<PAGE>
[FRONT COVER]
KEYSTONE
[Photo of flora in a countryside]
MIDCAP GROWTH
FUND (S-3)
[Evergreen Keystone Funds logo]
SEMIANNUAL REPORT
FEBRUARY 28, 1997
<PAGE>
PAGE 1
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Keystone Mid-Cap Growth Fund (S-3)
Seeks capital appreciation from a diversified portfolio of growth-oriented
companies.
Dear Shareholder:
We are pleased to report to you on the activities of Keystone Mid-Cap Growth
Fund for the six-month period which ended February 28, 1997. Following our
letter to you, we have included a discussion with your Fund's manager and
complete financial information.
Performance
Your Fund produced a total return of 6.68% for the six months and 8.34% for the
twelve months which ended February 28, 1997. The benchmark Standard & Poor's 400
MidCap Stock Index (S&P 400) returned 13.89% and 16.92% for the same six- and
12-month periods.
These returns reflect the challenging environment for mid-cap stocks during
the six-month period. In addition, they underscore the differences between your
Fund's holdings and the stocks in the S&P 400 Index. In general, your Fund tends
to position the portfolio more aggressively, with a view to maximizing the
potential for long-term capital appreciation. Consequently, the Fund buys fewer
large-company stocks than are represented in the S&P 400, and, typically, owns
fewer defensive investments, such as utilities. While this growth strategy can
help maximize your Fund's returns over the long term, it also tends to cause the
Fund to underperform in uncertain markets, such as the one we have just seen,
and in markets led by large-company stocks.
A difficult market for small company stocks
The six-month period which ended February 28, 1997 was a challenging one for
picking stocks in the small- and mid-cap areas. These two asset classes never
fully recovered from the correction that took place in June and July. Despite
the fact that the correction was generally considered to be positive in that it
brought the valuations to more realistic levels, investors did not come back to
smaller-cap stocks. Instead, they opted for the relative safety and high
liquidity of blue-chip stocks. The attractiveness of blue-chip companies was
further intensified by the fact that the large-cap sector had gathered a strong
growth momentum during 1995 and 1996 and was experiencing higher-than-average
earnings growth rates, comparable to the historical rates of smaller-cap stocks.
The downturn in small- and mid-cap stocks continued through the end of the
fiscal period. February 1997 ended with a broad-reaching stock market correction
that affected companies of all sizes, including the large-cap sector.
Diversification was beneficial
By investing in a broad range of industries and targeting well performing
sectors, your Fund was able to mitigate the disappointments the February
correction created in the technology areas. At the end of February, the Fund had
19.1% of its net assets in Finance and Insurance stocks. Those areas performed
well during the six-month period and were largely spared during the February
correction. Business Services, with 13.6% of net assets, and Health Care
Services, with nearly 6.7% were two other successful industry allocations. In
contrast, while some of the Fund's electronics and energy stocks had strong
performance during most of the six-month period, the February correction
reversed much of their gains.
Investment strategy
During the six-month period, your Fund maintained its strategy of emphasizing
stocks of medium-sized companies with market capitalizations from $750 million
to $3 billion. We concentrated on businesses viewed to have
--continued--
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PAGE 2
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Keystone Mid-Cap Growth Fund (S-3)
consistent earnings growth rates, innovative or leading products and services,
strong finances, and superior management. Many of these companies are still in
the accelerated growth phase of their life cycles and offer the potential for
continued strong growth. By investing in mid-cap growth stocks, your Fund seeks
to offer greater growth potential and more consistent performance than would
likely be generated over the long term by investing solely in large-company
stocks or only in small-company stocks.
Our outlook
Looking ahead, we believe that small- and mid-cap stocks are fundamentally well
positioned for strong performance, especially over the long term. This area of
the market has been in a downturn for more than a year, and valuations are fair,
relative to large-company stocks. We think that as the large-cap companies
return to their historical earnings growth ranges, the smaller-cap market has
the potential to regain its edge as the one sector that can deliver earnings
growth of 15% to 20% a year.
Over the short-term, however, we are mindful of the turbulence in the
market. On March 25, shortly after the end of the fiscal period, the Federal
Reserve Board raised short-term interest rates by one-quarter of one percent. At
this writing, the possibility exists for further increases in interest rates. In
the short term, it is possible that the stock market may continue to react
dramatically to interest rate increases and experience further consolidation. As
we have said in past reports, such corrections are normal and can be healthy. We
believe that the Federal Reserve is attempting to anticipate and control a
re-emergence of inflation. Up until now, the stock market's strong performance
has been fueled by moderate, balanced economic growth, relatively low inflation,
and rising corporate profits. This is a very friendly environment for the stock
market. If the Federal Reserve is successful, it can prolong both these
favorable conditions and the upward movement of the stock market.
We appreciate your continued support of Keystone Funds. As always, we
welcome your questions and comments.
Sincerely,
/S/Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment [GRAPHIC OMITTED] [GRAPHIC OMITTED]
Management Company
/S/George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
Albert H. Elfner, III George S. Bissell
<PAGE>
PAGE 3
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A Discussion With
Your Fund's Manager
[GRAPHIC OMITTED]
Margery C. Parker is portfolio manager of Keystone
Mid-Cap Growth Fund (S-3). Ms. Parker has more than 15 years of investment
management experience. She holds a BA from Wellesley College and an MBA from
Babson College. Together with senior portfolio manager Maureen Cullinane she
selects mid-cap stocks for your Fund.
Q What was the environment like for the stock market during the six-month period
which ended February 28, 1997?
A Overall, it was a volatile market, driven by con flicting forces. On the one
hand, the positive backdrop of low interest rates and controlled inflation
attracted huge inflows of investor dollars into the market. On the other hand,
the resulting surge in stock prices stoked fears that the six-year-old stock
market would soon run out of fuel. The July correction in the small- and mid-cap
sectors was a wake-up call for many investors to look for safety. Although the
broad stock market, as measured by the S&P 500 stock index, exhibited strong
performance during the six months, most of the gains were achieved by a small
number of stocks, mainly those of the largest companies.
Q How do you assess the Fund's performance during the six-month period?
A The performance reflected the Fund's difficult invest ment climate. We
concentrate on growth oriented mid- cap companies and we adhere to our strategy,
regardless of the current mood in the stock market. Mid-cap stocks, along with
small-cap stocks, were undeniably the wall flowers of the stock rally during the
six-month period. Like any other sector of the market, mid-cap stocks rotate in
and out of favor. But over the long term, this asset class has tended to
generate higher growth rates than those of large-cap stocks.
We define mid-cap stocks as stocks of companies with market capitalization
generally between $750 million and $3 billion. A stock's market capitalization
is determined by multiplying its current price by the number of shares
outstanding.
Q Did you make any significant portfolio changes during the six-month period?
A We positioned the portfolio more conservatively. We shifted our focus to
companies with larger capitalizations to give the portfolio more liquidity. We
emphasized stocks with attractive valuations and established earnings histories.
We looked for lower than average price to earnings ratios. We reduced our
weighting in technology stocks and retail stocks before the February correction.
Fund Profile
Objective: Seeks capital appreciation from a diversified portfolio of
growth-oriented companies.
Commencement of investment operations: September 11, 1935
Net assets: $297 million
Number of stocks: 80
Newspaper listing: "MidCapS3"
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PAGE 4
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Keystone Mid-Cap Growth Fund (S-3)
Your Fund Invests In:
[bullet] Dynamic companies with earnings growth rates of 20% or more
[bullet] Companies with strong management, a leading market position and solid
balance sheets
[bullet] Primarily medium-sized companies, with market capitalizations between
$750 million and $3 billion
[bullet] U.S. stocks and stocks of established foreign companies
Q Which industry allocations performed the best?
A The finance sector posted positive performance, especially bank and insurance
stocks. At the end of February, the Fund had about 19% of net assets invested in
Finance and Insurance industries, which helped to boost overall performance.
Electronics was a successful area, but it suffered during the last two weeks of
February. We had strong gains in energy stocks, but they too were reduced in
February. The health care sector had successful performance and it largely
resisted the February correction.
Q Which stocks were particularly successful for the Fund?
A Greenpoint Financial, the largest stock holding at the end of February,
advanced 46% since we bought it in July, 1996. Cardinal Health, the fourth
largest holding, gained approximately 20% during the six months which ended
February 28, 1997. Cardinal Health is a larger-capitalization company, well
managed, with a consistent history of growing their earnings at 20% a year. In
the Business Services area, U.S. Filter, another top holding, was up
approximately 45% during the period.
Q How about examples of disappointments?
A The disappointments had more to do with the overall market environment for
smaller-cap stocks than with any one holding or investment decision. We believe
the Fund owns many strong, well positioned companies that didn't have an
opportunity to advance during the fiscal period because of short-term emotions
driving the market. However, we believe this a temporary situation.
Q What type of companies do you emphasize?
A We emphasize companies that have grown their
earnings about 20% a year, offer interesting services, have proprietary
technology, are market leaders in a strong, competitive position, and have great
managements. We look for reasonable valuations relative to peers, or
historically.
We spend a lot of time visiting companies and learning about their
products, assessing the managements' ability to execute their goals.
Q What is your sell strategy?
A We sell when we believe something has changed in the reasons for which we
bought the stock in the first place. A market correction isn't going to scare us
away. Change in management or problems in accounting might trigger a sale. Of
course, we have our target prices and we watch them carefully, especially if the
stock is a large holding and it appreciated dramatically. We might start to pare
it down and take profits.
Top 5 Industries
as of February 28, 1997
<TABLE>
<S> <C>
Percent of
Industry net assets
- --------------------- ------------
Finance 14.0
- --------------------- ------------
Business services 13.6
- --------------------- ------------
Health Care Services 6.7
- --------------------- ------------
Oil Services 6.2
- --------------------- ------------
Insurance 5.1
- --------------------- ------------
</TABLE>
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PAGE 5
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Top 10 Holdings
as of February 29, 1996
<TABLE>
<S> <C> <C>
Percentage of
Company Industry net assets
- --------------------- ----------------------------- ---------------
Greenpoint Financial Finance 3.1
- --------------------- ----------------------------- ---------------
USA Waste Services Business Services 3.0
- --------------------- ----------------------------- ---------------
US Filter Business 2.4
- --------------------- ----------------------------- ---------------
Cardinal Health Health Care Services 2.2
- --------------------- ----------------------------- ---------------
Bank of Boston Finance 2.1
- --------------------- ----------------------------- ---------------
HFS Inc Amusements 2.1
- --------------------- ----------------------------- ---------------
SunAmerica Insurance 2.0
- --------------------- ----------------------------- ---------------
BMC Software Software Services 1.9
- --------------------- ----------------------------- ---------------
EMC Corp Mass Office & Business Equipment 1.8
- --------------------- ----------------------------- ---------------
Danaher Automotive 1.7
- --------------------- ----------------------------- ---------------
</TABLE>
Q What is your outlook?
A For the long term, we are positive. We think the economy will continue to grow
at a moderate rate and inflationary pressures will remain low. On March 25,
1997, the Federal Reserve Board raised short-term interest rates by a quarter of
a percent. There is a possibility that future increases will follow, causing
short-term volatility. We feel that the Fed's move was more designed to prevent
an acceleration in the economic growth, than based on any tangible signs of
inflation. We believe mid-cap and small-cap stocks are going to pick up and
deliver a strong long-term performance. We think the Fund is well positioned to
participate in the growth opportunities ahead.
[diamond]
This column is intended to answer
questions about your Fund.
If you have a question you would like answered, please write to:
Evergreen Keystone Investment Services, Inc.,
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
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Keystone Mid-Cap Growth Fund (S-3)
Growth of an Investment in Keystone Mid-Cap Growth Fund (S-3)
In Thousands
Initial Investment
Reinvested Distributions
Total Value: $25,094
A $10,000 investment in Keystone Mid-Cap Growth Fund (S-3) made on February 28,
1987 with all distributions reinvested was worth $25,094 on February 28, 1997.
Past performance is no guarantee of future results.
<TABLE>
<S> <C>
2/87 10000 10000
7399 9009
2/89 8086 10051
8826 11279
2/91 9059 12764
10327 15858
2/93 9809 16268
10169 18050
2/95 8879 17388
9524 23162
2/97 9260 26093
</TABLE>
[GRAPHIC OMITTED]
Six-Month Performance as of February 28, 1997
- --------------------------------------
<TABLE>
<S> <C> <C>
Total return* *6.68%
Net asset value 8/31/96 $ 9.15
2/28/97 $ 8.76
Dividends None
Capital gains $ 0.99
</TABLE>
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of February 28, 1997
- --------------------------------------
<TABLE>
<CAPTION>
If you If you did
Cumulative total return redeemed not redeem
<S> <C> <C>
1-year 5.42% 8.34%
5-year 58.24% 58.24%
10-year 150.94% 150.94%
Average annual total return
1-year 5.42% 8.34%
5-year 9.61% 9.61%
10-year 9.64% 9.64%
</TABLE>
The one-year return reflects 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 received the one-year return
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 Keystone fund by phone or in writing.
You may also exchange funds by using Keystone's Automated Response Line (KARL).
The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 7
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Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type (usually
common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities from
its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a capital
gain distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 8
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Keystone Mid-Cap Growth Fund (S-3)
SCHEDULE OF INVESTMENTS--February 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
------ -----
<S> <C> <C>
COMMON STOCKS (94.8%)
AMUSEMENTS (2.1%)
HFS, Inc. (a) 90,000 $6,165,000
AUTOMOTIVE (2.6%)
Danaher Corp. 115,000 4,973,750
Gentex Corp. (a) 153,400 2,828,313
7,802,063
BUILDING MATERIALS (1.6%)
Oakwood Homes Corp. 130,000 2,567,500
Toll Brothers, Inc. (a) 120,000 2,325,000
4,892,500
BUSINESS SERVICES (13.6%)
Alternative Resources Corp. (a) 180,000 2,756,250
G & K Services, Inc., Class A 150,000 4,828,125
Ikon Office Solutions, Inc. 65,000 2,681,250
Paychex, Inc. 90,000 3,909,375
Thermedics Detection, Inc. rts. (a) 13,000 4,063
Thermedics, Inc. (a) 130,000 2,697,500
Thermo Electron Corp. 123,000 4,197,375
US Filter Corp. (a) 204,700 7,164,500
USA Waste Services, Inc. (a) 250,000 9,000,000
Viking Office Products, Inc. (a) 130,000 3,055,000
40,293,438
CAPITAL GOODS (0.9%)
Industrie Natuzzi SPA ADR 136,600 2,817,375
CHEMICALS (3.3%)
Airgas, Inc. (a) 100,000 1,925,000
Hanna M.A. Co. 180,000 3,735,000
OM Group, Inc. 142,500 4,132,500
9,792,500
CONSUMER GOODS (1.6%)
Manpower, Inc. 125,000 4,718,750
DIVERSIFIED COMPANIES (1.0%)
Tyco, Ltd. 52,800 3,115,200
DRUGS (4.0%)
Amylin Pharmaceuticals, Inc. (a) 300,000 4,425,000
Centocor, Inc. (a) 100,000 3,800,000
Gilead Sciences, Inc. (a) 121,400 3,687,525
11,912,525
<CAPTION>
Market
Shares Value
--------- -----------
<S> <C> <C>
ELECTRONICS PRODUCTS (2.1%)
Analog Devices, Inc. (a) 200,000 $4,650,000
Micron Technology, Inc. 46,000 1,725,000
- ------------------------------------- -------- ----------
6,375,000
----------
FINANCE (14.0%)
Bank of Boston Corp. 84,600 6,376,725
- ------------------------------------- -------- ----------
First American Corp.-Tenn 60,000 3,843,750
- ------------------------------------- -------- ----------
First USA Paymentech, Inc. (a) 77,000 2,300,375
Greenpoint Financial Corp. 155,000 9,300,000
Northern Trust Corp. 90,000 3,813,750
- ------------------------------------- -------- ----------
Summit Bancorp 75,000 3,581,250
- ------------------------------------- -------- ----------
TCF Financial Corp. 100,000 4,537,500
Washington Mutual, Inc. 90,000 4,758,750
WestAmerica Bancorporation 45,800 3,068,600
- ------------------------------------- -------- ----------
41,580,700
----------
FOODS (3.3%)
Coca Cola Enterprises, Inc. 40,000 2,470,000
PanAmerican Beverages, Inc.,
Class A 75,000 4,228,125
Richfood Holdings, Inc. 140,300 2,963,838
- ------------------------------------- -------- ----------
9,661,963
----------
HEALTHCARE SERVICES (6.7%)
Boston Scientific Corp. (a) 47,000 3,113,750
Cardinal Health, Inc. 107,700 6,623,550
Healthsouth Corp. (a) 80,000 3,220,000
IDEXX Laboratories, Inc. (a) 86,500 3,200,500
Lifecore Biomedical, Inc. (a) 185,000 3,607,500
- ------------------------------------- -------- ----------
19,765,300
----------
INSURANCE (5.1%)
Allmerica Financial Corp. 125,000 4,671,875
Conseco 112,000 4,396,000
SunAmerica, Inc. 130,000 5,963,750
- ------------------------------------- -------- ----------
15,031,625
----------
METALS & MINING (1.4%)
UCAR International, Inc. (a) 100,000 4,300,000
- ------------------------------------- -------- ----------
NATURAL GAS (2.6%)
CMS Energy Corp. 100,000 3,275,000
Devon Energy Corp. 100,000 3,125,000
United Meridian Corp. (a) 40,000 1,205,000
- ------------------------------------- -------- ----------
7,605,000
----------
</TABLE>
(Continued on next page)
<PAGE>
PAGE 9
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SCHEDULE OF INVESTMENTS--February 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
------ -----
<S> <C> <C>
OFFICE & BUSINESS EQUIPMENT (3.0%)
EMC Corp. (a) 144,800 $ 5,212,800
Synopsys, Inc. (a) 100,000 3,568,750
- ---------------------------------------------------------------
8,781,550
- ---------------------------------------------------------------
OIL SERVICES (6.2%)
Barrett Resources (a) 70,000 2,301,250
BJ Services Co. (a) 57,000 2,265,750
Diamond Offshore Drilling, Inc. (a) 60,100 3,545,900
Noble Affiliates, Inc. 85,000 3,315,000
Pennzoil Co. 60,000 3,442,500
Tidewater, Inc. 85,000 3,655,000
- ---------------------------------------------------------------
18,525,400
- ---------------------------------------------------------------
PAPER & PACKAGING (2.3%)
Bowater, Inc. 75,000 3,178,125
Temple Inland, Inc. 30,000 1,653,750
Unisource Worldwide, Inc. 32,500 698,750
Willamette Industries, Inc. 19,000 1,216,000
- ---------------------------------------------------------------
6,746,625
- ---------------------------------------------------------------
RESTAURANTS (1.3%)
Applebees, Inc. 155,000 3,913,750
- ---------------------------------------------------------------
RETAIL (3.9%)
Corporate Express, Inc. (a) 150,000 2,793,750
Global Directmail Corp. (a) 61,600 2,063,600
Kohls Corp. (a) 80,000 3,680,000
Tiffany & Co. 84,600 2,939,850
- ------------------------------------- --------- -----------
11,477,200
-----------
<CAPTION>
Market
Shares Value
---------- ------------
<S> <C> <C>
SOFTWARE SERVICES (5.3%)
BMC Software, Inc. (a) 130,000 $ 5,565,625
Komag, Inc. (a) 83,800 2,524,475
McAfee Associates, Inc. (a) 15,900 728,419
Parametric Technology Corp. (a) 60,300 3,395,644
Peoplesoft, Inc. (a) 80,000 3,185,000
Transaction System Architects,
Inc., Class A (a) 14,200 371,863
- ------------------------------------- --------- ------------
15,771,026
------------
TELECOMMUNICATIONS (4.1%)
Andrew Corp. (a) 75,000 4,115,625
Tel Save Holdings, Inc. (a) 216,900 3,863,531
Tellabs, Inc. (a) 100,000 3,987,500
Winstar Communications, Inc. (a) 26,400 354,750
- ------------------------------------- --------- ------------
12,321,406
------------
UTILITIES (2.8%)
Allegheny Power Systems, Inc. 120,000 3,675,000
Hawaiian Electric Industries, Inc. 65,000 2,283,123
Teco Energy, Inc. 100,000 2,437,500
- ------------------------------------- --------- ------------
8,395,623
------------
TOTAL COMMON STOCKS
(Cost--$244,094,930) 281,761,519
- ------------------------------------- ------------
</TABLE>
<PAGE>
PAGE 10
- --------------------------------------
Keystone Mid-Cap Growth Fund (S-3)
SCHEDULE OF INVESTMENTS--February 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Maturity Market
Value Value
-------------- --------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (6.3%)
Investment in repurchase agreements, in a joint trading account
purchased 2/28/97, 5.413%, maturing 3/3/97 (b) $18,847,498 $18,839,000
- ----------------------------------------------------------------- ------------ -----------
TOTAL SHORT-TERM INVESTMENTS (Cost--$18,839,000) 18,839,000
- ----------------------------------------------------------------- -----------
TOTAL INVESTMENTS (Cost--$262,933,930) 300,600,519
- ----------------------------------------------------------------- -----------
OTHER ASSETS AND LIABILITIES--NET (-1.1%) (3,389,474)
- ----------------------------------------------------------------- -----------
NET ASSETS (100%) $297,211,045
- ----------------------------------------------------------------- -----------
</TABLE>
(a) Non-income-producing security.
(b) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at February 28, 1997.
Legend of Portfolio Abbreviations:
ADR--American Depository Receipt
<PAGE>
PAGE 11
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FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended August 31,
February 28, 1997 ----------------------
(Unaudited) 1996
============================================== ================= =========
<S> <C> <C>
Net asset value beginning of period $ 9.15 $ 9.22
- ---------------------------------------------- ----------------- ---------
Income from investment operations
Net investment income (loss) (0.02) (0.09)
Net realized and unrealized gain on
investments and foreign currency related
transactions 0.62 0.94
- ---------------------------------------------- ----------------- ---------
Total from investment operations 0.60 0.85
- ---------------------------------------------- ----------------- ---------
Less distributions from
Net investment income 0.00 (0.39)
In excess of net investment income 0.00 (0.20)
Net realized gain on investments (0.78) (0.33)
In excess of net realized gain on investments (0.21) 0.00
Tax basis return of capital 0.00 0.00
- ---------------------------------------------- ----------------- ---------
Total distributions (0.99) (0.92)
- ---------------------------------------------- ----------------- ---------
Net asset value end of period $ 8.76 $ 9.15
============================================== ================= =========
Total return(a) 6.68% 10.07%
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.58%(d) 1.74%
Total expenses, excluding indirect expenses 1.57%(d) 1.73%
Net investment income (loss) (0.49%)(d) (0.78%)
Portfolio turnover rate 50% 158%
Average commissions rate paid $ 0.0009 $0.0053
- ---------------------------------------------- ----------------- ---------
Net assets end of period (thousands) $ 297,211 $285,374
============================================== ================= =========
<CAPTION>
Year Ended August 31,
---------- ---------- ------------ --------
1995 1994 1993 1992
============================================== ===== ===== ========= =======
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 9.38 $ 9.92 $ 8.98 $ 9.66
- ---------------------------------------------- ------- ------- --------- --------
Income from investment operations
Net investment income (loss) 0.04 0.02 (0.02) (0.01)
Net realized and unrealized gain on
investments and foreign currency related
transactions 1.72 0.09 1.69 0.10
- ---------------------------------------------- ------- ------- --------- ---------
Total from investment operations 1.76 0.11 1.67 0.09
- ---------------------------------------------- ------- ------- --------- ---------
Less distributions from
Net investment income (0.04) (0.02) 0.00 (0.03)
In excess of net investment income (0.02) (0.01) 0.00 (0.05)
Net realized gain on investments (1.72) (0.57) (0.73) (0.69)
In excess of net realized gain on investments (0.14) 0.00 0.00 0.00
Tax basis return of capital 0.00 (0.05) 0.00 0.00
- ---------------------------------------------- ------- ------- --------- ---------
Total distributions (1.92) (0.65) (0.73) (0.77)
- ---------------------------------------------- ------- ------- --------- ---------
Net asset value end of period $ 9.22 $ 9.38 $ 9.92 $ 8.98
============================================== ======= ======= ========= =========
Total return(a) 21.42% 1.21% 19.31% 1.31%
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.32% 1.35% 1.74% 1.69%
Total expenses, excluding indirect expenses N/A N/A N/A N/A
Net investment income (loss) 0.43% 0.16% (0.21%) (0.12%)
Portfolio turnover rate 172% 58% 69% 99%
Average commissions rate paid N/A N/A N/A N/A
- ---------------------------------------------- ------- ------- --------- ---------
Net assets end of period (thousands) $276,034 $252,351 $292,965 $262,696
============================================== ======= ======= ========= =========
</TABLE>
(a) Excluding applicable sales charges.
(b) The total expense ratios includes indirectly paid expenses for the six
months ended February 28, 1997 and for the year ended August 31, 1996.
(c) Calculated using average shares outstanding throughout the period.
(d) Annualized
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------------------------------------------------------
Keystone Mid-Cap Growth Fund (S-3)
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997 (Unaudited)
<TABLE>
<S> <C>
Assets
Investments at market value (identified cost--
$262,933,930) $300,600,519
Cash 27,342
Receivable for:
Fund shares sold 171,130
Dividends and interest 171,043
Prepaid expenses and other assets 43,658
- --------------------------------------------------------------------------------
Total assets 301,013,692
- --------------------------------------------------------------------------------
Liabilities
Payable for:
Investments purchased 3,183,992
Fund shares redeemed 384,961
Accrued expenses 233,694
- --------------------------------------------------------------------------------
Total liabilities 3,802,647
- --------------------------------------------------------------------------------
Net assets $297,211,045
- --------------------------------------------------------------------------------
Net assets represented by (Note 3)
Paid-in-capital $251,719,937
Net undistributed investment income 14,471,942
Accumulated distributions in excess of net realized
gain on investment transactions (6,647,138)
Net unrealized appreciation on investments and
other assets and liabilities 37,666,304
- --------------------------------------------------------------------------------
Total net assets $297,211,045
- --------------------------------------------------------------------------------
Net asset value
Net assets of $297,211,045 [dividedby] 33,927,441 shares
outstanding $8.76
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended February 28, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
Investment income
Dividends (net of foreign withholding
tax of $2,785) $ 898,765
Interest 481,939
- --------------------------------------------------------------------------------
Total income 1,380,704
- --------------------------------------------------------------------------------
Expenses (Notes 4, 5 and 6)
Management fee $ 967,193
Distribution Plan expenses 518,303
Transfer agent fees 320,676
Custodian fees 115,096
Registration fees 27,399
Auditing and legal 21,590
Printing 15,299
Accounting 13,920
Miscellaneous expenses 9,449
Trustees' fees and expenses 1,529
- --------------------------------------------------------------------------------
Total expenses 2,010,454
Less: Expenses paid indirectly
(Note 6) (9,665)
- --------------------------------------------------------------------------------
Net expenses 2,000,789
- --------------------------------------------------------------------------------
Net investment loss (620,085)
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign currency
related transactions (Note 3)
Net realized gain on investments 8,560,028
Net realized loss on foreign currency
related transactions (139,264)
- --------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency related transactions 8,420,764
- --------------------------------------------------------------------------------
Net change in unrealized appreciation on
investments and foreign currency
related transactions 11,404,420
- --------------------------------------------------------------------------------
Net realized and unrealized gain on
investments and foreign currency
related transactions 19,825,184
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $19,205,099
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 13
- --------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 28, 1997 August 31, 1996
==================== =================
(Unaudited)
<S> <C> <C>
Operations
Net investment loss $ (620,085) $ (2,282,189)
Net realized gain on investments and foreign currency related transactions 8,420,764 43,873,535
Net change in unrealized appreciation (depreciation) on investments and
foreign currency related transactions 11,404,420 (13,929,242)
- ---------------------------------------------------------------------------- ------------ ------------
Net increase in net assets resulting from operations 19,205,099 27,662,104
- ---------------------------------------------------------------------------- ------------ ------------
Distributions to shareholders from (Note 5)
Net investment income 0 (11,703,529)
In excess of net investment income 0 (6,074,672)
Net realized gain on investment transactions (25,097,726) (9,943,735)
In excess of net realized gain on investment transactions (6,647,138) 0
- ---------------------------------------------------------------------------- ------------ ------------
Total distributions to shareholders (31,744,864) (27,721,936)
- ---------------------------------------------------------------------------- ------------ ------------
Capital share transactions (Note 2)
Proceeds from shares sold 33,459,227 49,458,379
Payments for shares redeemed (37,543,098) (64,895,935)
Net asset value of shares issued in reinvestment of distributions 28,460,373 24,837,684
- ---------------------------------------------------------------------------- ------------ ------------
Net increase in net assets resulting from capital share transactions 24,376,502 9,400,128
- ---------------------------------------------------------------------------- ------------ ------------
Total increase in net assets 11,836,737 9,340,296
- ---------------------------------------------------------------------------- ------------ ------------
Net assets:
Beginning of period 285,374,308 276,034,012
- ---------------------------------------------------------------------------- ------------ ------------
End of period [including undistributed net investment income as follows:
1997--$14,471,942 and 1996--$15,092,027] $297,211,045 $285,374,308
============================================================================ ============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------------------------
Keystone Mid-Cap Growth Fund (S-3)
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Mid-Cap Growth Fund (S-3) ( 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"). On December 11, 1996, KII, and indirectly
each of its subsidiaries, were acquired by First Union National Bank of North
Carolina.
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end investment company. The Fund's
investment objective is to provide shareholders with growth of capital.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
Investments, including American Depository Receipts ("ADR's"), are usually
valued at the closing sales price, or, in the absence of sales and for
over-the-counter securities, the mean of the bid and asked prices. In
determining value for normal institutional-size transactions, the pricing
service uses methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Evergreen Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting
<PAGE>
PAGE 15
- --------------------------------------
from changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions, foreign
currency transactions and the difference between the amounts of interest and
dividends recorded on the books of the Fund and the amount actually received.
The portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase trade date and subsequent sale trade
date is included in realized gain (loss) on foreign currency transactions
D. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts. Dividend income is recorded on the ex-dividend date.
E. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income or excise taxes is required.
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. Tax treatment of such distributions for the calendar year
will be reported to shareholders prior to February 28, 1998.
(2.) Capital Share Transactions
The Fund's Restatement of Trust Agreement 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
February 28, 1997 Year Ended
(Unaudited) August 31, 1996
-------------------- -----------------
<S> <C> <C>
Shares sold 3,602,996 5,434,642
Shares redeemed (4,135,050) (7,136,623)
Shares issued in
reinvestment of
distributions 3,286,417 2,946,344
- ----------------- ----------- -----------
Net increase 2,754,363 1,244,363
- ----------------- ----------- -----------
</TABLE>
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the six months ended
February 28, 1997, were $144,597,577 and $138,676,255, respectively.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under a Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution Plan,
the Fund pays its principal underwriter amounts which are calculated and paid
monthly.
On December 11, 1996, the Fund entered into a principal underwriting
agreement with Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned
subsidiary of The BISYS Group Inc. Prior to Decem-
<PAGE>
PAGE 16
- --------------------------------------
Keystone Mid-Cap Growth Fund (S-3)
ber 11, 1996, Evergreen Keystone Investment Services, Inc. (formerly, Keystone
Investment Distributors Company) ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
Under the Distribution 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 shareholder
service fees.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares.
However, after the termination of the Distribution Plan, and subject to the
discretion of the Independent Trustees, payments to EKIS and/or EKD may continue
as compensation for services that had been earned while the Distribution 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 and Management Agreement and Other Affiliated
Transactions
Under an Investment Advisory and Management 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. In return,
Keystone is paid a management fee. The management fee paid by the Fund to
Keystone is determined by applying percentage rates, which start at 0.70%, and
decline, as net assets increase, to 0.35% per annum, to the average daily net
assets of the Fund.
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 the
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. For the six months ended February 28,
1997, aggregate management fees, under both agreements amounted to 0.65%
(annualized) of the Fund's average daily net assets.
During the six months ended February 28, 1997, the Fund paid or accrued
$13,920 to Keystone for certain accounting services. Additionally, the Fund paid
or accrued $320,676 to Evergreen Keystone Service Company (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 February 28, 1997, the Fund incurred total custody fees of
$115,096 and received a credit of $9,665 pursuant to this expense offset
arrangement, resulting in a net custody expense of $105,431. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
<PAGE>
PAGE 17
- --------------------------------------
ADDITIONAL INFORMATION
Shareholders of the Fund considered and acted upon the proposal listed below at
a special meeting of shareholders held Monday, December 9, 1996. In addition,
below each proposal are the results of that vote.
1. To elect the following Trustees:
<TABLE>
<CAPTION>
Affirmative Withhold
-------------- ----------
<S> <C> <C>
Frederick Amling 18,433,870 569,610
Laurence B. Ashkin 18,416,008 587,473
Charles A. Austin III 18,439,359 590,183
Foster Bam 18,413,298 590,183
George S. Bissell 18,425,852 577,629
Edwin D. Campbell 18,419,597 583,884
Charles F. Chapin 18,428,463 575,018
K. Dun Gifford 18,435,168 568,314
James S. Howell 18,421,031 582,450
Leroy Keith, Jr. 18,439,785 563,696
F. Ray Keyser, Jr. 18,421,977 581,504
Gerald M. McDonell 18,415,272 588,209
Thomas L. McVerry 18,433,606 569,875
William Walt Pettit 18,424,200 579,281
David M. Richardson 18,436,837 566,644
Russell A. Salton, III MD 18,414,668 588,813
Michael S. Scofield 18,435,430 568,051
Richard J. Shima 18,433,943 569,538
Andrew J. Simons 18,435,865 567,616
</TABLE>
2. To approve an Investment Advisory and Management Agreement between the Fund
and Keystone Investment Management Company.
<TABLE>
<S> <C>
Affirmative 17,964,867
Against 402,867
Abstain 635,746
</TABLE>
<PAGE>
PAGE 18
- --------------------------------------
Keystone Mid-Cap Growth Fund (S-3)
Keystone's Services for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL) - Receive up-to-date information
on your balance, last transaction and recent Fund distribution. You may also
process transactions such as investments, redemptions and exchanges using a
touch-tone telephone as well as receive quotes on price, yield, and total return
of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT - Information about your
Keystone account is available 24 hours a day through KARL. To speak with a
Shareholder Services representative about your account, call toll-free
1-800-343-2898 between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan
investors should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT - You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS - You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net asset
value with no sales charge.
EXCHANGE PRIVILEGE - You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you
the added ability to move your money any time of day, any day of the week.
Keystone offers a variety of funds with different investment objectives for
your changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT) - Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to move
money between your bank account and your Keystone account.
CHECK WRITING - Shareholders of Keystone Liquid Trust may exercise the
check writing privilege to draw from their accounts.
EASY REDEMPTION - KARL makes redemption services available to you 24 hours
a day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS - Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined contribution
plans. For more information, please call Retirement Plan Services, toll-free
at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
[BACK COVER]
KEYSTONE
FAMILY OF FUNDS
[diamond]
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 prospec-
tus. 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 logo]
P.O. Box 2121
Boston, Massachusetts 02106-2121
[Recycle logo]
S3-R-4/97
20.4M
