<PAGE>
PAGE 1
KEYSTONE STRATEGIC GROWTH FUND (K-2)
SEEKS CAPITAL GROWTH FROM A BROAD SPECTRUM OF DOMESTIC AND FOREIGN SECURITIES.
Dear Shareholder:
We are pleased to update you on the activities of Keystone Strategic Growth Fund
(K-2) for the six-month period ending April 30, 1997. Following this letter, we
have included an interview with the Fund's portfolio manager, Maureen Cullinane,
discussing portfolio strategy.
PERFORMANCE OF YOUR FUND
Your Fund returned 11.23% for the six-month period and 17.03% for the
twelve-month period ending April 30, 1997. Standard & Poor's 500 Index (S&P
500), a highly followed stock index comprised of 500 common stocks, returned
14.72% for the six-month period and 25.13% for the twelve-month period.
We believe Strategic Growth Fund (K-2) performed satisfactorily during an
unusual period when the large capitalization stock indices, such as the S&P 500
and Dow Jones Industrial Average, outperformed the overwhelming majority of
domestic growth funds. Your Fund performed better than most of its peers,
ranking in the second quartile of Lipper Analytical Services' growth funds
category for the six- and twelve-month periods ending April 30, 1997.1
MARKET RECAP
Although the final performance of the U.S. stock market for the six-month period
ended strong, it was a turbulent journey. We witnessed the S&P 500 reach new
heights and the Dow Jones Industrial Average leap over the 7000 mark, only to
see both retreat at the end of the first quarter. Then in April, investor
sentiment turned positive once again, and the market staged another rally.
The volatility in the market was triggered by a stronger than expected U.S.
economy in the fourth quarter of 1996 and the first quarter of 1997. This fueled
investors' fears that higher inflation and interest rates were looming ahead. As
a result, the market corrected in late February and sank further at the end of
March when the Federal Reserve Board, in an effort to head off inflation,
increased short-term interest rates a quarter of a percentage point. This action
raised concerns that a series of interest rate hikes could occur in 1997. Also,
the fact that 1995 and 1996 were so strong (the S&P 500's average annual return
of 1995-1996 was a lofty 30.1%) made investors leery about the possibility of
three consecutive above-average years. From February 18 through April 11, a
market correction eliminated much of the gains of January and early February.
The S&P 500 fell 5.76% and the Nasdaq Composite Index dropped 9.57%. However,
the market rebounded strongly in April and has continued on to new highs.
Bigger continued to be better during the past six months. Large capitalization
companies with high stock market liquidity were favored over medium and small
capitalization companies. The gap between large and small companies in the
technology sector was the most striking.
We believe your Fund's performance benefitted from our shift in mid 1996 to
emphasize large capitalization companies and de-emphasize small- and mid-cap
companies. Between 65% to 70% of the Fund's assets were invested in large-cap
companies during the six-month period. The remainder of the portfolio was
invested in the stock of mid-cap companies and foreign stocks for
diversification and attractive growth opportunities. We continue to believe
there is
1SOURCE: LIPPER ANALYTICAL SERVICES, INC., AN INDEPENDENT MUTUAL FUND RATING
SERVICE. KEYSTONE STRATEGIC GROWTH FUND (K-2)'S PERFORMANCE RANKED 229 OUT OF
798 GROWTH FUNDS FOR SIX MONTHS ENDING 4/30/1997, 277 OUT OF 735 FUNDS FOR
ONE YEAR, 141 OUT OF 275 FUNDS FOR FIVE YEARS AND 135 OUT OF 175 FUNDS FOR 10
YEARS. PERFORMANCE IS BASED ON TOTAL RETURN WHICH INCLUDES REINVESTMENT OF
DIVIDENDS, AND DOES NOT INCLUDE THE EFFECTS OF SALES CHARGES. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE STRATEGIC GROWTH FUND (K-2)
great value in the Fund's strategy of investing in large, medium and small
companies. Although this diversified approach didn't fare as well as the large
capitalization indices during the past six months, we believe the Fund, over the
long run, offers competitive, strong growth potential.
Overseas, attractive gains were recorded by the major equity markets, with the
exception of Japan, for the six-month period. The emerging markets of Latin
America also performed well. Approximately 12.8% of your Fund's net assets were
in foreign stocks. The Fund's largest foreign holding, Telebras, a large
telephone utilities operation in Brazil, was a contributor to overall
performance.
OUR OUTLOOK
We expect the U.S. economy to continue to grow at a moderate clip. Corporate
earnings power and improved dividend growth among U.S. corporations should be
positive factors as well. We also expect inflation to remain modest. This
economic landscape should allow capital markets and your Fund to do well
throughout the remainder of 1997. But a degree of price fluctuation could remain
as investors continue to worry about the strength of the economy and the
direction of interest rates.
As the market has shown in the past six months, volatility is a characteristic
of stock investing. But strong growth potential is also a characteristic.
Therefore, investing in a growth fund requires patience. We take a long-term
approach to managing your Fund. We encourage you to take a long-term perspective
when investing to reach your financial goals.
Sincerely,
/s/ ALBERT H. ELFNER, III
Albert H. Elfner, III
CHAIRMAN
KEYSTONE INVESTMENT MANAGEMENT COMPANY
/s/ GEORGE S. BISSELL
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
June, 1997
<PAGE>
PAGE 3
A DISCUSSION WITH
YOUR FUND MANAGER
(Photo of Maureen E. Cullinane)
MAUREEN E. CULLINANE IS SENIOR PORTFOLIO MANAGER OF KEYSTONE STRATEGIC
GROWTH FUND (K-2). 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 MAUREEN, THERE WAS A HIGH DEGREE OF VOLATILITY IN THE STOCK MARKET DURING THE
SIX-MONTH PERIOD ENDING APRIL 30TH. DID THIS VOLATILE ENVIRONMENT HAVE ANY
EFFECT ON YOUR INVESTMENT DECISIONS?
A It has been a pretty choppy investment environment. The most recent swing
occurred in late March when the Federal Reserve Board raised short-term interest
rates 25 basis points. March gave back all the gains of the previous two months,
but fortunately April rebounded well.
For greater stability, we continued the strategy we undertook in mid 1996 of
investing in larger capitalization companies. The median market capitalization
of the portfolio was a little over $11 billion on April 30, 1997.
Our strategy called for a continued focus on those companies that have a
consistent record of earnings growth. Approximately 60% of the Fund is invested
in such companies. The majority of these companies tend to be large
capitalization companies. An example is Warner Lambert. This company recently
had two new drugs approved by the Food and Drug Administration. This should
contribute to an acceleration of Warner's earnings growth from the low
single-digit rate to a 15% rate of earnings growth.
Q YOU CONTINUE TO FAVOR FINANCIAL STOCKS, WITH 18.6% OF THE FUND'S ASSETS
INVESTED IN THIS SECTOR. COULD YOU NAME A FEW FINANCIALS THAT REMAIN ATTRACTIVE
TO YOU?
A We have been overweighted in the finance sector for the past year. The
consolidation of the banking industry has created stronger companies with
greater earnings potential. The bank stocks have fared well in the market and we
believe they remain attractive. However, we prefer the financial institutions
such as American Express as investments. American Express offers a brokerage
business, credit card business and travel service. Its services, we believe,
will continue to grow as the Baby Boomer population invests for retirement, and
an aging population has more leisure time on its hands to travel.
Q WHAT OTHER SECTORS DO YOU BELIEVE OFFER SIGNIFICANT GROWTH OPPORTUNITIES AT
THIS TIME?
A We continue to believe that a number of energy and oil service companies are
positioned for greater growth. Stable oil prices have boosted business for oil
service companies. Oil companies have been expanding their capital budgets for
exploration, which in the process creates more contracts for oil service
companies. Contract rates have risen significantly in the past year and have
contributed to an acceleration in earnings growth. This has been one of the
Fund's more profitable areas in the past year.
The health care area is another attractive area for growth prospects. We like
the pharmaceutical companies Warner Lambert and Eli Lilly, and health care
companies such as Health South.
<PAGE>
PAGE 4
KEYSTONE STRATEGIC GROWTH FUND (K-2)
Q YOU HAVE 12.8% OF THE FUND INVESTED OVERSEAS. WHAT REGIONS ARE YOU FAVORING,
AND DO YOU EXPECT TO ADD TO THE FUND'S FOREIGN COMPONENT?
A Our largest foreign component is currently Latin American markets: Brazil and
Mexico. We favor the large-cap stocks Telebras, the largest telephone utilities
company in Brazil, and Panamerican Beverages, a Mexican company is Latin
America's largest soft drink bottling company and one of the world's largest
Coca-Cola bottlers.
We are always searching for attractive opportunities around the globe. At this
time, we expect to maintain our international holdings at approximately 12% to
15% of the Fund.
Q WHAT WERE SOME OF THE STRATEGIES THAT REALLY WORKED FOR THE FUND?
A Overall, our strong focus on industries and individual stocks (there were 72
stocks in the portfolio as of April 30) helped the Fund during this volatile
period.
Our concentration on large-cap stocks benefitted the Fund during the past six
months. In a volatile market, investors are willing to pay extra for the
stability in such stocks as General Electric or Coca Cola.
We believe that the overweighting in the financial sector contributed to
performance. Conversely the underweighting in technology helped to reduce the
Fund's price fluctuation. With the exception of the global technology leaders,
such as Microsoft and Intel, technology stocks did not fare well during the past
six months.
Q HAVE THERE BEEN ANY STOCK DISAPPOINTMENTS DURING THE SIX-MONTH PERIOD?
A No, not really. There are always a few individual stocks that do not live up
to expectations but the portfolio, in general, has had more than satisfactory
performance!
Q WHAT CHANGES ARE YOU MAKING TO THE FUND'S INVESTMENTS?
A As the year progresses, we believe the market will broaden out to include
mid-cap and small-cap stocks. These two asset classes were passed over by
investors who fled to the safety of large-cap stocks. As a result, there are
numerous stocks in the mid-cap area that have attractive earnings and price
valuations relative to large-cap stocks. In choosing mid-cap stocks, stocks of
companies with market capitalizations generally between $750 million to $3
billion, we follow the same parameters for consistent growth as we do for
large-cap stocks. Greenpoint Financial and US Filter are two mid-cap names we
consider attractive.
Q WHAT'S YOUR OUTLOOK?
A It's been a "Goldilocks economy"-- not too hot, not too cold, just right. At
this time, economic data point to more of the same-- moderate economic growth,
tame inflation and moderate interest rates. This almost perfect economic
environment should continue to favor the stock market, and the Fund's
performance.
We believe industries have used technology to control inventory levels and to
smooth out the old boom-bust business cycles. We now live in a global economy.
Corporations can go anywhere in the world now to build the product at the best
price and sell it to the global consumer. Demographics are also favoring the
financial markets. The Baby Boomers are preparing for retirement by saving and
investing in stocks and bonds.
As always, though, it is important to realize that short-term stock market
corrections are inevitable. So it is always important to take a long-term
perspective when investing in a growth fund.
<PAGE>
PAGE 5
TOP 10 HOLDINGS
AS OF APRIL 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY INDUSTRY NET ASSETS
<S> <C> <C>
Warner Lambert Co. Drugs 3.67%
General Electric Co. Capital Goods 3.39%
Thermo Electron Corp. Business Services 3.06%
Exxon Corp. Oil 2.34%
American Express Co. Finance 2.27%
Greenpoint Financial Finance 2.24%
USA Waste Services Inc. Business Services 2.23%
Microsoft Software Software Services 2.19%
EMC Corp. Computers 2.01%
Coca Cola Co. Foods 1.94%
</TABLE>
(bullet)
IF YOU HAVE A QUESTION ABOUT YOUR FUND, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, NC 28288-1173
<PAGE>
PAGE 6
KEYSTONE STRATEGIC GROWTH FUND (K-2)
Your Fund's Performance
(Graph of Growth of an investment in
Keystone Strategic Growth Fund (K-2))
<TABLE>
<CAPTION>
SIX-MONTH PERFORMANCE AS OF APRIL 30, 1997
<S> <C> <C>
Total return* 11.23%
Net asset value 10/31/96 $ 8.68
4/30/97 $ 8.56
Distributions:
Net investment income None
Capital gains $ 1.04
</TABLE>
* BEFORE DEDUCTION OF CONTINGENT DEFERRED SALES CHARGE (CDSC).
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL RECORD AS OF APRIL 30, 1997
<S> <C> <C>
IF YOU IF YOU DID
CUMULATIVE TOTAL RETURN REDEEMED NOT REDEEM
<S> <C> <C>
1-year 14.03% 17.03%
5-year 91.34% 91.34%
10-year 172.68% 172.68%
AVERAGE ANNUAL TOTAL RETURN
1-year 14.03% 17.03%
5-year 13.86% 13.86%
10-year 10.55% 10.55%
</TABLE>
The "if you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge for those investors who sold Fund shares after one
calendar year. Investors who retained their fund investment earned the returns
reported in the second column of the table.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Evergreen Keystone fund by calling or
writing Evergreen Keystone directly, or through Evergreen Keystone Express Line
at 800-346-3858. The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<C> <S> <C>
<CAPTION>
COMMON STOCKS (94.8%)
<C> <S> <C>
ADVERTISING & PUBLISHING (2.5%)
500,000 Pearson PLC $ 5,769,854
56,719 Wolters Kluwer N.V. (b) 6,721,972
12,491,826
AEROSPACE (0.7%)
37,500 Boeing Co. 3,698,438
AMUSEMENT (0.5%)
40,000 HFS Inc. (b) 2,370,000
APPLIANCES & FURNISHINGS (1.4%)
100,000 Sony Corp. 7,279,316
AUTOMOTIVE (1.1%)
65,000 Danaher Corp. 2,933,125
55,000 Goodyear Tire and Rubber 2,894,375
5,827,500
BUSINESS SERVICES (8.3%)
675,000 Compass Group PLC 7,395,462
450,000 Thermo Electron Corp. 15,525,000
345,000 USA Waste Services Inc. (b) 11,298,750
255,500 U.S. Filter Corp. (b) 7,760,812
41,980,024
CAPITAL GOODS (3.4%)
155,000 General Electric Co. 17,185,625
CHEMICALS (2.5%)
60,000 Du Pont E.I. De Nemours and Co. 6,367,500
150,000 Monsanto Co. 6,412,500
12,780,000
COMPUTERS (3.6%)
280,300 EMC Corp. (b) 10,195,912
35,600 International Business Machines 5,722,700
85,000 Komag Inc. 2,385,313
18,303,925
CONSUMER GOODS (1.5%)
60,000 Procter & Gamble Co. 7,545,000
DIVERSIFIED (2.3%)
75,000 Allied Signal Inc. 5,418,750
232,300 Desc S.A. de C.V ADR (b) 5,981,725
11,400,475
<CAPTION>
MARKET
SHARES VALUE
<C> <S> <C>
DRUGS (9.9%)
78,900 American Home Products Corp. $ 5,227,125
151,300 Gilead Sciences Inc. (b) 3,338,056
130,000 Johnson & Johnson 7,962,500
79,200 Lilly (Eli) & Co. 6,959,700
100,000 Smithkline Beecham PLC 8,062,500
190,000 Warner Lambert Co. 18,620,000
50,169,881
ELECTRONIC PRODUCTS (5.9%)
300,000 Analog Devices Inc. (b) 8,025,000
40,000 Intel Corp. 6,125,000
120,000 Motorola Inc. 6,870,000
100,000 Texas Instruments Inc. 8,925,000
29,945,000
FINANCE (14.7%)
175,000 American Express Co. 11,528,125
76,700 BankBoston Corp. 5,579,925
48,900 Bankamerica Corp. 5,715,187
230,000 Federal Home Loan Mortgage Corp. 7,331,250
205,000 Greenpoint Financial Corp. 11,351,875
1,837,000 Grupo Financiero Banamex 3,934,530
103,600 NationsBank Corp. 6,254,850
112,400 Norwest Corp. 5,605,950
65,000 Student Loan Marketing
Association 7,686,250
170,000 Travelers Group, Inc. 9,413,750
74,401,692
FOODS (8.6%)
155,000 Coca-Cola Co. 9,861,875
200,000 Flowers Industries, Inc. 4,875,000
130,000 Heinz (H J) Co. 5,395,000
260,000 Panamerican Beverages Inc. ADR 7,540,000
215,000 Pepsico Inc. 7,498,125
220,000 Philip Morris Cos., Inc. 8,662,500
43,832,500
HEALTHCARE SERVICES (1.6%)
62,500 Boston Scientific Corp. 3,015,625
270,000 Healthsouth Corp. 5,332,500
8,348,125
INSURANCE (2.8%)
70,000 Allmerica Financial Corp. 2,520,000
70,000 American International Group
Inc. 8,995,000
109,900 Nationwide Financial Services
Inc. 2,912,350
14,427,350
</TABLE>
<PAGE>
PAGE 8
KEYSTONE STRATEGIC GROWTH FUND (K-2)
SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<C> <S> <C>
MUTUAL FUND SHARES (0.2%)
1,653,374 Chronicle 2001 Mutual Fund (b) $ 1,062,798
MACHINERY-- CONSTRUCTION & MINING (2.6%)
110,000 Case Corp. 6,091,250
80,000 Caterpillar Inc. 7,120,000
13,211,250
METALS & MINING (0.6%)
40,000 Aluminum Co. of America 2,795,000
NATURAL GAS (2.0%)
60,000 Anadarko Petroleum Corp. 3,292,500
85,000 KN Energy Inc. 3,166,250
131,500 United Meridian Corp. (b) 3,731,313
10,190,063
OIL (8.8%)
60,000 Amoco Corp. 5,017,500
210,000 Exxon Corp. 11,891,250
50,000 Mobil Corp. 6,500,000
100,000 Pennzoil Co. 4,925,000
80,000 Texaco Inc. 8,440,000
205,000 Unocal Corp. 7,815,625
44,589,375
OIL SERVICES (4.1%)
87,600 Diamond Offshore Drilling Inc. 5,639,250
110,000 ENSCO International Inc. (b) 5,225,000
65,000 Halliburton Co. 4,590,625
133,800 Tidewater, Inc. 5,368,725
20,823,600
RETAIL (1.1%)
200,000 Wal Mart Stores Inc. 5,650,000
<CAPTION>
MARKET
SHARES VALUE
<C> <S> <C>
SOFTWARE SERVICES (2.2%)
91,300 Microsoft Corp. (b) $ 11,098,656
TELEPHONE-- UTILITIES (1.9%)
85,000 Telecomunicacoes Brasileiras
S.A. ("Telebras") ADR 9,753,750
TOTAL COMMON STOCKS
(COST-- $398,377,305) 481,161,169
<CAPTION>
PREFERRED STOCKS (2.0%)
<C> <S> <C>
FINANCE (1.1%)
645,300,000 Banco Bradesco S.A. 5,339,577
METALS & MINING (0.9%)
360,000 Companhia Vale do Rio Doce
Navegacao S.A. 4,586,742
TOTAL PREFERRED STOCKS
(COST-- $8,793,087) 9,926,319
<CAPTION>
MATURITY MARKET
VALUE VALUE
<C> <S> <C>
<CAPTION>
REPURCHASE AGREEMENT (4.3%)
<C> <S> <C>
21,594,256 Investment in repurchase
agreements in a joint trading
account, purchased 4/30/97
5.504%, maturing 5/1/97
(Cost-- $21,591,000) (a) 21,591,000
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS (101.1%)
(COST-- $428,761,392) 512,678,488
</TABLE>
<TABLE>
<S> <C>
OTHER ASSETS AND LIABILITIES--
NET [(1.1%)] (5,415,389)
</TABLE>
<TABLE>
<S> <C>
NET ASSETS (100.0%) $507,263,099
</TABLE>
(a) The repurchase agreement is fully collaterialized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) Non-income producing security.
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- APRIL 30, 1997 (UNAUDITED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts to Sell:
<S> <C> <C> <C> <C> <C>
Net Unrealized
Exchange U.S. $ Value at In Exchange Appreciation/
Date Contracts to Deliver April 30, 1997 for U.S. $ (Depreciation)
5/20/97 4,382,807 Pound Sterling $ 7,101,055 $ 7,000,000 $ (101,055)
7/28/97 435,715,000 Japanese Yen 3,478,329 3,500,000 21,671
$10,579,384 $10,500,000 $ (79,384)
</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 April 30, 1997,
the Fund had investments, excluding repurchase agreements, in the following
countries:
<TABLE>
<CAPTION>
MARKET PERCENT OF
COUNTRY VALUE NET ASSETS
<S> <C> <C>
United States $425,721,762 84.0%
Brazil 19,680,069 3.9%
Mexico 17,456,255 3.4%
United Kingdom 13,165,316 2.6%
Japan 7,279,316 1.4%
Netherlands 6,721,972 1.3%
Taiwan 1,062,798 0.2%
Total $491,087,488 96.8%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
KEYSTONE STRATEGIC GROWTH FUND (K-2)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1997 YEAR ENDED OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF PERIOD $8.68 $8.05 $7.54 $9.00 $7.60 $8.18 $6.52 $7.67 $6.53
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss) 0.01 (0.04) (0.02) 0 (0.06) (0.01) 0.08 0.08 0.16
Net gain (loss) on
investments and foreign
currency related
transactions 0.91 1.04 1.13 0.23 1.89 0.42 2.24 (0.80) 1.21
Total from investment
operations 0.92 1.00 1.11 0.23 1.83 0.41 2.32 (0.72) 1.37
LESS DISTRIBUTIONS FROM:
Net investment income 0 (0.01) 0 0 0 (0.01) (0.16) (0.18) (0.18)
In excess of net
investment income 0 0 0 0 (0.03) (0.05) 0 0 0
Net realized gain on
investments and foreign
currency related
transactions (1.04) (0.36) (0.60) (1.66) (0.40) (0.93) (0.50) (0.25) (0.05)
In excess of net realized
gain on investments and
foreign currency related
transactions 0 0 0 (0.03) 0 0 0 0 0
Total distributions (1.04) (0.37) (0.60) (1.69) (0.43) (0.99) (0.66) (0.43) (0.23)
NET ASSET VALUE END OF
PERIOD $8.56 $8.68 $8.05 $7.54 $9.00 $7.60 $8.18 $6.52 $7.67
TOTAL RETURN (A) 11.23% 12.95% 15.05% 3.55% 24.97% 6.38% 38.77% (10.05%) 21.74%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets:
Total expenses 1.25%(b) 1.91% 2.01% 1.73% 1.83% 1.58% 1.52% 1.65% 1.59%
Total expenses,
excluding indirectly
paid expenses 1.24%(b) 1.90% 2.00% N/A N/A N/A N/A N/A N/A
Net investment income
(loss) 0.20%(b) (0.48%) (0.25%) (0.17%) (0.57%) (0.15%) 0.99% 1.64% 2.06%
Portfolio turnover rate 49% 156% 140% 68% 65% 62% 86% 30% 40%
Average commission rate
paid $0.0362 $0.0042 N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF PERIOD
(THOUSANDS) $507,263 $496,876 $491,610 $416,684 $403,693 $321,794 $339,359 $234,060 $329,994
<CAPTION>
1988
<S> <C>
NET ASSET VALUE BEGINNING
OF PERIOD $7.55
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss) 0.18
Net gain (loss) on
investments and foreign
currency related
transactions 0.19
Total from investment
operations 0.37
LESS DISTRIBUTIONS FROM:
Net investment income (0.14)
In excess of net
investment income 0
Net realized gain on
investments and foreign
currency related
transactions (1.25)
In excess of net realized
gain on investments and
foreign currency related
transactions 0
Total distributions (1.39)
NET ASSET VALUE END OF
PERIOD $6.53
TOTAL RETURN (A) 7.73%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets:
Total expenses 1.69%
Total expenses,
excluding indirectly
paid expenses N/A
Net investment income
(loss) 2.14%
Portfolio turnover rate 89%
Average commission rate
paid N/A
NET ASSETS END OF PERIOD
(THOUSANDS) $328,205
</TABLE>
(a) Excluding contingent deferred sales charge (CDSC).
(b) Annualized
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value
(cost, $428,761,392) $512,678,488
Foreign currency, at value (cost, $10,607) 10,529
Cash 634
Dividends and interest receivable 819,800
Receivable for Fund shares sold 596,052
Unrealized appreciation on open forward
foreign currency exchange contracts 21,671
Receivable for foreign tax withheld 9,648
Prepaid expenses 79,112
Total assets 514,215,934
LIABILITIES:
Payable for investments purchased 5,179,265
Payable for Fund shares redeemed 1,351,358
Unrealized depreciation on open forward
foreign currency exchange contracts 101,055
Management fees payable 16,234
Distribution fees payable 100,607
Accrued expenses and other liabilities 204,316
Total liabilities 6,952,835
NET ASSETS $507,263,099
NET ASSETS REPRESENTED BY:
Paid-in capital $377,200,385
Undistributed net investment income 604,060
Accumulated net realized gain on investments
and foreign currency related transactions 45,622,990
Net unrealized appreciation on investments
and foreign currency related transactions 83,835,664
Total net assets $507,263,099
NET ASSET VALUE PER SHARE
Net assets of $507,263,099 4 59,279,661
shares outstanding $8.56
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (Net of foreign
withholding taxes of $56,106) $ 3,082,525
Interest 647,603
Total income 3,730,128
EXPENSES:
Management fee $1,524,140
Distribution plan expenses 896,707
Transfer Agent fees 579,351
Administration expenses 8,604
Custodian fees 145,666
Auditing and legal 35,850
Trustees' fees and expenses 16,085
Registration fees 15,306
Printing 6,328
Miscellaneous expenses 6,350
Total expenses 3,234,387
Less: Expenses paid indirectly (22,341)
Net expenses 3,212,046
Net investment income 518,082
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS:
Net realized gain on:
Investments 45,268,632
Foreign currency related
transactions 512,005
Net realized gain 45,780,637
Net change in unrealized
appreciation (depreciation) on:
Investments 8,133,138
Foreign currency related
trasactions 5,244
Net change in unrealized
appreciation 8,138,382
Net realized and unrealized gain
on investments and foreign
currency related transactions 53,919,019
Net increase in net assets
resulting from operations $54,437,101
</TABLE>
<PAGE>
PAGE 12
KEYSTONE STRATEGIC GROWTH FUND (K-2)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1997 YEAR ENDED
(UNAUDITED) OCTOBER 31, 1996
<S> <C> <C>
OPERATIONS:
Net investment income (loss) $ 518,082 $(2,412,617)
Net realized gain on investments and foreign currency related transactions 45,780,637 70,337,618
Net change in unrealized appreciation (depreciation) 8,138,382 (7,283,970)
Net increase in net assets resulting from operations 54,437,101 60,641,031
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income 0 (478,981)
Net realized gain on investments and foreign currency related transactions (59,854,493) (22,079,862)
Total distributions to shareholders (59,854,493) (22,558,843)
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 72,897,924 65,085,209
Payments for shares redeemed (110,633,661) (118,085,204)
Net asset value of shares issued in reinvestment of distributions 53,539,767 20,184,450
Net increase (decrease) in net assets resulting from capital share transactions 15,804,030 (32,815,545)
Total increase in net assets 10,386,638 5,266,643
NET ASSETS:
Beginning of period 496,876,461 491,609,818
End of period [including undistributed net investment income as follows: April,
1997-- $604,060 and October, 1996-- $85,978] $507,263,099 $496,876,461
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Strategic Growth Fund (K-2) (the "Fund") is a Pennsylvania common law
trust for which Keystone Investment Management Company ("Keystone") is the
Investment Advisor and Manager. Keystone was formerly a wholly owned subsidiary
of Keystone Investments, Inc ("KII") and is currently a subsidiary of First
Union Keystone, Inc. First Union Keystone, Inc. is a wholly owned subsidiary of
First Union National Bank of North Carolina which in turn is a wholly owned
subsidiary of First Union Corporation ("First Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act") as an open-end diversified management investment company. The
Fund's investment objective is to provide shareholders with growth of capital.
The Fund seeks to meet its objective principally through investments in a
diversified group of domestic and foreign stocks.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. VALUATION OF SECURITIES
Investments are usually valued at the closing sales price or, in the absence of
sales and for over-the-counter securities, the mean of bid and asked prices.
Securities for which valuations are not available from an independant 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 sixty days or less are
valued at amortized cost, which approximates market. Short-term investments
maturing in more than sixty days are valued at current market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone Funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency 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, foreign currency transactions and the
difference between the amounts of interest and dividends recorded on the books
of the Fund and the amount actually received. The portion of foreign currency
gains and losses related to fluctuations in exchange rates between the initial
purchase trade date
<PAGE>
PAGE 14
KEYSTONE STRATEGIC GROWTH FUND (K-2)
and subsequent sale trade date is included in realized gain (loss) on investment
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 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
amortization of discounts and premiums. Dividend income is recorded on the
ex-dividend date.
F. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund intends to avoid any excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income or excise tax is required.
G. DISTRIBUTIONS
The Fund distributes net investment income and net capital gains, if any, at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The tax treatment of such distributions for the calendar
year will be reported to shareholders prior to February 1, 1998.
2. 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>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1997 OCTOBER 31,
(UNAUDITED) 1996
<S> <C> <C>
Shares sold 8,473,565 8,012,349
Shares redeemed (13,111,490) (14,456,998)
Shares issued in
reinvestment of
distributions 6,675,457 2,591,072
Net increase (decrease) 2,037,532 (3,853,577)
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the six months ended April 30, 1997 were $238,042,123
and $255,002,114, respectively.
4. DISTRIBUTION PLAN
The Fund bears some of the costs of selling its shares under a Distribution Plan
(the "Plan") adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund pays its principal underwriter amounts which are calculated daily and
paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributors, Inc. (formerly, Evergreen Fund
Distributor, Inc.) ("EKD"), a wholly owned subsidiary of The BISYS Group, Inc.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(Formerly
<PAGE>
PAGE 15
Keystone Investment Distributors Company) ("EKIS"), a wholly owned subsidiary of
Keystone, served as the Fund's principal underwriter.
Under the Plan, the Fund pays a distribution fee which may not exceed 1.00% of
the Fund's average daily net assets. Of that amount, 0.75% is used to pay
distribution expenses and 0.25% may be used to pay service fees. During the six
months ended April 30, 1997, EKD and/or EKIS were paid total distribution fees
of $896,707, representing 0.35% (annualized) of the Fund's average daily net
assets.
Contingent deferred sales charges paid by redeeming shareholders may be paid
to EKD or EKIS. During the six months ended April 30, 1997, the Fund received
$55,412 in contingent deferred sales charges. Contingent deferred sales charges
received by the Fund are used to reduce distribution fees.
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 earned 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.
5. 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. Keystone
provides the Fund with investment advisory and management services 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. For the six months ended April 30, 1997, the management fee
amounted to 0.59% (annualized) of the Fund's average daily net assets.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under an investment advisory
agreement between KMI and Keystone, Keystone served as investment adviser and
provided investment advisory and management services to the Fund. In return for
its services, Keystone received an annual fee equal to 85% of the management fee
received by KMI.
During the six months ended April 30, 1997, the Fund paid or accrued $8,604 to
Keystone for certain administrative services. Additionally, during the six
months ended April 30, 1997, the Fund paid or accrued $579,351 to Evergreen
Keystone Services Company ("EKSC") (formerly Keystone Investor Resource Center,
Inc.), a wholly-owned subsidiary of Keystone, for services rendered as the
Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended April 30, 1997, the Fund incurred total custody fees of
$145,666 and received a credit of $22,341 pursuant to this expense offset
arrangement, resulting in a net custody expense of $123,325. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
<PAGE>
PAGE 16
KEYSTONE STRATEGIC GROWTH FUND (K-2)
ADDITIONAL INFORMATION
The Fund held a special meeting of shareholders on Monday, December 9, 1996. On
October 18, 1996, the record date for the meeting, the Fund had 57,595,299
shares outstanding, of which 34,038,937 shares were represented at the meeting.
The votes at the meeting were as follows:
PROPOSAL 1: TO ELECT THE FOLLOWING PERSONS AS TRUSTEE OF THE FUND:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NOMINEES FOR TRUSTEE AFFIRMATIVE WITHHELD
<S> <C> <C>
Lawrence B. Ashkin 33,250,226 788,711
Frederick Amling 33,274,742 764,195
Charles A Austin, III 33,281,814 757,123
Foster Bam 33,268,815 770,122
George S. Bissell 33,268,509 770,428
Edwin D. Campbell 33,269,094 769,843
Charles F. Chapin 33,279,171 759,766
K. Dun Gifford 33,277,354 761,583
James S. Howell 33,263,724 775,213
Leroy Keith, Jr. 33,284,589 754,348
F. Ray Keyser 33,263,442 775,495
Gerald M. McDonnell 33,280,795 758,142
Thomas L. McVerry 33,273,004 765,933
William Walt Pettit 33,283,652 755,285
David M. Richardson 33,288,689 750,248
Russell A Salton, III M.D. 33,274,302 764,635
Michael S. Scofield 33,280,387 758,550
Richard J. Shima 33,285,738 753,199
Andrew J. Simons 33,262,399 776,538
</TABLE>
PROPOSAL 2: TO APPROVE AN INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN
KEYSTONE INVESTMENT MANAGEMENT COMPANY AND THE FUND:
<TABLE>
<S> <C>
Affirmative 33,388,099
Against 620,544
Abstain 1,030,294
</TABLE>
<PAGE>
KEYSTONE
FAMILY OF FUNDS
*
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
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.
(Evergreen Keystone
FUNDS Logos)
P.O. Box 2121
Boston, Massachusetts 02106-2121
K2-R REV01
6/97
KEYSTONE
(Photo Here)
STRATEGIC
GROWTH FUND (K-2)
(Evergreen Keystone
FUNDS Logos)
SEMI-ANNUAL REPORT
APRIL 30, 1997
