Class B shares returned -7.28% for six months and 3.10% since inception.
Class C shares returned -7.44% for six months and 3.20% since inception.
The Fund's short-term performance trailed the Russell 2000 Index, which
declined -1.35% for the six-month time frame and returned 16.57% for one year.
The Russell 2000 Growth Index had a -8.83% return for six months and returned
11.56% for the 12-month period.
In contrast to Keystone's long-term record of positive performance for its
small company stock portfolios, your Fund's most recent performance was
disappointing. We believe these short-term results reflect in part the
positioning of the Fund in smaller capitalization stocks. Not only did small-cap
stocks bear the brunt of a midsummer market sell-off, but the smaller-sized
small companies, which your Fund was emphasizing, witnessed the greatest stock
price declines. In addition, there were problems in stock and industry
selection, particularly in the technology industries, which were heavily hit in
the June-July market correction.
We are reviewing the risk profile of your Fund, and are dedicated to
providing more consistent results from period to period. Following this letter,
Keystone's Small Company Stock Team leader, J. Gary Craven, discusses his risk
management strategy in managing Keystone Small Company Growth Fund II.
As we have stated in the past, this small company stock investing strategy
offers investors attractive long-term growth potential, but is accompanied by
risks. Investors should keep in mind that short-term losses, such as we have
seen in the past six months, are a normal part of investing in small company
stocks. We remain convinced that our strategy can play an important role in
helping investors reach their long-term financial goals.
Longer-term, we seek the stock of small companies that appear to have
sustainable above-average growth prospects, not necessarily the companies which
have the highest growth rates, or the greatest momentum. Our investment process
requires that the present value of projected earnings justify the stock price.
We seek to buy stocks of small companies that have attractive prospects with a
two-year perspective. We believe this discipline can produce consistent returns
over the long term.
Market Review
The last six months have seen the largest stocks outperform their smaller
counterparts by one of the largest margins in the last two decades. From the end
of May through the end of November, the Dow Jones Industrial Average leaped
15.6%, to 6,521.70. Meanwhile, the Russell 2000, the premier index of
small-stock performance, declined 1.35%. It appears investors were flocking to
safer, more liquid, blue-chip names in light of concerns that the economy may
slow down.
Technology stocks led the market up for most of the past six years. This
summer they demonstrated that they can lead it down too. At the bottom of the
slide, on July 16, the Dow was off 10% from an all-time high set on May 22.
Smaller firms fared worse. At its low, on July 16, the technology-heavy
NASDAQ Composite Index was off 19% from its record high.
--continued--
<PAGE>
PAGE 2
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Keystone Small Company Growth Fund II
Valuation Still Reasonable
One way we measure the attractiveness of small-cap stocks is by comparing the
price-to-earnings ratio (P/E) of small-cap stocks to the Standard & Poor's 500
Index (S&P 500) P/E. The S&P 500 is a broad market average of large-cap stocks.
Historically, the ratio of small caps versus the S&P 500 has ranged between 1.0
and 2.2. A ratio of 1.0 indicates that small-cap stocks offer good value
compared to large-cap stocks for the same level of earnings. A ratio of 2.2
indicates that small-cap stocks are relatively expensive compared to large-cap
stocks. Our experience tells us that a ratio below 2.0 is reasonable. As of
November 30, 1996, this ratio was 1.58.
Our Outlook
Looking at the next six months, our outlook for small company stocks is
positive. Given the moderate pace of economic growth in the second half of 1996,
we expect small-cap stocks to post stronger earnings growth than larger
companies. Also, the valuation of small caps has become more attractive relative
to large caps and other asset classes after the November rally. We believe the
current economic backdrop of moderate economic growth, low inflation and
moderate interest rates should improve the small company stock market's relative
performance in 1997.
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. Your Fund
will continue to be managed with the same style and philosophy as in the past.
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 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.
Thank you for your continued support of Keystone Small Company Growth Fund
II. We encourage you to write to us with any questions you may have about your
Keystone investment.
Sincerely, [photos of Elfner and Bissell]
/s/Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
January 1997
[photo captions] Albert H. Elfner, III George S. Bissell
<PAGE>
PAGE 3
- --------------------------------------
A Discussion With
Your Fund Manager
[photo of J. Gary Craven]
J. Gary Craven is head of Keystone's Small Company Stock Team. Mr. Craven is a
Chartered Financial Analyst. Prior to joining Keystone on November 4, he 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. Keystone's Small Company Stock
Team is comprised of Mr. Craven and portfolio manager Margery C. Parker, with
support from Keystone's 11 equity analysts. Together, they search for stocks of
small companies with sustainable above-average growth rates.
Q What is your investment philosophy?
A As a growth-style investment manager, I strive to allocate capital to
companies with strong competitive positions. We look for ways to increase
sustainable above-average growth prospects in the portfolio, at prices that are
economically sensible. The price you pay for a growth stock is reflected in the
price-to-earnings ratio, or P/E. It is how many times earnings the market
thinks a stock is worth. We look for strong growth at a reasonable price.
We analyze numerous factors before selecting a stock for the portfolio.
First of all, we look at what is the need for a product or service the company
offers. Secondly, does the company have an advantage over its competition. We
also look at the growth prospects for the next two to five years, and how the
earnings growth will look.
Q What about your sell discipline?
A If we choose the stock correctly, we will graduate it from the small-cap
asset class. This generally takes two to six years. I have a set methodology
that is pretty strict on weeding stocks out of a portfolio. I sell a stock when
I feel it has obtained its optimal price, or if the fundamental outlook
deteriorates. Also, if a stock does not develop as anticipated, I will sell it
to make room for more compelling ideas.
Q What is the small-cap universe that the Fund invests in?
A The bottom 20% of the stock market capitalization. This is generally in the
$1 billion and under market capitalization range.
Q How do you manage the risk inherent in small company stocks in your
portfolio, especially during volatile periods?
A First of all, volatility is a part of the small company asset class. But
above-average growth prospects is also a characteristic of this asset class.
Therefore, investing in small company stocks requires patience.
Risk management is a key element of my investment strategy. My main
emphasis is on finding small companies with the best business models. These
models can include: low cost production, technological leaders, exceptional
distribution systems or management teams that run companies smarter than their
competition. Gravitating to companies with the best business models I believe is
one way to manage risk. That's because these companies, which I consider to be
high quality companies, tend to be able to better deal with problems when they
occur and therefore usually carry less risk. Also, we analyze the two- to
five-year
<PAGE>
PAGE 4
- --------------------------------------
Keystone Small Company Growth Fund II
business outlook for every small-cap issue we add to the Fund. Additionally, I
believe attention to valuation lowers risk and improves the risk/reward ratio.
Q How has this risk control strategy affected your decisions recently?
A In an effort to minimize risk during the past few months, we shifted some
of the Fund's assets to interest-rate-sensitive stocks. As the economy slows, we
expect interest rates to be lowered to stop the economy from weakening too much.
Financial stocks tend to go up when interest rates slide, as do mortgage and
home building firms. Toll Brothers and IMC Mortgage Co. are two names added to
the portfolio that we feel will benefit from declining interest rates.
We also trimmed back on some issues that had high price-to-earnings ratios
to again minimize risk in the portfolio. One example is Falcon Drilling.
Q How would you describe the overall investment environment for small company
stocks during the past six months?
A It has been a difficult six months for small company stocks. Small company
stocks were hit the hardest during a midsummer market correction. In the third
quarter, the market witnessed a rotation into large company stocks and away from
small company stocks due to fears of a weakening economy in the United States.
Historically, small caps have been more susceptible to market mood swings than
large caps when there are signs of a slowing economy. This was reflected in the
stock market during the past few months, as evidenced by the Russell 2000
Index's decline of 1.35% from May 31 to November 30. Meanwhile, the Dow Jones
average of 30 blue-chip stocks gained 15.6% for that time frame.
Q The Fund's technology holdings were trimmed back during the past six
months. It seems that you've directed more of the fund's assets into the
financial services sector?
A I am bullish on financial service firms. I believe there are numerous
attractive growth prospects in this sector. Financial stocks have been
experiencing strong earnings growth, and lower interest rates should help their
earnings even more. But I also remain bullish on select tech stocks.
As the mortgage industry continues to evolve in favor of low-cost, high
personal service marketing firms, we believe several mortgage firms will
experience attractive earnings growth. One example is First Alliance Co., which
has a niche in non-conventional mortgage loans. The company originates,
purchases, sells and services non-conventional mortgage loans secured primarily
by first mortgages on single-family residences. First Alliance (accounted for
2.0% of the Fund's holdings as of November 30) is expected to grow earnings at
20% over the next few years.
Q What other sectors do you favor?
A Energy and oil services companies are benefitting from the escalation of
oil prices as well as operating leverage based on exploration budgets of larger
oil companies. We expect this trend to continue in 1997. One company in the Fund
that we believe will benefit from this trend is Seacor Holdings (accounted for
2.42% of the fund's holdings as of November 30). This company operates a fleet
of 200 marine vessels that support
Top 5 Industries
as of November 30, 1996
<TABLE>
<CAPTION>
Percentage of
Industry net assets
- ---------------------------- ---------------
<S> <C>
Business services 11.8
- ---------------------------- ---------------
Finance 10.9
- ---------------------------- ---------------
Oil services 9.5
- ---------------------------- ---------------
Consumer goods 6.7
- ---------------------------- ---------------
Office & business equipment 5.5
- ---------------------------- ---------------
</TABLE>
<PAGE>
PAGE 5
- --------------------------------------
offshore oil and gas exploration. The company's vessels provide services for
exploration and production activities.
As I previously mentioned, I remain high on technology stocks. I believe
software, telecommunications infrastructure and computer service firms are some
of the most exciting areas to be invested in throughout the 1990s. I believe
there is a technology revolution going on right now. New technology should spur
further earnings growth around the globe as companies through technological
advances push to become more productive and more efficient. We believe several
of the Fund's positions will benefit from this worldwide trend.
Q What is your outlook for the next six to ten months?
A Our outlook for small company stocks is very positive. They have lagged
large company stocks during the past six months. However, we expect small caps
to catch up over the next several months. Given the moderate pace of economic
growth thus far in the second half of 1996, small-cap stocks are expected to
post stronger earnings growth than larger companies. Also, the valuation of
small caps has become more attractive relative to large caps after the November
rally of large caps.
We believe moderate economic growth of around 2.5%, tame inflation and
moderate interest rates are creating a positive economic environment for small
company stocks. We have had a moderate economic growth environment in the United
States for several years now. Therefore, we do not expect to witness a recession
as there are no excesses to be wrung out of the system.
There are a lot of new and exciting opportunities emerging in software,
telecommunications and business services. We believe small companies are best
situated to profit from such cutting-edge innovations.
Top 10 Holdings
as of November 30, 1996
<TABLE>
<CAPTION>
Percentage of
Company Industry net assets
- ----------------------------- ----------------------------- ---------------
<S> <C> <C>
Falcon Drilling Oil services 3.0
- ----------------------------- ----------------------------- ---------------
Applied Magnetics Corp. Office & business equipment 2.8
- ----------------------------- ----------------------------- ---------------
Champion Enterprises Building 2.8
- ----------------------------- ----------------------------- ---------------
USA Detergents, Inc. Consumer goods 2.7
- ----------------------------- ----------------------------- ---------------
Seacor Holdings, Inc. Oil services 2.4
- ----------------------------- ----------------------------- ---------------
BJ Services Co. Oil services 2.3
- ----------------------------- ----------------------------- ---------------
HCC Insurance Holdings, Inc. Insurance 2.3
- ----------------------------- ----------------------------- ---------------
Tower Automotive Automotive 2.3
- ----------------------------- ----------------------------- ---------------
CMAC Investment Corp. Finance 2.2
- ----------------------------- ----------------------------- ---------------
Natural Microsystems Corp. Office & business equipment 2.1
- ----------------------------- ----------------------------- ---------------
</TABLE>
Q What should investors reasonably expect from this Fund over a three- to
five-year period?
A With long-term interest rates below 7%, the longer parade of time looks
positive for small company stocks. Historically, small company stocks have
returned an average of 11% to 12% for the long-term. With the economic
environment the way it is, we expect the performance of small company stocks to
remain in that range. Of course, it is important to remember that small caps can
be volatile for the short term.
[boxed text]
If you have a question about your Fund, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
[end boxed text]
<PAGE>
PAGE 6
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Keystone Small Company Growth Fund II
Your Fund's Performance
[typeset representation of mountain chart]
Growth of an investment in
Keystone Small Company Growth Fund II Class A
In Thousands
Initial Reinvested
Investment Distributions
2/96 9378 9378
3/96 9538 9538
4/96 10349 10349
5/96 10509 10509
6/96 10094 10094
7/96 8992 8992
8/96 9670 9670
9/96 9981 9981
10/96 9680 9680
11/96 9783 9783
A $10,000 investment in Keystone Small Company Growth Fund II Class A made on
February 20, 1986 with all distributions reinvested was worth $9,783 on
November 30, 1996. Past performance is no guarantee of future results.
[end mountain chart]
Six-Month Performance as of November 30, 1996
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Total return* -6.91% -7.28% -7.44%
Net asset value 5/31/96 $ 11.15 $ 11.12 $ 11.12
11/29/96 $ 10.38 $ 10.31 $ 10.32
Dividends None None None
Capital gains None None None
</TABLE>
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of November 30, 1996
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
Life of Class
W/o sales charge 3.80% 3.10% 3.20%
With sales charge -2.17% -1.90% 2.20%
</TABLE>
Class A share performance is reported at the current maximum front-end charge of
5.75%.
Class B shares are sold without a front-end sales charge. Shares purchased
after June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period and
reflects the deduction of a 4% CDSC.
Class C shares are sold without a front-end sales charge. Performance
reflects the return you would have received after holding shares for one year or
more and redeeming after the end of that period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by calling or
writing to Keystone directly, or through Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 7
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Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type (usually
common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities from
its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a capital
gain distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 8
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Keystone Small Company Growth Fund II
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------- -------- ----------
<S> <C> <C>
COMMON STOCKS (100.2%)
ADVERTISING AND PUBLISHING (0.9%)
Outdoor Systems, Inc. 16,500 $ 419,719
- ---------------------------------------- -------- ----------
AMUSEMENTS (2.2%)
Promus Hotel Corp. 25,000 806,250
Station Casinos, Inc. 28,000 297,500
- ---------------------------------------- -------- ----------
1,103,750
- ---------------------------------------- -------- ----------
AUTOMOTIVE (3.7%)
Gentex Corp. 35,000 684,687
Tower Automotive, Inc. 35,000 1,120,000
- ---------------------------------------- -------- ----------
1,804,687
- ---------------------------------------- -------- ----------
BUILDING (4.2%)
Amre Inc. 43,000 118,250
Champion Enterprises 65,000 1,356,875
Oakwood Homes Corp. (a) 23,000 508,875
Toll Brothers Inc. 6,000 119,250
- ---------------------------------------- -------- ----------
2,103,250
- ---------------------------------------- -------- ----------
BUSINESS SERVICES (11.8%)
Alternative Resources Corp. 25,000 423,438
Barret Business Services, Inc. 40,000 595,000
Donnelley Enterpise Solution 27,000 678,375
G & K Services (a) 25,000 912,500
Rental Services Corp. 37,000 952,750
Thermo Cardiosystems, Inc. 20,000 692,500
US Filter Corp. 18,000 616,500
Vincam Group, Inc. 25,400 887,412
- ---------------------------------------- -------- ----------
5,758,475
- ---------------------------------------- -------- ----------
CHEMICALS (2.4%)
Molten Metal Technology, Inc. 22,000 332,750
OM Group, Inc. (a) 20,000 820,000
- ---------------------------------------- -------- ----------
1,152,750
- ---------------------------------------- -------- ----------
CONSUMER GOODS (6.7%)
Action Performance Cos., Inc. 30,600 520,200
Blyth Industries, Inc. 7,500 325,312
DeVry, Inc. Del 13,000 580,125
Golden Bear Golf Inc. 36,000 483,750
USA Detergents, Inc. 35,000 1,312,500
- ---------------------------------------- -------- ----------
3,221,887
- ---------------------------------------- -------- ----------
Number Market
of Shares Value
- ---------------------------------------- -------- ----------
DRUGS (4.9%)
Cytotherapeutics 35,000 $ 315,000
Gilead Sciences, Inc. 19,400 498,336
Idexx Laboratories, Inc. 20,900 736,725
Magainin Pharmaceutical, Inc. 30,000 251,250
Neurogen Corp. 20,000 370,000
Sequus Pharmaceuticals, Inc. 18,000 256,500
- ---------------------------------------- -------- ----------
2,427,811
- ---------------------------------------- -------- ----------
ELECTRONICS (2.4%)
Altron Inc. 21,700 406,875
BMC Industries, Inc. (a) 26,700 767,625
- ---------------------------------------- -------- ----------
1,174,500
- ---------------------------------------- -------- ----------
FINANCE (10.9%)
BostonFed Bancorp, Inc. (a) 40,000 595,000
Everen Capital Corp. (a) 27,000 607,500
First Alliance Company 33,900 978,863
IMC Mtg. Co. 27,100 870,588
Investors Financial Services Corp. (a) 30,000 821,250
Queens County Bancorp (a) 13,333 623,318
RAC Financial Group, Inc. 15,000 810,000
- ---------------------------------------- -------- ----------
5,306,519
- ---------------------------------------- -------- ----------
FOODS (3.4%)
Flowers Industries, Inc. (a) 40,000 945,000
Hudson Foods, Inc. (a) 40,000 730,000
- ---------------------------------------- -------- ----------
1,675,000
- ---------------------------------------- -------- ----------
HEALTH CARE (3.5%)
- ----------------------------------------
Lifecore Biomedical, Inc. 30,000 468,750
Phymatrix Corp. 20,000 305,000
Total Renal Care Holdings, Inc. 27,000 924,750
- ---------------------------------------- -------- ----------
1,698,500
- ---------------------------------------- -------- ----------
INSURANCE (4.5%)
- ----------------------------------------
CMAC Investment Corp. (a) 14,100 1,075,125
HCC Insurance Holdings, Inc. (a) 40,000 1,120,000
- ---------------------------------------- -------- ----------
2,195,125
- ---------------------------------------- -------- ----------
OFFICE & BUSINESS EQUIPMENT (5.5%)
Applied Magnetics Corp. 50,000 1,368,750
Cognex Corp. 14,000 278,250
Natural Microsystems Corp. 40,000 1,027,500
- ---------------------------------------- -------- ----------
2,674,500
- ---------------------------------------- -------- ----------
</TABLE>
<PAGE>
PAGE 9
- --------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------- -------- ----------
<S> <C> <C>
OIL SERVICE (9.5%)
BJ Services Co. 24,000 $1,146,000
Falcon Drilling, Inc. 36,600 1,461,713
Newpark Resources, Inc. 25,000 875,000
Seacor Holdings Inc. 18,700 1,182,775
- ------------------------------------- -------- ----------
4,665,488
- ------------------------------------- -------- ----------
RESTAURANTS (3.5%)
Quality Dining, Inc. 45,000 1,023,750
Sonic Corp. 30,000 690,000
- ------------------------------------- -------- ----------
1,713,750
- ------------------------------------- -------- ----------
RETAIL (5.2%)
Black Box Corp. 20,000 815,000
CDW Computer Centers, Inc. 15,000 999,375
Sports Authority, Inc. 30,000 742,500
- ------------------------------------- -------- ----------
2,556,875
- ------------------------------------- -------- ----------
SOFTWARE SERVICES (4.9%)
Epic Design Technology, Inc. 17,000 425,000
FactSet Research Systems Inc. 30,000 705,000
Geoworks, Inc. 20,000 443,750
INSO Corp. 20,000 853,750
- ------------------------------------- -------- ----------
2,427,500
- ------------------------------------- -------- ----------
TELECOMMUNICATIONS (3.9%)
Aspect Telecommunications Corp. 8,600 471,925
Cox Radio Inc. 40,800 714,000
Heartland Wireless
Communications, Inc. 30,000 360,000
Proxim Inc. 17,100 321,694
- ------------------------------------- -------- ----------
1,867,619
- ------------------------------------- -------- ----------
Number Market
of Shares Value
- ------------------------------------- -------- ----------
TEXTILES (3.7%)
Nautica Enterprises, Inc. 30,000 $ 952,500
St. John Knits, Inc. (a) 20,000 857,500
- ------------------------------------- -------- ----------
1,810,000
------------------------------------- -------- ----------
TRANSPORTATION (2.5%)
- -------------------------------------
Coach USA Inc. 9,300 235,988
Swift Transportation Co., Inc. 40,000 962,500
- ------------------------------------- -------- ----------
1,198,488
- ------------------------------------- -------- ----------
TOTAL COMMON STOCKS
(Cost--$47,218,839) 48,956,193
- ------------------------------------- -------- ----------
TOTAL INVESTMENTS
(Cost--$47,218,839) 48,956,193
OTHER ASSETS AND LIABILITIES (-0.2%) (111,232)
- ------------------------------------- -------- ----------
NET ASSETS (100.0%) $48,844,961
- ------------------------------------- -------- ----------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Income-producing security.
See Notes to Financial Statements.
<PAGE>
PAGE 10
- --------------------------------------
Keystone Small Company Growth Fund II
FINANCIAL HIGHLIGHTS-- CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 21, 1996
Six Months (Commencement of
Ended Operations) to
November 30, 1996 May 31, 1996
==================== ===================
<S> <C> <C>
(Unaudited)
Net asset value beginning of period $ 11.15 $ 10.00
- ------------------------------------------------------- ------- -------
Income from investment operations:
Net investment loss (0.07) (0.02)
Net realized and unrealized gain (loss) on investments (0.70) 1.17
- ------------------------------------------------------- ------- -------
Total from investment operations (0.77) 1.15
- ------------------------------------------------------- ------- -------
Net asset value end of period $ 10.38 $ 11.15
- ------------------------------------------------------- ------- -------
Total return (b) (6.91%) 11.50%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.03%(a)(c) 2.10%(a)(c)
Total expenses excluding reimbursement 2.09%(c) 3.70%(c)
Net investment loss (1.45%)(c) (1.41%)(c)
Portfolio turnover rate 48% 13%
Average Commission rate paid $0.0580 $0.0607
- ------------------------------------------------------- ------- -------
Net assets end of period (thousands) $14,687 $ 8,201
- ------------------------------------------------------- ------- -------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the six months ended
November 30, 1996 and the year ended May 31, 1996 includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio for both
periods would have been 1.95%.
(b) Excluding applicable sales charges.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 21, 1996
Six Months (Commencement of
Ended Operations) to
November 30, 1996 May 31, 1996
==================== ===================
<S> <C> <C>
(Unaudited)
Net asset value beginning of period $11.12 $ 10.00
- ------------------------------------------------------- --------- --------
Income from investment operations:
Net investment loss (0.10) (0.03)
Net realized and unrealized gain (loss) on investments (0.71) 1.15
- ------------------------------------------------------- --------- --------
Total from investment operations (0.81) 1.12
- ------------------------------------------------------- --------- --------
Net asset value end of period $ 10.31 $ 11.12
- ------------------------------------------------------- --------- --------
Total return (b) (7.28%) 11.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.78%(a)(c) 2.85%(a)(c)
Total expenses excluding reimbursement 2.84%(c) 4.45%(c)
Net investment loss (2.19%)(c) (2.16%)(c)
Portfolio turnover rate 48% 13%
Average Commission rate paid $0.0580 $0.0607
- ------------------------------------------------------- --------- --------
Net assets end of period (thousands) $23,791 $12,487
- ------------------------------------------------------- --------- --------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the period ended
November 30, 1996 and the year ended May 31, 1996 includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio for both
periods would have been 2.70%.
(b) Excluding applicable sales charges.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------------------------
Keystone Small Company Growth Fund II
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 21, 1996
Six Months (Commencement of
Ended Operations) to
November 30, 1996 May 31, 1996
==================== ===================
<S> <C> <C>
(Unaudited)
Net asset value beginning of period $ 11.12 $ 10.00
- ------------------------------------------------------- --------- --------
Income from investment operations:
Net investment loss (0.11) (0.02)
Net realized and unrealized gain (loss) on investments (0.69) 1.14
- ------------------------------------------------------- --------- --------
Total from investment operations (0.80) 1.12
- ------------------------------------------------------- --------- --------
Net asset value end of period $ 10.32 $ 11.12
- ------------------------------------------------------- --------- --------
Total return (b) (7.44%) 11.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.78%(a)(c) 2.85%(a)(c)
Total expenses excluding reimbursement 2.85%(c) 4.44%(c)
Net investment loss (2.19%)(c) (2.20%)(c)
Portfolio turnover rate 48% 13%
Average Commission rate paid $0.0580 $0.0607
- ------------------------------------------------------- --------- --------
Net assets end of period (thousands) $10,367 $ 8,315
- ------------------------------------------------------- --------- --------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the six months ended
November 30, 1996 and the year ended May 31, 1996 includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio for both
periods would have been 2.70%.
(b) Excluding applicable sales charges.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets (Note 2)
Investments at market value:
(identified cost--$47,956,193) $48,956,193
Receivable for:
Fund shares sold 651,328
Dividends 3,276
Deferred organization expenses 14,922
Prepaid expenses 32,339
- ------------------------------------------------------ --------------
Total assets 49,658,058
- ------------------------------------------------------ --------------
Liabilities (Note 2)
Payable for:
Investments purchased 90,764
Fund shares redeemed 82,213
Other accrued expenses and liabilities 58,058
- ------------------------------------------------------ --------------
Total liabilities 813,097
- ------------------------------------------------------ --------------
Net assets $48,844,961
- ------------------------------------------------------ --------------
Net assets represented by
Paid-in capital $49,735,511
Undistributed net investment loss (Note 1) (426,169)
Accumulated net realized loss on investments (2,201,735)
Net unrealized appreciation on investments 1,737,354
- ------------------------------------------------------ --------------
Total net assets $48,844,961
- ------------------------------------------------------ --------------
Net asset value per share (Note 2)
Class A Shares
Net asset value of $14,687,063 / 1,414,405 shares
outstanding $10.38
Offering price per share ($10.38 / 0.9425) (based)
on a sales charge of 5.75% of the offering price
on November 30, 1996) $11.01
Class B Shares
Net asset value of $23,790,608 / 2,306,511 shares
outstanding $10.31
Class C Shares
Net asset value of $10,367,290 / 1,004,846 shares
outstanding $10.32
- ------------------------------------------------------ --------------
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended November 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment income
Dividends $ 32,969
Interest 75,749
- ------------------------------------------ -------------
Total income 108,718
- ------------------------------------------ -------------
Expenses (Notes 4, 5 and 6)
Management fee $150,704
Transfer Agent fees 101,693
Accounting, auditing and legal 11,092
Custodian fees 53,763
Printing 12,600
Amortization of organization expenses 2,509
Distribution Plan expenses 168,892
Registration fees 61,102
Miscellaneous expenses 3,637
Reimbursement from investment adviser (14,277)
- ------------------------------------------ -----------
Total expenses 551,715
Less: Expenses paid indirectly (16,828)
- ------------------------------------------ -------------
Net expenses 534,887
- ------------------------------------------ -------------
Net investment loss (426,169)
- ------------------------------------------ -------------
Net realized and unrealized
gain (loss) on investments (Note 3)
Net realized loss on investments (2,109,842)
Net change in unrealized
appreciation on investments 440,683
- ------------------------------------------ -------------
Net realized and unrealized loss
on investments (1,579,159)
- ------------------------------------------ -------------
Net decrease in net assets resulting
from operations ($ 2,005,328)
- ------------------------------------------ -------------
</TABLE>
<PAGE>
PAGE 14
- --------------------------------------
Keystone Small Company Growth Fund II
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
February 21, 1996
Six Months (Commencement
Ended of Operations)
November 30, 1996 to May 31, 1996
==================== ===================
<S> <C> <C>
(Unaudited)
Operations
Net investment loss ($ 426,169) ($ 59,141)
Net realized loss on investments (2,019,842) (181,893)
Net change in unrealized appreciation on investments 440,683 1,296,671
- ----------------------------------------------------------------------- ------------ ----------
Net increase (decrease) in net assets resulting from operations (2,005,328) 1,055,637
- ----------------------------------------------------------------------- ------------ ----------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 9,707,186 8,267,986
Class B Shares 20,649,038 12,267,442
Class C Shares 4,327,317 8,667,945
Payment for shares redeemed:
Class A Shares (2,691,757) (410,693)
Class B Shares (8,404,951) (284,594)
Class C Shares (1,740,302) (559,965)
- ----------------------------------------------------------------------- ------------ ----------
Net increase in net assets resulting from capital share transactions 21,846,531 27,948,121
- ----------------------------------------------------------------------- ------------ ----------
Total increase in net assets 19,841,203 29,003,758
- ----------------------------------------------------------------------- ------------ ----------
Net assets
Beginning of period 29,003,758 0
- ----------------------------------------------------------------------- ------------ ----------
End of period [including undistributed net investment
loss of $426,169--November, 1996] $48,844,961 $29,003,758
======================================================================= ============ ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 15
- --------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Small Company Growth Fund II (the "Fund") is a Massachusetts business
trust for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone is a wholly-owned subsidiary of
Keystone Investments, Inc. ("KII"). On December 11, 1996, KII, and indirectly
each of its subsidiaries, were acquired by First Union National Bank of North
Carolina (Note 7). 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 offers several classes of shares. The Fund's investment
objective is long-term growth of capital.
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 the bid and asked prices. Securities for which
valuations are not available from an independent pricing service (including
restricted securities) are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. 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.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade
<PAGE>
PAGE 16
- --------------------------------------
Keystone Small Company Growth Fund II
date is included in realized gain (loss) on foreign currency transactions.
D. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts. Dividend income is recorded on the ex-dividend date.
E. Organization Expenses
The Fund's organization expenses are amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares of the
Fund are redeemed by Keystone during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses in
the same proportion as the number of initial shares being redeemed bears to the
number of initial shares outstanding at the time of redemption.
F. 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 taxesthe required distributions under the Code.
Accordingly, no provision for federal income taxes is required.
G. Distributions
The Fund distributes 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 a net operating
loss and wash sales.
H. Class Allocations
Class A shares are offered at a public offering price, which includes a maximum
sales charge of 5.75% payable at the time of purchase. Class B shares are sold
subject to a contingent deferred sales charge that is payable upon redemption
and decreases depending on how long the shares have been held. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
will automatically convert to Class A shares. Class B shares purchased prior to
June 1, 1995 that have been outstanding for seven years will automatically
convert to Class A shares. Class C shares are sold subject to a contingent
deferred sales charge payable on shares redeemed within one year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with no par value. As of November 30, 1996,
shares of beneficial interest of the Fund were divided into Class A, Class B and
Class C. Transactions in shares of the Fund were as follows:
<PAGE>
PAGE 17
- --------------------------------------
<TABLE>
<CAPTION>
February 21, 1996
(Commencement
Six Months Ended of Operations)
Class A November 30, 1996 to May 31, 1996
- ----------------- -------------------- --------------------
<S> <C> <C>
Shares sold 942,947 772,993
Shares redeemed (263,994) (37,541)
- ---------------- --------- ---------
Net increase 678,953 735,452
- ---------------- --------- ---------
Class B
- ----------------
Shares sold 2,001,845 1,149,103
Shares redeemed (818,399) (26,038)
- ---------------- --------- ------ 1,183,446 1,123,065
- ---------------- --------- ---------
Class C
- ----------------
Shares sold 424,095 797,320
Shares redeemed (167,172) (49,397)
- ---------------- --------- ---------
Net increase 256,923 747,923
- ---------------- --------- ---------
</TABLE>
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the six months ended
November 30, 1996, were $41,511,116 and $18,822,108, respectively.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter,
Keystone Investment Distributors Company ("KIDC"), a wholly-owned subsidiary of
Keystone, amounts which are calculated and paid daily.
The Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average daily net assets of the Class
A shares, to pay expenses related to the distribution of Class A shares. During
the six months ended November 30, 1996, the Fund paid $15,466 to KIDC under the
Class A Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund
pays a distribution fee, which may not exceed 1.00% annually of the average
daily net assets of Class B and Class C shares, respectively. Of that amount,
0.75% is used to pay distribution expenses and 0.25% is used to pay service
fees.
During the six months ended November 30, 1996, under the Class B
Distribution Plans, the Fund paid or accrued $4,808 for Class B shares purchased
on or before June 1, 1995 and $99,563 for Class B shares purchased after June 1,
1995. The Fund paid $49,055 under the Class C Distribution Plan.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
KIDC, may continue as compensation for services which had been earned while the
Distribution Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. KIDC intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At November 30, 1996, total unpaid distribution costs were $95,798 for
Class B shares purchased before June 1, 1995, and $1,440,072 for Class B shares
purchased on or after June 1, 1995. Unpaid distribution costs for Class C shares
were $682,870 at November 30, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid
to KIDC.
<PAGE>
PAGE 18
- --------------------------------------
Keystone Small Company Growth Fund II Keystone Small Company Growth Fund II
(5.) Investment 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, which start at 0.70% and decline to 0.35% per annum
as net assets increase, to the average daily net asset value of the Fund.
Keystone has voluntarily limited the expenses of Class A shares to 1.95% of
its average daily net assets and has limited the expenses of Class B and C
shares to 2.70% of the average daily net assets of each respective class. For
the six months ended November 30, 1996, Keystone reimbursed the Fund $14,277.
The Fund paid or accrued $101,693 to Keystone Investor Resource Center,
Inc., a wholly-owned subsidiary of Keystone, for services rendered as the Fund's
transfer and dividend disbursing agent.
Certain officers and/or directors of Keystone are also officers and or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently the independent Trustees of the
Fund receive no compensation for their services.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended November 30, 1996, the Fund incurred total custody fees of
$53,763 and received a credit of $16,828 pursuant to this expense offset
arrangement, resulting in a net custody expense of $36,935. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
(7.) Subsequent Events
On December 11, 1996, KII and indirectly each of its subsidiaries, including
Keystone, the Fund's investment adviser, were acquired (the "Acquisition") by
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union").
Consequently, the Fund entered into a new Investment Advisory and
Management Agreement (the "New Advisory Agreement") with Keystone. The terms of
the New Advisory Agreement are substantially identical to the current agreement.
In addition, the Fund has entered into a principal underwriting agreement with
Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. EKD replaces
Evergreen Keystone Investment Services, Inc. (formerly, Keystone Investment
Distributors Company ("KIDC")) as the Fund's principal underwriter.
Also, in connection with the Acquisition, KIRC changed its name to
Evergreen Keystone Service Company.
It is expected that the Acquisition will not affect services provided to
the Fund.
<PAGE>
PAGE 19
- --------------------------------------------------------------------
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution. You
may also process transactions such as investments, redemptions and exchanges
using a touch-tone telephone as well as receive quotes on price, yield, and
total return of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should
call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound th no minimum additional
investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net asset
value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you the
added ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your changing
investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to move
money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than your
original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined contribution
plans. For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
[cover]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Balanced Fund II
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources and Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
World Bond Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
[Keystone logo] KEYSTONE
I N V E S T M E N T S
P.O. Box 2121
Boston, Massachusetts 02106-2121
SCG2-R 1/97 [recycle logo]
8M
K E Y S T O N E
[photo of little girl with gardening tools and flower pot]
SMALL COMPANY
GROWTH FUND II
[Keystone logo]
SEMIANNUAL REPORT
