PAGE 1
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II (FORMERLY KEYSTONE SMALL COMPANY GROWTH
FUND II)
Dear Shareholders:
Despite some volatility during the last quarter of l997, the
U.S. stock market produced strong gains for the six months that
ended November 30, 1997, and investors in Evergreen Small
Company Growth Fund II participated in the market's strong
performance.
SMALL-COMPANY STOCKS STAGE A COMEBACK
Over the six month period, the performance of small company
stocks was particularly rewarding. After lagging large company
stocks for more than two years, the attractive prices and
strong potential for accelerated earnings growth fueled
(Photo of investor demand for small caps. The economic environment was
William M. ideal for small company stocks. Economic growth was strong,
Ennis) inflation remained under control, and interest rates were
WILLIAM M. ENNIS relatively low. Against this backdrop, small company stocks
generated strong returns. In fact, for the third calendar
quarter of 1997, small company stocks were market leaders. It
is important, however, to keep your
Fund's returns in perspective.
MARKET CYCLES
History has shown that the markets move in cycles, and six month's or one year's
performance does not often indicate the following year's performance. History
also has taught us, however, that over longer periods of time, the winning
investment strategies are those that have consistent disciplines and that remain
faithful to those disciplines, even during periodic market slumps.
At Evergreen Funds, we encourage you to remain focused on your long-term goals
and to remain disciplined in your personal investment strategies. No one can
confidently say whether next year's market or the following year's market will
be as rewarding as last year's market. We can say, however, that the most likely
winners in the long run are those who consistently follow long-term investment
strategies.
UPCOMING DEVELOPMENTS
In the next few weeks and months, shareholders of Evergreen and Keystone funds
will begin to notice some changes. The Evergreen Keystone Funds are becoming the
Evergreen Funds. On October 31, 1997, Keystone America Funds adopted the name of
Evergreen and your Fund changed its name to Evergreen Small Company Growth Fund
II. In early 1998 the original Keystone Funds will also take the Evergreen name.
You should have received a proxy statement in November explaining a proposal to
reorganize the Evergreen (formerly Keystone) Small Company Growth Fund II into a
new fund, the Evergreen Small Company Growth Fund.
We believe that by putting all the funds under the umbrella name of Evergreen
Funds we will be creating a simpler and more cohesive image. Importantly, we
expect to create substantial cost savings for shareholders as a result of
consolidating prospectuses, annual reports, legal registrations and other
materials. It also will be easier for you to find all the funds of the Evergreen
Family, to which you have exchange privileges, under one heading in newspapers
and electronic services. What will not change will be our commitment to provide
you with the finest investment products and shareholder services possible.
If you have any questions about these changes or other issues affecting your
investments, we encourage you to consult your financial advisor or call
Evergreen Funds at 1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
<PAGE>
PAGE 2
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
A Discussion With
Your Fund Management Team
[PHOTO OF THOMAS L. HOLMAN APPEARS HERE]
THOMAS L. HOLMAN IS VICE PRESIDENT AND PORTFOLIO MANAGER OF YOUR FUND. MR.
HOLMAN JOINED KEYSTONE INVESTMENT MANAGEMENT COMPANY IN JANUARY 1997.
PRIOR TO JOINING KIMCO, HE WAS AN INVESTMENT OFFICER AND SECURITIES
ANALYST AT INVISTA CAPITAL MANAGEMENT, A SUBSIDIARY OF THE PRINCIPAL
FINANCIAL GROUP, WHERE HE WAS CO-MANAGER OF PRINCOR GROWTH FUND AND
PRINCOR EMERGING GROWTH FUND. MR. HOLMAN IS A MEMBER OF KIMCO'S SMALL
COMPANY STOCK TEAM, WHICH IS COMPOSED OF THREE PORTFOLIO MANAGERS AND FIVE
EQUITY ANALYSTS. TOGETHER, THEY SEARCH FOR STOCKS OF SMALL COMPANIES WITH
SUSTAINABLE ABOVE-AVERAGE GROWTH RATES. THIS TEAM IS HEADED BY J. GARY
CRAVEN, SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER, SMALL COMPANY
STOCKS.
Q HOW DID THE FUND PERFORM DURING THE SIX MONTH PERIOD THAT ENDED NOVEMBER 30,
1997?
A For the six month period, your fund generated strong performance. Class A
shares returned 11.07%, Class B shares returned 10.60%, and Class C shares
returned 10.60%. The Fund's newest class of shares, Class Y, which were
introduced on January 13, 1997, returned 11.10%. Your Fund's total return is in
line with the total return of its benchmark, the Russell 2000 Growth Index,
which rose 10.91% for the same period. These returns are unadjusted for any
sales charges.
Q WHAT ACCOUNTED FOR THE FUND'S STRONG SIX MONTH PERFORMANCE?
A The economic backdrop was favorable. Moderate economic growth, relatively
stable interest rates, and relatively low inflation were positive for small
company stocks. In addition, small company stocks, which had been out of favor
with investors for some time, benefited from a rising U.S. dollar.
Q HOW DOES A STRONG U.S. DOLLAR AFFECT SMALL COMPANY STOCKS?
A A rising U.S. dollar makes U.S. products more expensive overseas. Therefore, a
strong dollar may dampen the profits (earnings) of large companies that depend
on overseas markets for a significant portion of their business. Lower profits
can lead to declining stock prices. Large companies had been market leaders for
more than two years, but over the last six months, investors grew concerned
about whether or not they would be able to sustain their strong earnings growth.
Small company stocks, which were relatively inexpensive had strong earnings
growth rates and became more attractive to investors.
<PAGE>
PAGE 3
- ---------------------------------------------------------
Q DID YOU MAKE ANY SIGNIFICANT CHANGES IN THE PORTFOLIO DURING THE SIX MONTHS?
A We made the largest change in oil stocks. On May 31, 1997, oil service company
stocks accounted for nearly 16% of the portfolio's net assets. Because most of
the oil companies in the portfolio had reached or exceeded our expectations for
growth, we cut back the Fund's exposure to them. On November 30, 1997, 8.5% of
the Fund's net assets were committed to oil stocks. We eliminated Falcon
Drilling and Seacor Smit, two companies that had been among the Fund's top ten
holdings. In addition, we reduced the Fund's position in Newpark Resources. In
some instances, the stock prices for the companies on which we cut back have
declined significantly. Because we believe the fundamentals of some of these
businesses continue to be strong, we have now started to inch our way back into
them.
Q AT 30% OF NET ASSETS, TECHNOLOGY STOCKS ACCOUNTED FOR THE PORTFOLIO'S LARGEST
POSITION. WHY WERE THESE STOCKS ATTRACTIVE?
A The technology component of the portfolio is composed of two areas: hardware
stocks, which accounted for 17% of net assets, and software stocks, which made
up 13% of net assets. In the hardware area, we focused on semiconductor
manufacturing equipment companies that are well positioned to benefit from an
upgrade cycle, as semiconductor producers shift to larger silicon wafers. In the
software area, we invested in companies with products that greatly enhance the
productivity of their customers. Over the last three months of the period,
technology stocks experienced wide price swings. Despite this volatility, we
believe that the technology companies in which we have invested are market
leaders, with innovative products in the pipeline and attractive risk/reward
characteristics.
Q WHERE DID YOU FIND NEW OPPORTUNITIES?
A We invested 5% of the Fund's net assets in businesses called Competitive Local
Exchange Carriers (CLECs). These companies provide consumers with more choice in
selecting their local telephone service suppliers. There is increasing
competition in the local exchange area, and these companies have been effective
in taking market share from incumbent providers. Using new technology, CLECs can
provide the same, or enhanced, levels of service at considerably lower cost to
consumers. An example of such a company is McLeod. Based in Iowa, McLeod has
taken over 30% share in its addressable markets from U.S. West.
Q DID YOU MAKE ANY CHANGES TO THE FUND'S HEALTHCARE HOLDINGS?
A We made some changes to the healthcare stocks in the portfolio, resulting in a
slight increase in this sector from May 31, 1997. As of May 31, 1997, healthcare
stocks represented 9.0% of the portfolio's net assets, compared to 10.7% on
November 30, 1997. We cut back on some of the portfolio's biotechnology holdings
whose fundamentals did not live up to our expectations. These companies were
conducting tests on products that had appeared promising in early phase testing
but proved to be disappointing in later trials. We used the proceeds from the
sale of the Fund's biotechnology holdings to invest in more attractive
companies, such as Graham Field, a manufacturer and distributor of home health
care products, and Wesley Jessen, a contact lens manufacturer.
<PAGE>
PAGE 4
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
Q WHAT IS YOUR OUTLOOK?
A We believe that the U.S. economy should continue to grow at a moderate rate
and interest rates should be flat or declining. We are optimistic about the
opportunities for small company stocks in the months ahead. Valuations continue
to be very attractive in relation to large company stocks. The Fund continues to
have a significant amount of assets invested in technology stocks, and we
believe there are several new product cycles in the high-tech area that should
benefit the Fund. We will continue to monitor events in Asia and to assess their
impact on technology stocks. While your fund made strong gains over the past six
months, it would be unrealistic to expect that such high returns will continue
without interruption. Over the long term, there will be upswings and downturns,
as there have always been with small company investments. That is why, we
encourage you to take a long-term perspective when reviewing your fund's
performance. Over time, we believe small company stocks have the potential to
provide strong returns to long-term investors.
TOP 10 HOLDINGS
AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY INDUSTRY NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Roper Industries, Inc. Industrial Specialty
Products
& Services 2.3%
- ----------------------------------------------------------------
ACC Corp. Telecommunication
Services
& Equipment 2.0%
- ----------------------------------------------------------------
Newpark Resources Oil Field Services 1.9%
- ----------------------------------------------------------------
Dime Community Bancorp, Banks
Inc. 1.9%
- ----------------------------------------------------------------
Trimas Corp Industrial Specialty
Products
& Services 1.9%
- ----------------------------------------------------------------
Bostonfed Bancorp, Inc. Banks 1.9%
- ----------------------------------------------------------------
Stage Stores, Inc. Retailing & Wholesale 1.9%
- ----------------------------------------------------------------
Aspen Technology, Inc. Information Services
& Technology 1.9%
- ----------------------------------------------------------------
Oakwood Homes Corp. Building, Construction
& Furnishing 1.8%
- ----------------------------------------------------------------
International Telecomm Information Services
Systems, Inc. & Technology 1.7%
- ----------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 5
- ---------------------------------------------------------
Your Fund's Performance
Comparison of change in value of a $10,000 investment in Evergreen Small
Company Growth Fund II Class A and the Russell 2000 index.
[GRAPH APPEARS BELOW WITH THE FOLLOWING PLOT POINTS:]
February 21, 1996 through November 30, 1997
Russell 2000 Class A
------------ --------
(In Thousands)
2/21/96 9,800 9,200
5/96 11,200 10,200
11/96 11,000 9,500
5/97 12,000 9,400
11/97 14,013 10,845
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in each class. The investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. The Russell 2000 index is an unmanaged market index. The
index does not include transaction costs associated with buying and selling
securities nor any management fee.
SIX MONTH PERFORMANCE AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Total Return
w/o sales charge 11.07% 10.60% 10.60% 11.10%
Total Return
with sales charge 5.80% 5.60% 9.60% 11.10%
Distributions
Capital Gains $0.49 $0.49 $0.49 $0.49
</TABLE>
HISTORICAL RECORD
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURNS* CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Inception Date 2-21-96 2-21-96 2-21-96 1-13-97
1 year 4.47% 3.77% 7.67% --
Since Inception 4.66% 4.50% 6.65% --
Cumulative Return
Since Inception 8.44% 8.15% 12.15% 8.16%
Maximum Sales
Charge 4.75% 5.00% 1.00% n/a
Front End CDSC CDSC
</TABLE>
*ADJUSTED FOR MAXIMUM APPLICABLE SALES CHARGES.
FUNDS THAT INVEST IN STOCKS OF SMALL COMPANIES, ALSO CALLED SMALL CAP STOCKS,
INVOLVE CERTAIN RISKS AND, THEREFORE, MAY NOT BE APPROPRIATE FOR ALL INVESTORS.
ALTHOUGH THEY MAY OFFER THE POTENTIAL FOR GREATER LONG-TERM RETURNS, THEY ALSO
MAY EXPERIENCE GREATER PRICE VOLATILITY DUE TO THEIR LIMITED FOCUS ON A
PARTICULAR INDUSTRY, MARKET, PRODUCT, OR SERVICE, OR BECAUSE THEY INVEST IN
SMALLER, LESS ESTABLISHED COMPANIES.
<PAGE>
PAGE 6
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
SCHEDULE OF INVESTMENTS-- NOVEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- 98.9%
BANKS-- 5.7%
<S> <C> <C> <C>
34,000 * Bostonfed Bancorp, Inc............ $ 699,125
30,200 * Dime Community Bancorp, Inc....... 707,813
5,000 Prime Bancshares, Inc............. 97,031
17,398 * Queens County Bancorp, Inc........ 607,299
-----------
2,111,268
-----------
BUILDING, CONSTRUCTION &
FURNISHINGS-- 4.6%
22,000 Furniture Brands International,
Inc............................. 430,375
18,600 * General Cable Corp................ 634,725
21,700 * Oakwood Homes Corp................ 651,000
-----------
1,716,100
-----------
BUSINESS EQUIPMENT &
SERVICES-- 3.8%
7,501 Concentra Managed Care, Inc....... 254,331
24,000 Equity Corp. International........ 513,000
6,100 * Market Facts, Inc................. 108,466
14,600 * Vincam Group, Inc................. 531,987
-----------
1,407,784
-----------
CONSUMER PRODUCTS &
SERVICES-- 2.9%
32,700 Chattem, Inc...................... 500,719
14,600 WestPoint Stevens, Inc............ 583,087
-----------
1,083,806
-----------
ELECTRICAL EQUIPMENT &
SERVICES-- 13.0%
10,500 * Asyst Technologies, Inc........... 323,531
20,400 Computer Products, Inc............ 403,537
9,300 Credence Systems Corp............. 249,066
20,100 * Cymer, Inc........................ 385,041
17,500 Data General Corp................. 313,906
15,600 * DII Group, Inc.................... 350,025
7,900 Lattice Semiconductor Corp........ 445,856
12,700 Natural Microsystems Corp......... 604,837
25,200 Ortel Corp........................ 448,875
11,600 * Pri Automation, Inc............... 395,125
11,900 Splash Technology Holdings,
Inc............................. 383,775
29,900 Westell Technologies, Inc.
Cl. A........................... 498,022
-----------
4,801,596
-----------
<CAPTION>
SHARES VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
FINANCE & INSURANCE-- 7.7%
11,900 * CMAC Investment Corp.............. $ 618,056
13,500 * Delphi Financial Group, Inc....... 541,688
14,700 * Everen Capital Corp............... 586,162
21,600 * First Alliance Co................. 453,600
11,700 * Firstplus Financial Group, Inc.... 447,525
2,100 * Horace Mann Educators Corp........ 117,338
2,900 PAULA Financial................... 65,250
-----------
2,829,619
-----------
FOOD & BEVERAGE
PRODUCTS-- 0.4%
6,500 * Worthington Foods, Inc............ 149,500
-----------
HEALTHCARE PRODUCTS &
SERVICES-- 6.6%
26,400 Cytyc Corp........................ 572,550
35,700 Graham Field Health Products,
Inc............................. 533,269
19,100 Lifecore Biomedical, Inc.......... 371,256
8,800 Pediatrix Medical Group, Inc...... 389,400
3,300 Spine-Tech, Inc................... 108,900
15,300 Wesley Jessen Visioncare, Inc..... 471,431
-----------
2,446,806
-----------
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 4.9%
13,700 * BMC Industries, Inc............... 254,306
29,900 * Roper Industries, Inc............. 861,494
22,600 * Trimas Corp....................... 700,600
-----------
1,816,400
-----------
INFORMATION SERVICES &
TECHNOLOGY-- 16.8%
18,000 * Aspen Technology, Inc............. 685,125
17,800 Avid Technology, Inc.............. 522,875
12,600 Discreet Logic, Inc............... 241,763
20,000 Geoworks.......................... 256,250
23,800 International Telecomm Systems,
Inc............................. 636,650
14,100 JDA Software Group, Inc........... 434,016
5,200 Lycos, Inc........................ 158,925
15,000 * Manugistics Group, Inc............ 524,531
40,600 Metacreations Corp................ 483,394
27,100 Project Software & Development,
Inc............................. 526,756
10,300 QAD, Inc.......................... 163,191
45,800 Rational Software Corp............ 459,431
14,824 Synopsys, Inc..................... 610,563
22,000 Vantive Corp...................... 528,000
-----------
6,231,470
-----------
</TABLE>
<PAGE>
PAGE 7
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- NOVEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
LEISURE & TOURISM-- 1.0%
500 Pegasus Systems, Inc.............. $ 8,844
38,900 Sodak Gaming, Inc................. 342,806
-----------
351,650
-----------
MACHINERY-- DIVERSIFIED-- 2.6%
25,000 * Omniquip International, Inc....... 477,344
19,400 Rental Service Corp............... 487,425
-----------
964,769
-----------
OIL / ENERGY-- 3.7%
20,600 * KCS Energy, Inc................... 489,250
9,300 Ocean Energy, Inc................. 520,219
16,500 Swift Energy Co................... 358,875
-----------
1,368,344
-----------
OIL FIELD SERVICES-- 4.8%
8,400 BJ Services Co., Inc.............. 603,225
16,300 * Maverick Tube Corp................ 466,078
35,600 * Newpark Resources, Inc............ 709,775
-----------
1,779,078
-----------
PHARMACEUTICALS-- 4.1%
12,100 * Agouron Pharmaceuticals, Inc...... 463,203
26,300 Amylin Pharmaceuticals, Inc....... 178,347
11,900 Dura Pharmaceuticals, Inc......... 520,625
18,900 Neurogen Corp..................... 369,731
-----------
1,531,906
-----------
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 2.9%
13,200 Cox Radio, Inc. Cl. A............. 447,150
20,700 Hearst Argyle Television, Inc..... 610,650
-----------
1,057,800
-----------
<CAPTION>
SHARES VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------------
<CAPTION>
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
RETAILING & WHOLESALE-- 5.2%
4,300 Brylane, Inc...................... $ 222,525
15,000 Gadzooks, Inc..................... 417,188
17,600 Michaels Stores, Inc.............. 567,050
16,600 Stage Stores, Inc................. 698,237
-----------
1,905,000
-----------
TELECOMMUNICATION SERVICES
& EQUIPMENT-- 6.8%
16,000 ACC Corp.......................... 748,500
7,500 Intermedia Communications, Inc.... 370,781
12,200 McLeod USA, Inc., Cl. A........... 452,925
25,000 Smartalk Teleservices, Inc........ 535,938
37,600 Telegroup, Inc.................... 387,750
-----------
2,495,894
-----------
TRANSPORTATION-- 1.4%
40,900 Fritz Companies, Inc.............. 536,813
500 Jevic Transportation, Inc......... 8,250
-----------
545,063
-----------
TOTAL COMMON STOCKS
(COST-- $35,456,629)............ 36,593,853
-----------
PRINCIPAL
AMOUNT
- ---------
REPURCHASE AGREEMENT--1.2%
$457,000 Keystone Joint Repurchase
Agreement, (Investment in a joint
trading account, purchased
11/28/97, 5.718% maturing
12/1/97, maturing value $457,218
(a)) cost $457,000............. 457,000
----------
TOTAL INVESTMENTS--
(COST--$35,913,629.......100.0% 37,050,853
OTHER ASSETS AND
LIABILITIES--NET......... (0.1) (52,155)
------ -----------
NET ASSETS..................100.0% $36,998,698
====== ===========
* Income producing securities.
(a) The repurchase agreement is fully collateralized by U.S. Government and/or
agency obligations based on market prices at November 30, 1997.
See Notes to Financial Statements.
</TABLE>
<PAGE>
PAGE 8
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
FINANCIAL HIGHLIGHTS-CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FEBRUARY 21,
1996
SIX MONTHS ENDED (COMMENCEMENT OF
NOVEMBER 30, 1997 YEAR ENDED OPERATIONS)
(UNAUDITED) (A) MAY 31, 1997 (A) TO MAY 31, 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 10.25 $ 11.15 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.08) (0.16) (0.02)
Net realized and unrealized gain (loss) on investments 1.23 (0.74) 1.17
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.15 (0.90) 1.15
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gain on investments (0.49) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $ 10.91 $ 10.25 $ 11.15
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (B) 11.07% (8.07%) 11.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.73%(c) 1.97% 2.10%(c)
Total expenses, excluding indirectly paid expenses 1.72%(c) 1.92% 1.95%(c)
Total expenses, excluding reimbursement N/A N/A 3.70%(c)
Net investment loss (1.45%)(c) (1.55%) (1.41%)(c)
PORTFOLIO TURNOVER RATE 80% 5% 13%
AVERAGE COMMISSION RATE PAID PER SHARE $0.0561 $ 0.0554 $ 0.0607
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS) $ 9,386 $ 10,779 $ 8,201
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS-CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FEBRUARY 21,
1996
SIX MONTHS ENDED (COMMENCEMENT OF
NOVEMBER 30, 1997 YEAR ENDED OPERATIONS)
(UNAUDITED) (A) MAY 31, 1997 (A) TO MAY 31, 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 10.14 $ 11.12 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.13) (0.24) (0.03)
Net realized and unrealized gain (loss) on investments 1.22 (0.74) 1.15
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.09 (0.98) 1.12
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gain on investments (0.49) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $ 10.74 $ 10.14 $ 11.12
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (B) 10.60% (8.81%) 11.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.48%(c) 2.72% 2.85%(c)
Total expenses, excluding indirectly paid expenses 2.47%(c) 2.67% 2.70%(c)
Total expenses, excluding reimbursement N/A N/A 4.45%(c)
Net investment loss (2.20%)(c) (2.29%) (2.16%)(c)
PORTFOLIO TURNOVER RATE 80% 5% 13%
AVERAGE COMMISSION RATE PAID PER SHARE $0.0561 $ 0.0554 $ 0.0607
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS) $21,412 $ 21,187 $ 12,487
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on average shares outstanding throughout the period.
(b) Excluding applicable sales charges.
(c) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 9
- ---------------------------------------------------------
FINANCIAL HIGHLIGHTS-CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FEBRUARY 21,
1996
SIX MONTHS ENDED (COMMENCEMENT OF
NOVEMBER 30, 1997 YEAR ENDED OPERATIONS)
(UNAUDITED) (A) MAY 31, 1997 (A) TO MAY 31, 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 10.14 $ 11.12 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.13) (0.24) (0.02)
Net realized and unrealized gain (loss) on investments 1.22 (0.74) 1.14
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.09 (0.98) 1.12
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gain on investments (0.49) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) 0 0
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $ 10.74 $ 10.14 $ 11.12
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (B) 10.60% (8.81%) 11.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.48%(c) 2.73% 2.85%(c)
Total expenses, excluding indirectly paid expenses 2.47%(c) 2.68% 2.70%(c)
Total expenses, excluding reimbursement N/A N/A 4.44%(c)
Net investment loss (2.20%)(c) (2.29%) (2.20%)(c)
PORTFOLIO TURNOVER RATE 80% 5% 13%
AVERAGE COMMISSION RATE PAID PER SHARE $0.0561 $ 0.0554 $ 0.0607
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS) $ 5,593 $ 7,661 $ 8,315
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on average shares outstanding throughout the period.
(b) Excluding applicable sales charges.
(c) Annualized.
FINANCIAL HIGHLIGHTS-CLASS Y SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
JANUARY 13, 1997
(COMMENCEMENT OF
SIX MONTHS ENDED OPERATIONS)
NOVEMBER 30, 1997 TO MAY 31, 1997
(UNAUDITED) (A) (A)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $ 10.31 $ 10.59
- -------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.07) 0
Net realized and unrealized gain (loss) on investments 1.23 (0.28)
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.16 (0.28)
- -------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gain on investments (0.49) 0
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) 0
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $ 10.98 $ 10.31
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.10% (2.64%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.48%(b) 2.23%(b)(c)
Total expenses, excluding indirectly paid expenses 1.47%(b) 2.23%(b)(c)
Net investment loss (1.20%)(b) (1.26%)(b)(c)
PORTFOLIO TURNOVER RATE 80% 5%
AVERAGE COMMISSION RATE PAID PER SHARE $0.0561 $ 0.0554
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS) $ 608 $ 5
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on average shares outstanding throughout the period.
(b) Annualized.
(c) For the period from May 28, 1997 (commencement of investment operations) to
May 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------
ASSETS:
Investments, at value (cost, $35,913,629) $37,050,853
Receivable for Fund shares sold 19,357
Dividends and interest receivable 1,161
Prepaid expenses 14,844
Deferred organization expenses 11,403
- ------------------------------------------------------------
Total assets 37,097,618
- ------------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 19,742
Management fees payable 22,449
Distribution Plan expenses payable 32,648
Accrued expenses and other liabilities 24,081
- ------------------------------------------------------------
Total liabilities 98,920
- ------------------------------------------------------------
NET ASSETS $36,998,698
- ------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital $35,193,989
Accumulated net investment loss (405,090)
Accumulated net realized gain on investments 1,072,575
Net unrealized appreciation on investments 1,137,224
- ------------------------------------------------------------
Total net assets $36,998,698
- ------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A Shares
Net asset value of $9,385,7484860,620
shares outstanding $ 10.91
Offering price per share ($10.9140.9525)
(based on a sales charge of 4.75% of the
offering price on November 30, 1997) $ 11.45
Class B Shares
Net asset value of $21,411,94241,993,837
shares outstanding $ 10.74
Class C Shares
Net asset value of $5,592,9684520,635
shares outstanding $ 10.74
Class Y Shares
Net asset value of $608,040455,402 shares
outstanding $ 10.98
- ------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 35,072
Interest 19,604
- -------------------------------------------------------------
Total Income 54,676
- -------------------------------------------------------------
EXPENSES
Management fee $141,774
Distribution Plan expenses 160,995
Transfer Agent fees 59,085
Administration expense 5,255
Registration fees 64,714
Amortization of organization
expense 1,761
Trustee Fees 1,333
Miscellaneous expenses 25,598
- -------------------------------------------------------------
Total expenses 460,515
Less: Expenses paid indirectly (749)
- -------------------------------------------------------------
Net expenses 459,766
- -------------------------------------------------------------
Net investment loss (405,090)
- -------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments 3,878,148
Net change in unrealized
appreciation on investments 802,366
- -------------------------------------------------------------
Net realized and unrealized gain
on investments 4,680,514
- -------------------------------------------------------------
Net increase in net assets
resulting from operations $4,275,424
- -------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
- ---------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, 1997 YEAR ENDED
(UNAUDITED) MAY 31, 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (405,090) $ (887,932)
Net realized gain (loss) on investments 3,878,148 (1,014,769)
Net change in unrealized appreciation (depreciation) on investments 802,366 (961,813)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 4,275,424 (2,864,514)
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized capital gains
Class A Shares (405,357) 0
Class B Shares (935,345) 0
Class C Shares (245,985) 0
Class Y Shares (22,224) 0
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,608,911) 0
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A Shares 1,580,107 10,500,455
Class B Shares 1,874,675 24,464,278
Class C Shares 561,568 5,257,765
Class Y Shares 650,106 5,011
Reinvestment of distributions:
Class A Shares 375,964 0
Class B Shares 851,834 0
Class C Shares 63,283 0
Class Y Shares 238 0
Payment for shares redeemed:
Class A Shares (4,161,874) (7,163,980)
Class B Shares (3,791,494) (14,359,496)
Class C Shares (3,280,752) (5,211,808)
Class Y Shares (22,939) 0
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share transactions (5,299,284) 13,492,225
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (2,632,771) 10,627,711
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 39,631,469 29,003,758
- ------------------------------------------------------------------------------------------------------------------------
End of period, including accumulated net investment loss of $405,090 and $0,
respectively $36,998,698 $39,631,469
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Evergreen Small Company Growth Fund II, formerly 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 was formerly a wholly-owned subsidiary of Keystone
Investments, Inc. ("KII") and is currently a subsidiary of First Union
Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end management investment company. The
Fund's investment objective is long-term growth of capital.
The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares
are offered at a public offering price, which includes a maximum front-end sales
charge of 4.75% payable at the time of purchase. Class B and C are sold without
a front-end sale charge, but pay higher ongoing distribution expenses than Class
A. 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 after January 1, 1997 will automatically convert
to Class A shares after seven years. Class B shares purchased prior to January
1, 1997 retain their existing conversion rights. Class C shares are sold subject
to a contingent deferred sales charge payable on shares redeemed within one year
after the month of purchase. Class Y shares are available without a front-end
sales charge or contingent deferred sales charge only to investment advisory
clients of First Union and its affiliates and certain institutional clients.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
The Fund values securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Fund values securities traded on an
exchange or NMS for which there have been no sales and other securities traded
in the over-the-counter market at the mean between the last reported bid and
asked price. Securities for which valuations are not available from an
independent pricing service, including restricted securities, are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at an amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other funds managed by Keystone, may
transfer uninvested cash balances into a joint trading account. These balances
are invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
C. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis and includes accretion of discounts and
amortization of premiums.
<PAGE>
PAGE 13
- ---------------------------------------------------------
D. FEDERAL 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 investment company taxable income and net capital
gains, if any, to its shareholders. The Fund intends to avoid any excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal taxes is required. To the extent that realized capital
gains can be offset by capital loss carryforwards, it is the Fund's policy not
to distribute such gains.
E. 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 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. 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 differing
treatment for net operating losses.
G. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
3. 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. Transactions in shares of
the Fund were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, 1997 YEAR ENDED
CLASS A (UNAUDITED) MAY 31, 1997*
<S> <C> <C>
- ---------------------------------------------------------
Shares sold 134,633 1,023,296
Shares issued in
reinvestment of
distributions 33,598 0
Shares redeemed (358,963) (707,396)
- ---------------------------------------------------------
Net increase
(decrease) (190,732) 315,900
- ---------------------------------------------------------
CLASS B
Shares sold 165,014 2,388,573
Shares issued in
reinvestment of
distributions 77,299 0
Shares redeemed (337,581) (1,422,533)
- ---------------------------------------------------------
Net increase
(decrease) (95,268) 966,040
- ---------------------------------------------------------
CLASS C
Shares sold 49,787 518,678
Shares issued in
reinvestment of
distributions 5,743 0
Shares redeemed (290,172) (511,324)
- ---------------------------------------------------------
Net increase
(decrease) (234,642) 7,354
- ---------------------------------------------------------
CLASS Y
Shares sold 56,824 488
Shares issued in
reinvestment of
distributions 21 0
Shares redeemed (1,931) 0
- ---------------------------------------------------------
Net increase 54,914 488
- ---------------------------------------------------------
</TABLE>
* FOR CLASS Y, TRANSACTIONS IN SHARES WERE FOR THE PERIOD FROM JANUARY 13, 1997
(DATE OF INITIAL PUBLIC OFFERING) TO MAY 31, 1997.
<PAGE>
PAGE 14
- ---------------------------------------------------------
EVERGREEN SMALL COMPANY GROWTH FUND II
4. 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, 1997, were $31,131,152 and $37,087,522, respectively.
5. DISTRIBUTION PLANS
The Fund has entered into a principal underwriting agreement with Evergreen
Distributors, Inc. (Formerly, Evergreen Keystone Distributors, Inc.) ("EDI"), a
wholly owned subsidiary of BISYS Group, Inc.
The Fund has adopted Distribution Plans for each class of shares, except Class
Y shares, as allowed by Rule 12b-1 of the 1940 Act. Distribution plans permit
the Fund to reimburse its principal underwriter for costs related to selling
shares of the Fund and for various other services. These costs, which consist
primarily of commissions and services fees to broker-dealers who sell shares of
the fund, are paid by shareholders through expenses called "Distribution Plan
expenses". Each Class, except Class Y, currently pays a service fee equal to
0.25% of the average daily net asset of the class. Class B and Class C also
presently pay distribution fees equal to 0.75% of the average daily net assets
of the class. Distribution Plan expenses are calculated daily and paid monthly.
During the six months ended November 30, 1997, amounts paid to EDI and/or its
predessor pursuant to the Fund's Class A, Class B and Class C Distribution Plans
were $13,383, $113,147 and $34,465, respectively.
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 EDI
and/or its predessor may continue as compensation for services which had been
earned while the Distribution Plan was in effect.
6. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of an investment advisory agreement between the Fund and
Keystone, Keystone serves as the investment adviser and manager to the Fund. In
return, Keystone is paid a management fee, computed daily and paid monthly,
which is determined by applying percentage rates starting at 0.70% and declining
as net assets increase to 0.35% per annum, to the average daily net asset value
of the Fund.
During the six months ended November 30, 1997, the Fund paid or accrued $5,255
to Keystone for certain administrative services. Evergreen Service Company
("ESC") (formerly Evergreen Keystone Service Company), a wholly-owned subsidiary
of Keystone, served as the Fund's transfer and dividend disbursing agent.
BISYS Fund Services, Inc. ("BISYS"), an affiliate of EDI, serves as the Fund's
sub-administrator. As sub-administrator, BISYS provides the officers of the
Fund. For these services, BISYS was paid a fee by Keystone, which was not a Fund
expense.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
7. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
8. NAME CHANGE
Effective October 31, 1997, Keystone Small Company Growth Fund II changed its
name to Evergreen Small Company Growth Fund II.
<PAGE>
PAGE 15
- ---------------------------------------------------------
9. SPECIAL MEETING OF SHAREHOLDERS
The special meeting of shareholders scheduled for Tuesday, January 6, 1998 was
adjourned until Tuesday, January 20, 1998. The meeting is being held to consider
a proposal providing for the acquisition of all the assets of the Fund by a new
Fund, the Evergreen Small Company Growth Fund, a series of the Evergreen Equity
Trust.
Pending shareholder approval, the reorganization is currently planned to be
completed as of the close of business on January 23, 1998.
<PAGE>
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Funds, contact your
financial advisor or call Evergreen Funds.
<TABLE>
<C> <S>
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
EVERGREEN DISTRIBUTOR, INC.
Evergreen is a Service Mark of Evergreen
Investment Services, Inc. Copyright 1997.
</TABLE>
SCG2-R RV2 [RECYCLE LOGO]
<PAGE>
EVERGREEN
SMALL COMPANY
GROWTH FUND II
(Formerly Keystone Small
Company Growth Fund II)
[EVERGREEN LOGO APPEARS HERE]
EVERGREEN FUNDS(SM)
SINCE 1932
SEMIANNUAL REPORT
NOVEMBER 30, 1997
