<PAGE>
PAGE 1
KEYSTONE STRATEGIC GROWTH FUND (K-2)
Dear Shareholders:
(Photo of We have pleasant news to share with you in this report.
William M. The U.S. stock market delivered exceptionally strong
Ennis appears performance during the 12 months that ended on September 30,
here) 1997. Investors in Keystone Strategic Growth Fund (K-2)
certainly had the opportunity to participate in this pleasant
experience.
Riding a friendly, rising tide of moderate growth and modest
inflation, the stock market rose higher and higher, with the
steady ascent interrupted just briefly for pauses in the late
winter and late summer of 1997.
MARKET LEADERSHIP
The 12 months from October 1, 1996 through September 30, 1997
were especially rewarding
for the biggest of the largest capitalization companies. Stocks
of the largest companies,
WILLIAM M. ENNIS particularly those with strong positions in the global markets,
tended to be the market leaders. Funds, such as Keystone
Strategic Growth Fund (K-2), that emphasized these stocks did very well, some
delivering total returns of 40% or more for the 12-month period.
It is important to keep these returns in perspective, however, and not use the
performance over the past year as a basis for future expectations.
MARKET CYCLES
History has shown that the markets move in cycles, and 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, you will begin to see some changes which we
believe will enhance the investment experience of shareholders of Keystone Funds
and Evergreen Funds.
You are scheduled to receive a proxy statement explaining a number of proposed
changes. Among these are proposals that would give shareholders of Keystone
Funds exchange privileges with a wide range of investment choices in the
Evergreen Funds family and that would introduce multiple classes for many
traditional Keystone Funds. This latter proposal may bring lower expenses for
many long-term fund shareholders. As part of these changes, all Keystone Funds
would become part of the Evergreen Fund family and be renamed as Evergreen Funds
early in 1998.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE STRATEGIC GROWTH FUND (K-2)
We have made these proposals after very serious consideration. We encourage
you to consider them carefully when you receive the proxy.
If you have any questions about these or other issues affecting your
investments, please consult your financial adviser or call Evergreen Funds at
1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
November, 1997
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
MAUREEN E. CULLINANE IS SENIOR PORTFOLIO MANAGER OF YOUR FUND. A CHARTERED
FINANCIAL ANALYST, MS. CULLINANE HAS MORE THAN 20 YEARS OF INVESTMENT
EXPERIENCE. SHE RECEIVED BA AND MA DEGREES FROM EMMANUEL COLLEGE WITH
POST-GRADUATE STUDY AT THE UNIVERSITE DE PARIS. SHE HOLDS AN MBA FROM
BOSTON UNIVERSITY. MS. CULLINANE FOCUSES ON SELECTING COMPANIES WITH
FAVORABLE EARNINGS POTENTIAL.
Q HOW DID THE FUND PERFORM DURING THE TWELVE-MONTH PERIOD THAT ENDED SEPTEMBER
30, 1997?
A For the twelve-months, the Fund's total return was 40.3%. This return outpaced
your Fund's benchmark, the Standard & Poor's 500 Index (S&P 500), a highly
followed stock index composed of 500 common stocks, which returned 37.4% for the
same period. Your Fund's performance reflected the strong returns of the U.S.
market in general and large U.S. companies in particular. During the fiscal
year, we focused investments on multinational companies that were benefitting
from strong competitive positions in the global economy.
Q WHAT WAS THE ECONOMIC ENVIRONMENT LIKE DURING THE TWELVE-MONTH PERIOD THAT
ENDED SEPTEMBER 30, 1997?
A The economic environment was positive for stocks during the twelve months.
Economic growth was moderate, inflation remained under control, and interest
rates, despite some short-term fluctuations, were relatively stable. Against
this backdrop, stocks generated strong gains. For most of the twelve months, the
stocks of large U.S. corporations continued to be market leaders-- a position
they have held for more than two years. During the last three months of the
period large company stock prices began to decline, and small- and mid-size
company stocks began to gain ground.
Q HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
A We emphasized large, established companies that have proven records of
consistent earnings growth. We diversified the portfolio's holdings across
several industries and economic sectors. Many of the companies in which we
invested are household names. For example, Warner Lambert, General Electric,
Motorola, Microsoft and American Express are among your Fund's top ten holdings.
Q WHY DID LARGE COMPANY STOCKS PERFORM WELL?
A During the past decade, many large companies have made significant capital
investments, especially in technology, which have increased their productivity.
At the same time, many companies have undergone restructuring and cost-cutting
programs. The result is that U.S. industry has become more competitive on a
worldwide basis, and many American companies have become world leaders.
<PAGE>
PAGE 4
KEYSTONE STRATEGIC GROWTH FUND (K-2)
TOP 10 HOLDINGS
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY INDUSTRY NET ASSETS
<S> <C> <C>
Warner Lambert Pharmaceuticals 3.2%
General Electric Electrical Equipment &
Services 2.8%
EMC Corp. Office Equipment & Supplies 2.7%
Travelers Group Finance & Insurance 2.2%
Motorola, Inc. Telecommunications Services
& Equipment 2.2%
Microsoft Information Services &
Technology 2.1%
Texas Instruments Electronics 2.0%
U.S. Filter Environmental Services 1.9%
American Express Finance & Insurance 1.8%
Pfizer Pharmaceuticals 1.8%
</TABLE>
Q HAVEN'T SMALL- AND MID-SIZED COMPANY STOCKS PERFORMED WELL, TOO?
A After lagging large companies for more than a year, smaller company stocks
began to rally during the last six months of the period. Since then, smaller
company stocks have provided excellent returns, with some outpacing
larger-company stocks. While the portfolio was composed mostly of large
companies, we added selected small company stocks, when they met our investment
criteria for accelerating earnings growth, strong management, and market
leadership. In addition, the Fund "inherited" a number of smaller company
stocks, when it merged with Keystone Mid-Cap Growth Fund (S-3) in July. Because
we believed that selected smaller companies that were part of Mid-Cap Growth
Fund had the potential to generate strong returns, we kept them in the
portfolio.
Q DID YOU INVEST IN FOREIGN STOCKS?
A Throughout the twelve months, we kept the foreign exposure in the Fund to 10%
to 15% of net assets. We held stocks in Japan, Britain and Latin America during
the year; however, on September 30, 1997, the Fund's foreign component was
primarily composed of large Brazilian and Mexican companies. In Brazil we
favored Telebras, the largest telephone utilities company, and in Mexico, we
invested in Panamerican Beverages, Latin America's largest soft drink bottling
company.
TOP FIVE INDUSTRIES
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY NET ASSETS
<S> <C>
Banks 9.5%
Finance & Insurance 9.1%
Pharmaceuticals 7.4%
Oil Field Service 6.4%
Food & Beverage Products 6.3%
</TABLE>
Q AT 18.6% ON SEPTEMBER 30, 1997, FINANCE STOCKS ACCOUNTED FOR THE LARGEST
PORTION OF THE FUND'S NET ASSETS. WHY WERE THESE STOCKS ATTRACTIVE?
A When we refer to finance stocks, we include banks, insurance companies and
other financial institutions. Within this group, banks have rebounded from the
early 1990s, a period in which many financial institutions were crippled by bad
loans. Financial companies (banks in particular) have ridden a wave of mergers,
low interest rates and productivity-enhancing technology to outstanding gains.
We invested in large banks, such as BankBoston, and smaller institutions such as
Coast Savings, a California savings and loan. Among other financial
institutions, we favored American Express, which is benefitting from increased
demand for credit card, travel and financial services. In the insurance area, we
added Travelers to the portfolio, a company that is expanding its base of
business through acquisitions.
<PAGE>
PAGE 5
Travelers owns Smith Barney brokerage and will acquire Salomon Brothers, a move
that should increase the company's global presence.
Q WHAT OTHER TYPES OF COMPANIES CONTRIBUTED TO THE FUND'S PERFORMANCE?
A Pharmaceutical stocks, which accounted for 7.4% of net assets on September 30,
1997, were strong performers. In fact, 3.2% of assets was invested in Warner
Lambert, your Fund's largest holding. In selecting pharmaceutical stocks, we
favored companies with strong product pipelines and the ability to develop and
introduce successful new products over time.
Q WHERE ELSE DID YOU FIND OPPORTUNITY?
A We built up the Fund's position in the oil field services area, which composed
6.4% of the portfolio on September 30, 1997. Oil field services companies supply
major oil and gas companies with the drilling rigs, boats and other equipment
needed to explore and produce oil and gas. Oil field services companies are
benefitting from a strong growth trend in exploration that has been triggered by
dwindling reserves and increased worldwide energy demand.
Q WHAT IS YOUR OUTLOOK?
A We continue to have a positive outlook for the stock market and your Fund over
the long term. We expect economic fundamentals-- healthy economic growth, low
inflation, relatively stable interest rates and solid corporate profits-- to
support this favorable position over the long term.
A word of caution is in order, however. The extraordinarily positive
environment for stock investing cannot continue indefinitely, and we believe
mutual fund investors should moderate their expectations about future returns.
In particular, they should not expect a repeat of the extremely impressive
returns of the past 12 months. Moreover, it would not be unusual if at some
point the market experiences a major correction in stock prices. These
corrections, while very painful when they occur, are normal events in market
cycles. Investors experiencing them should remind themselves of their long-term
objectives and not be overly influenced by short-term events.
(Diamond appears here)
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 600
CHARLOTTE, N.C. 28288-0969
<PAGE>
PAGE 6
KEYSTONE STRATEGIC GROWTH FUND (K-2)
Growth of an Investment
(Chart appears here with the following information:
Growth of an investment in
Keystone Strategic Growth Fund (K-2)
In Thousands September 30, 1987 through September 30, 1997
9/87 9/88 9/89 9/90 9/91 9/92 9/93 9/94 9/95 9/96 9/97
Dividend Reinvestment (Customer to fill in plot points)
Initial Investment
A $10,000 investment in Keystone Strategic Growth Fund (K-2) made on
September 30, 1987 with all distributions reinvested was worth $30,396 on
September 30, 1997. Past performance is no guarantee of future results.
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE AS OF SEPTEMBER 30, 1997
<S> <C>
CUMULATIVE TOTAL RETURN
1 year w/o sales charge 40.33%
1 year w/sales charge* 37.33%
5 years 135.98%
10 years 203.96%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 40.33%
1 year w/sales charge* 37.33%
5 years 18.73%
10 years 11.76%
</TABLE>
*THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 3.0%.
(Chart appears here with the following information:
Comparison of change in value of a $10,000 investment in Keystone Strategic
Growth Fund (K-2), the Standard & Poors 500 Index, and the Consumer Price Index.
In Thousands September 30, 1987 through September 30, 1997
9/87 9/88 9/89 9/90 9/91 9/92 9/93 9/94 9/95 9/96 9/97
Fund Shares (Customer to fill in plot points)
CPI
S&P 500
Past performance is no guarantee of future results. The Standard & Poors 500
Index is an unmanaged market index. This index does not include transaction
costs associated with buying and selling securities nor any management fees.
The Consumer Price Index is from September 30, 1997.
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
[CAPTION]
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 93.7%
AEROSPACE-- 0.5%
240,000 * Loral Space & Communications.. $ 4,950,000
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.6%
15,400 Dana Corp..................... 760,375
75,000 Goodyear Tire & Rubber Co..... 5,156,250
5,916,625
BANKS-- 8.8%
117,800 BankAmerica Corp.............. 8,636,213
136,700 BankBoston Corp............... 12,089,406
120,000 * Coast Savings Financial,
Inc......................... 6,292,500
120,000 First American Corporation of
Tennessee................... 5,883,750
200,000 Firstar Corp.................. 7,250,000
235,000 Greenpoint Financial Corp..... 14,893,125
1,837,000 * Grupo Financiero Banamex
Accival SA.................. 5,792,342
120,000 Northern Trust Corp........... 7,087,500
135,000 TCF Financial Corp............ 7,889,063
55,800 Westamerica Bancorp........... 4,868,550
80,682,449
BUILDING, CONSTRUCTION &
FURNISHINGS-- 1.7%
730,000 Cemex SA...................... 4,378,121
193,000 * Furniture Brands
International, Inc.......... 3,642,875
265,000 Sherwin Williams Company...... 7,800,937
15,821,933
BUSINESS EQUIPMENT &
SERVICES-- 3.1%
150,000 G & K Services................ 5,240,625
260,000 Paychex, Inc.................. 9,075,625
122,300 Stewart Enterprises, Inc...... 5,342,981
213,000 * Thermo Electron Corp.......... 8,520,000
28,179,231
CAPITAL GOODS-- 1.8%
110,000 Case Corp..................... 7,328,750
170,000 Caterpillar, Inc.............. 9,169,375
16,498,125
CHEMICAL & AGRICULTURAL
PRODUCTS-- 0.8%
120,000 Du Pont (E. I.) De Nemours &
Co.......................... 7,387,500
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- CONTINUED
CONSUMER PRODUCTS &
SERVICES-- 1.7%
100,000 Sony Corp..................... $ 9,447,253
98,800 Whirlpool Corp................ 6,551,675
15,998,928
DIVERSIFIED COMPANIES-- 3.2%
200,000 Allied Signal, Inc............ 8,500,000
232,300 * Desc S.A. de C.V., ADR........ 9,698,525
135,800 Tyco International Limited.... 11,144,088
29,342,613
ELECTRICAL EQUIPMENT &
SERVICES-- 4.0%
380,000 General Electric Co........... 25,863,750
420,000 Westinghouse Electric Corp.... 11,366,250
37,230,000
ELECTRONICS-- 4.6%
300,000 * Analog Devices, Inc........... 10,050,000
150,000 Intel Corp.................... 13,860,938
135,000 Texas Instruments, Inc........ 18,241,875
42,152,813
ENVIRONMENTAL SERVICES-- 3.4%
404,300 * U.S. Filter Corp.............. 17,410,169
345,000 * USA Waste Services, Inc....... 13,756,875
31,167,044
FINANCE & INSURANCE-- 9.1%
195,000 Allmerica Financial Corp...... 8,567,813
202,500 American Express Company...... 16,579,687
105,000 American International Group,
Inc......................... 10,834,687
160,000 * Concord EFS, Inc.............. 4,310,000
100,000 SLM Holding Corp.............. 15,450,000
195,000 SunAmerica, Inc............... 7,641,563
295,000 Travelers Group, Inc.......... 20,133,750
83,517,500
FOOD & BEVERAGE PRODUCTS-- 6.3%
155,000 Coca Cola Co. (The)........... 9,445,313
144,000 Coca Cola Enterprises, Inc.... 3,879,000
450,000 Flowers Industries, Inc....... 9,168,750
410,000 Panamerican Beverages, Inc.,
ADR......................... 16,015,625
330,000 Pepsico, Inc.................. 13,385,625
150,000 Philip Morris Companies,
Inc......................... 6,234,375
58,128,688
</TABLE>
<PAGE>
PAGE 8
KEYSTONE STRATEGIC GROWTH FUND (K-2)
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
HEALTHCARE PRODUCTS &
SERVICES-- 3.6%
57,700 Cardinal Health, Inc.......... $ 4,096,700
250,000 HBO & Co...................... 9,421,875
187,600 * Health Care & Retirement
Corp........................ 6,976,375
490,000 * HEALTHSOUTH Corp.............. 13,076,875
33,571,825
INFORMATION SERVICES &
TECHNOLOGY-- 3.0%
130,000 * BMC Software, Inc............. 8,413,437
146,300 * Microsoft Corp................ 19,361,891
27,775,328
LEISURE & TOURISM-- 1.6%
195,000 * HFS, Inc...................... 14,515,313
METAL PRODUCTS & SERVICES-- 0.7%
75,000 Aluminum Co. of America....... 6,150,000
NATURAL GAS-- 2.4%
200,000 Anadarko Petroleum Corp....... 14,362,500
200,000 * United Meridian Corp.......... 7,350,000
21,712,500
OFFICE EQUIPMENT & SUPPLIES-- 5.0%
425,100 * EMC Corp...................... 24,815,212
105,000 Hewlett-Packard Co............ 7,304,063
130,000 International Business
Machines Corp............... 13,771,875
45,891,150
OIL-- 4.5%
90,000 Amoco Corp.................... 8,673,750
215,000 Exxon Corp.................... 13,773,437
80,000 Mobil Corp.................... 5,920,000
220,000 Texaco, Inc................... 13,516,250
41,883,437
OIL FIELD SERVICES-- 6.4%
162,000 * BJ Services Company........... 12,028,500
165,400 Diamond Offshore Drilling,
Inc......................... 9,128,012
320,000 * ENSCO International, Inc...... 12,620,000
420,000 * Falcon Drilling............... 14,831,250
190,000 Halliburton Co................ 9,880,000
58,487,762
PHARMACEUTICALS-- 7.4%
110,200 American Home Products Corp... 8,044,600
120,000 Lilly (Eli) & Co.............. 14,452,500
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
PHARMACEUTICALS-- CONTINUED
272,500 Pfizer, Inc................... $ 16,367,031
215,000 Warner-Lambert Co............. 29,011,563
67,875,694
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.8%
56,719 * Wolters Kluwer NV............. 7,648,786
RETAILING & WHOLESALE-- 4.1%
262,500 Dollar General Corp........... 8,941,406
195,000 * Kohl's Corp................... 13,845,000
400,000 Wal-Mart Stores, Inc.......... 14,650,000
37,436,406
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 4.0%
115,000 * Cisco Systems, Inc............ 8,405,781
200,000 * Iridium World Communications.. 8,250,000
280,000 Motorola, Inc................. 20,125,000
36,780,781
UTILITIES-- TELEPHONE-- 0.6%
45,000 Telecomunicacoes Brasileiras
SA ("Telebras") ADR......... 5,793,750
TOTAL COMMON STOCKS
(COST $621,316,331)......... 862,496,181
<CAPTION>
PREFERRED STOCKS-- 2.3%
<C> <C> <S> <C>
BANKS-- 0.7%
645,300,000 Banco Bradesco SA............. 6,803,172
METAL PRODUCTS & SERVICES-- 0.7%
180,000 Compania Vale do Rio Doce
Navagacao SA Rights......... 17
260,000 Compania Vale do Rio Doce
Navegacao SA................ 6,357,903
6,357,920
OIL-- 0.6%
17,000,000 Petroleo Brasileiro SA........ 4,841,404
UTILITIES-- TELEPHONE-- 0.3%
8,000,000 * Telecomunicacoes de Sao
Paulo S.A................... 2,439,030
348,622 Telecomunicacoes de Sao
Paulo SA Rights............. 100,238
2,539,268
TOTAL PREFERRED STOCKS
(COST $17,225,793).......... 20,541,764
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
REPURCHASE AGREEMENT-- 4.8%
$43,935,000 Keystone Repurchase Agreement,
investment in a joint
trading account, purchased
9/30/97, 6.15%, maturing
10/1/97
(cost, $43,935,000; maturity
value $43,942,506) (a)...... $ 43,935,000
</TABLE>
TOTAL INVESTMENTS--
(COST $682,477,124)..................... 100.8% 926,972,945
OTHER ASSETS AND
LIABILITIES-- NET....................... (0.8) (6,992,212)
NET ASSETS................................ 100.0 % $919,980,733
* Non-income producing securities.
(a) The repurchase agreement is fully collateralized by U.S. Government and/or
agency obligations based on market prices at September 30, 1997.
ADR American Depository Receipts
NV Naamloze Veunootschap (Dutch Corporation)
SA Sociedad Anonyme (Spanish Corporation)
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts to Sell:
<S> <C> <C> <C> <C>
NET
EXCHANGE U.S. VALUE AT IN EXCHANGE UNREALIZED
DATE CONTRACTS TO DELIVER SEPTEMBER 30, 1997 FOR U.S. $ APPRECIATION
10/28/97 435,328,000 Japanese Yen $3,622,831 $3,800,000 $177,169
</TABLE>
GEOGRAPHIC DIVERSIFICATION
The Fund may invest in securities principally traded in markets outside the
United States. While investment in such securities is intended to reduce risk by
providing further diversification, foreign investments involve sovereign risk in
addition to the credit and market risks normally associated with domestic
securities. Foreign investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. At September 30,
1997, the Fund had investments, excluding short-term investments, in the
following countries:
<TABLE>
<CAPTION>
MARKET PERCENT OF
COUNTRY VALUE NET ASSETS
<S> <C> <C>
United States....................................................... $796,042,291 86.5%
Brazil.............................................................. 26,335,514 2.9%
Netherlands......................................................... 7,648,786 0.8%
Bermuda............................................................. 8,250,000 0.9%
Japan............................................................... 9,447,253 1.0%
Mexico.............................................................. 35,314,101 3.9%
$883,037,945 96.0%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
KEYSTONE STRATEGIC GROWTH FUND (K-2)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
ELEVEN-MONTH
PERIOD ENDED YEAR ENDED OCTOBER 31,
SEPTEMBER 30, 1997 (A)(D) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $ 8.68 $ 8.05 $ 7.54 $ 9.00 $ 7.60
Income from investment operations
Net investment income (loss) 0.01 (0.04) (0.02) 0 (0.06)
Net realized and unrealized gain (loss) on investments
and foreign currency related transactions 2.96 1.04 1.13 0.23 1.89
Total from investment operations 2.97 1.00 1.11 0.23 1.83
LESS DISTRIBUTIONS:
From net investment income 0 (0.01) 0 0 0
In excess of net investment income 0 0 0 0 (0.03)
Net realized gain on investments and foreign currency related
transactions (1.04) (0.36) (0.60) (1.66) (0.40)
In excess of net realized gain on investments and foreign
currency related transactions 0 0 0 (0.03) 0
Total distributions (1.04) (0.37) (0.60) (1.69) (0.43)
NET ASSET VALUE END OF PERIOD $ 10.61 $ 8.68 $ 8.05 $ 7.54 $ 9.00
TOTAL RETURN (B) 37.74% 12.95% 15.05% 3.55% 24.97%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.19%(c) 1.91% 2.01% 1.73% 1.83%
Total expenses, excluding indirectly paid expenses 1.18%(c) 1.90% 2.00% N/A N/A
Net investment income (loss) 0.12%(c) (0.48%) (0.25%) (0.17%) (0.57%)
PORTFOLIO TURNOVER RATE 71% 156% 140% 68% 65%
AVERAGE COMMISSION RATE PAID PER SHARE $0.0222 $0.0042 N/A N/A N/A
NET ASSETS END OF PERIOD (MILLIONS) $ 920 $ 497 $ 492 $ 417 $ 404
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $ 8.18 $ 6.52 $ 7.67 $ 6.53 $ 7.55 $ 9.13
Income from investment operations
Net investment income (loss) (0.01) 0.08 0.08 0.16 0.18 0.02
Net realized and unrealized gain (loss) on investments
and foreign currency related transactions 0.42 2.24 (0.80) 1.21 0.19 0.04
Total from investment operations 0.41 2.32 (0.72) 1.37 0.37 0.06
LESS DISTRIBUTIONS:
From net investment income (0.01) (0.16) (0.18) (0.18) (0.14) (0.13)
In excess of net investment income (0.05) 0 0 0 0 0
Net realized gain on investments and foreign currency related
transactions (0.93) (0.50) (0.25) (0.05) (1.25) (1.51)
In excess of net realized gain on investments and foreign currency
related transactions 0 0 0 0 0 0
Total distributions (0.99) (0.66) (0.43) (0.23) (1.39) (1.64)
NET ASSET VALUE END OF PERIOD $ 7.60 $ 8.18 $ 6.52 $ 7.67 $ 6.53 $ 7.55
TOTAL RETURN (B) 6.38% 38.77% (10.05%) 21.74% 7.73% 0.15%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.58% 1.52% 1.65% 1.59% 1.69% 2.12%
Total expenses, excluding indirectly paid expenses N/A N/A N/A N/A N/A N/A
Net investment income (loss) (0.15%) 0.99% 1.64% 2.06% 2.14% 0.23%
PORTFOLIO TURNOVER RATE 62% 86% 30% 40% 89% 104%
AVERAGE COMMISSION RATE PAID PER SHARE N/A N/A N/A N/A N/A N/A
NET ASSETS END OF PERIOD (MILLIONS) $ 322 $ 339 $ 234 $ 330 $ 328 $ 299
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Annualized
(d) Effective September 30, 1997, the Fund changed its fiscal year end from
October 31 to September 30.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at value (identified cost,
$682,477,124) $926,972,945
Foreign currency, at value (identified cost,
$2,304) 2,245
Cash 89,562
Receivable for investments sold 1,214,472
Receivable for interest and dividends 581,355
Receivable for Fund shares sold 280,019
Unrealized appreciation on forward foreign
currency exchange contracts 177,169
Prepaid expenses 31,228
Other assets 80,668
Total assets 929,429,663
LIABILITIES
Payable for investments purchased 7,896,232
Payable for Fund shares redeemed 950,768
Management Fee payable 396,442
Distribution fees payable 103,968
Due to affiliates 6,500
Accrued expenses and other liabilities 95,020
Total liabilities 9,448,930
NET ASSETS $919,980,733
NET ASSETS REPRESENTED BY
Paid-in capital $593,828,212
Undistributed net investment income 985,051
Accumulated net realized gains on investment
and foreign currency related transactions 80,495,985
Net unrealized appreciation on investments
and foreign currency related transactions 244,671,485
Total net assets $919,980,733
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST OUTSTANDING
Net assets of $919,980,733 (divided by)
86,746,662 shares outstanding $ 10.61
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN-MONTH YEAR ENDED
PERIOD ENDED OCTOBER 31,
SEPTEMBER 30, 1997* 1996
<S> <C> <C>
INVESTMENT INCOME
Dividends (Net of
foreign withholding
taxes of $143,306
and $103,251,
respectively) $ 6,158,849 $5,944,232
Interest 1,123,008 1,151,763
Total income 7,281,857 7,095,995
EXPENSES
Management fee $ 3,205,753 $2,994,500
Distribution Plan
expenses 1,790,675 4,845,352
Transfer agent fees 1,121,945 1,227,881
Administration
expenses 87,178 24,446
Custodian fees 219,438 270,162
Registration fees 61,065 57,858
Trustees' fees and
expenses 57,314 31,034
Professional fees 33,206 45,598
Miscellaneous expenses 79,261 56,074
Total expenses 6,655,835 9,552,905
Less: Expenses paid
indirectly (29,084) (44,293 )
Net expenses 6,626,751 9,508,612
Net investment income
(loss) 655,106 (2,412,617 )
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on
investments and
foreign currency
related transactions 80,803,578 70,337,618
Net change in
unrealized
appreciation on
investments and
foreign currency
related transactions 105,055,036 (7,283,970 )
Net realized and
unrealized gain on
investments and
foreign currency
related transactions 185,858,614 63,053,648
Net increase in net
assets resulting
from operations $ 186,513,720 $60,641,031
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM
OCTOBER 31 TO SEPTEMBER 30.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
KEYSTONE STRATEGIC GROWTH FUND (K-2)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ELEVEN-MONTH
PERIOD ENDED YEAR ENDED OCTOBER 31,
SEPTEMBER 30, 1997* 1996 1995
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 655,106 $ (2,412,617) $ (1,153,028)
Net realized gain on investments and foreign currency related
transactions 80,803,578 70,337,618 60,454,842
Net change in unrealized appreciation on investments and foreign
currency related transactions 105,055,036 (7,283,970) 8,987,189
Net increase in net assets resulting from operations 186,513,720 60,641,031 68,289,003
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income 0 (478,981) 0
Net realized gains on investments and foreign currency related
transactions (59,854,176) (22,079,862) (34,582,438)
Total distributions to shareholders (59,854,176) (22,558,843) (34,582,438)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 120,935,075 65,085,209 101,411,115
Payments for shares redeemed (165,997,292) (118,085,204) (91,086,308)
Net asset value of shares issued in reinvestment of
distributions 53,539,767 20,184,450 30,894,379
Shares issued in acquisition of Keystone Mid-Cap Growth Fund
(S-3) 287,967,178 0 0
Net increase (decrease) in net assets resulting from capital
share transactions 296,444,728 (32,815,545) 41,219,186
Total increase in net assets 423,104,272 5,266,643 74,925,751
NET ASSETS:
Beginning of period 496,876,461 491,609,818 416,684,067
End of period, including undistributed net investment
income of $985,051, $85,978 and $478,981, respectively $ 919,980,733 $496,876,461 $491,609,818
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM
OCTOBER 31 TO SEPTEMBER 30.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Keystone Strategic Growth Fund (K-2), (the "Fund") is a Pennsylvania 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.
2. ACQUISITION INFORMATION
Effective on the close of business on July 17, 1997, the Fund acquired the net
assets of Keystone Mid-Cap Growth Fund (S-3), an open-end management investment
company registered under the 1940 Act in exchange of shares of the Fund. The
acquisition was accomplished through a non-taxable exchange of 28,278,170 shares
of the Fund for the net assets of Keystone Mid-Cap Growth Fund (S-3). The
acquired net assets consisted primarily of portfolio securities with unrealized
appreciation of $63,919,167. The aggregate net assets of the Fund and Keystone
Mid-Cap Growth Fund (S-3) immediately prior to the acquisition were $592,882,806
and $287,967,178, respectively. The aggregate net assets of the Fund immediately
after the acquisition were $880,849,984.
3. 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 an established 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 has been no sale and other securities
traded in the over-the-counter market at the mean between the last reported bid
and asked price. Securities for which valuations are not available from an
independent pricing service, including restricted securities, are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement, including accrued interest.
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. The Fund will only enter
into repurchase agreements with banks and other financial institutions which are
deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts
<PAGE>
PAGE 14
KEYSTONE STRATEGIC GROWTH FUND (K-2)
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 related 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 and gains and losses resulting from 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 date is included in realized gain (loss) on
investments and foreign currency related transactions.
D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and are marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain (loss) on investments and foreign currency related
transactions. The Fund bears the risk of an unfavorable change in the foreign
currency exchange rate underlying the forward contract and is subject to the
credit risk that the other party will not fulfill their obligations under the
contract. Forward contracts involve elements of market risk in excess of the
amount reflected in the statement of assets and liabilities.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
F. 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 will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable income and
net capital gains, if any, to its shareholders. The Fund also intends to avoid
any excise tax liability by making the required distributions under the Code.
Accordingly, no provision for federal taxes is required.
G. DISTRIBUTIONS
The Fund distributes net investment income quarterly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distribution and distributions made in accordance with
income tax regulations are primarily due to differing treatment for net realized
gains from foreign currency related transactions.
<PAGE>
PAGE 15
4. CAPITAL SHARE TRANSACTIONS
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
ELEVEN-MONTH
PERIOD ENDED
SEPTEMBER YEAR ENDED OCTOBER 31
30, 1997* 1996 1995
<S> <C> <C> <C>
Shares sold 13,375,436 8,012,349 13,738,533
Shares redeemed (18,734,530 ) (14,456,998) (11,918,556)
Shares issued in
reinvestment of
distributions 6,585,457 2,591,072 3,996,685
Shares issued in
aquisition of
Keystone Mid-Cap
Growth Fund (S-3) 28,278,170 0 0
Net increase
(decrease) 29,504,533 (3,853,577) 5,816,662
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM
OCTOBER 31 TO SEPTEMBER 30.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the eleven-month period ended September 30, 1997 and
the year ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
ELEVEN-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1997* OCTOBER 31, 1997
<S> <C> <C>
Purchases $ 468,845,267 $744,597,577
Sales 500,846,980 824,803,255
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM
OCTOBER 31 TO SEPTEMBER 30.
On September 30, 1997, the cost of investments for federal income tax purposes
was $682,559,168, gross unrealized appreciation of investments was $246,289,158
and gross unrealized depreciation of investments was $1,875,381 resulting in net
unrealized appreciation of $244,413,777 for federal income tax purposes.
6. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. has served as principal
underwriter to the Fund. Prior to December 11, 1996, Evergreen Keystone
Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of Keystone,
served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan (the "Plan") as allowed by Rule 12b-1
of the 1940 Act. The Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the Fund, are paid by shareholders
through expenses called "Distribution Plan expenses". The Fund pays a service
fee equal to 0.25% of its average daily net assets and a distribution fee equal
to 0.75% of its average daily net assets. Distribution Plan expenses are
calculated daily and paid monthly.
With respect to the Fund's shares, the principal underwriter may incur
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
The Plan 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 Fund. However,
after the termination of the Plan, and subject to the discretion of the
Independent Trustees, payments to EKD and/or EKIS may continue as compensation
for services which had been provided while the Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD 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 Fund would be within permitted
limits.
<PAGE>
PAGE 16
KEYSTONE STRATEGIC GROWTH FUND (K-2)
Contingent deferred sales charges paid by redeeming shareholders may be paid
to EKD or its predecessor.
7. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of the investment advisory agreement dated December 11, 1996,
Keystone serves as the investment adviser and manager to the Fund. In return for
providing investment advisory and management services to the Fund 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 eleven-month period ended September 30, 1997 and year ended October
31, 1996, the Fund paid or accrued $87,178 and $24,446, respectively, to
Keystone for certain administrative services. Evergreen Keystone Service Company
("EKSC") , a wholly-owned subsidiary of Keystone, serves as the Fund's transfer
and dividend disbursing agent.
BISYS Fund Services, Inc. ("BISYS"), an affiliate of EKD, serves as the Fund's
sub-administrator. As sub-administrator, BISYS provides the officers of the
Fund. For this service, BISYS is paid a fee by Keystone, which is not a Fund
expense.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
8. 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.
9. YEAR-END CHANGE
The Fund changed its fiscal year end from October 31 to September 30, effective
September 30, 1997.
<PAGE>
PAGE 17
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE STRATEGIC GROWTH FUND (K-2)
We have audited the accompanying statement of assets and liabilities of Keystone
Strategic Growth Fund (K-2), including the schedule of investments, as of
September 30, 1997, and the related statements of operations for the
eleven-month period then ended and the year ended October 31, 1996, the
statements of changes in net assets for the eleven-month period ended September
30, 1997 and for each of the years in the two-year period ended October 31, 1996
and the financial highlights for the eleven-month period ended September 30,
1997 and for each of the years in the ten-year period ended October 31, 1996.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Strategic Growth Fund (K-2) as of September 30, 1997, the results of
its operations for the eleven-month period then ended and the year ended October
31, 1996, the changes in net assets for the eleven-month period ended September
30, 1997 and for each of the years in the two-year period ended October 31, 1996
and the financial highlights for the eleven-month period ended September 30,
1997 and for each of the years in the ten-year period ended October 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 31, 1997
<PAGE>
PAGE 18
KEYSTONE STRATEGIC GROWTH FUND (K-2)
FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
(UNAUDITED)
During the eleven-month period ended September 30, 1997, the Fund paid
distributions of $59,854,176. Included in these distributions were, $54,098,643
of long-term capital gain distributions. The remaining $5,755,533 is taxable to
shareholders as ordinary income in the year in which received by them or
credited to their accounts. None of the ordinary income distributions are
eligible for the corporate dividends received deduction. The above figures may
differ from those previously reported and those cited elsewhere in this report
due to differences in the calculation of income and capital gains for accounting
(book) purposes and internal revenue service (tax) purposes.
In January 1998, we will send you complete information on the distributions paid
during calendar year 1997 to help you in completing your federal tax return.
<PAGE>
(blank intentionally)
<PAGE>
KEYSTONE
FAMILY OF FUNDS
(Diamond appears here)
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free 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 Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
- ----------------------------------------
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
- ----------------------------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Evergreen Keystone(SM) is a Service Mark of Evergreen
Keystone Investment Services, Inc. Copyright 1997.
(Recycle logo appears here)
K2-R 542100 REV02 11/97
KEYSTONE
(Photo Exists in Film ONLY.
Will See on Dylux)
STRATEGIC
GROWTH FUND (K-2)
(Evergreen tree appears here)
Evergreen Funds(SM)
SINCE 1932
ANNUAL REPORT
SEPTEMBER 30, 1997
