PAGE 1
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Keystone Small Company Growth Fund (S-4)
Seeks long-term growth of capital by investing in stocks of small companies.
Dear Shareholder:
We are writing to report to you on activities of Keystone Small Company
Growth Fund (S-4) for the twelve-month period which ended May 31, 1996.
Following this letter, we have included a discussion with your Fund's manager
discussing portfolio strategy.
Performance
Your Fund produced a total return of 33.03% for the twelve-month period which
ended May 31, 1996. The Russell 2000, a broad, unmanaged index of
small-company stocks, returned 32.90% for the same period.
We were pleased with your Fund's twelve-month performance which we believe
was consistent with its long-term record of attractive returns.
Overall, stocks delivered excellent returns during most of the period.
However, toward the end of 1995 and into the first few days of January 1996,
technology stocks experienced a correction. Small-cap stock indexes, which
have a significant weighting in technology, reached a low point in early
January, and then rebounded from February through May. As small-caps
recovered, your Fund rebounded nicely.
In selecting small company (small-cap) stocks for the portfolio, we seek
companies which we believe have accelerating earnings growth and solid
management teams. We look for companies with innovative products and
services. In short, we look for tomorrow's market leaders. These companies
tend to be less seasoned and generally have greater stock price volatility.
However, we think we have been successful at reducing these risks by
carefully evaluating each company and diversifying the portfolio among a
variety of sectors, industries and issues.
Valuations still reasonable
One way we measure the attractiveness of small-cap stocks is by comparing the
price-to-earnings ratio (P/E) of small-cap stocks to the Standard & Poor's
500 Index (S&P 500) P/E. The S&P 500 is a broad market average of large-cap
stocks. Historically the ratio of small-cap versus the S&P 500 has ranged
between 1.0 and 2.2. A ratio of 1.0 indicates that small-cap stocks are cheap
compared to large-cap stocks for the same level of earnings. A ratio of 2.2
indicates that small-cap stocks are relatively expensive compared to
large-cap stocks. Our experience tells us that a ratio below 2.0 is
reasonable. As of May 31, 1996, this ratio was 1.6, an indication that
small-cap stocks are still attractively valued relative to larger stocks.
Outlook
We believe that the attractive long-term fundamentals for small-cap stocks
remain intact. We believe the economy is healthy and we continue to see
accelerating earnings growth rates at many small companies. We think
investors will continue to favor small-cap stocks for their attractive
earnings growth rates. However, periodic corrections are not unusual for
small-cap stocks. After the excellent gains experienced over the past twelve
months, we would tend to view any correction as an opportunity for your Fund.
As you evaluate your investment and market conditions, we encourage you to
remember a few investment principles that have withstood the test of time in
all types of markets. Diversify your investments. By putting your money in
different types of investments, you can minimize your risk. Have a long-term
perspective. The longer you keep your money invested, the more time you have
to weather the market's fluctuations. Invest regularly. By
--continued--
<PAGE>
PAGE 2
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Keystone Small Company Growth Fund (S-4)
making periodic investments over time, you can build a nest egg and lower
your average cost per share. Of course, your investment will fluctuate with
market conditions and there is no assurance that it will be worth more when
you sell your shares.
Your investment adviser can help you with these strategies by developing a
plan to meet your particular needs. He or she is a professional with the
resources and expertise to help you achieve your investment goals. We
encourage you to take advantage of the services your adviser can provide.
On July 11, 1996, Donald C. Dates, senior vice president, assumed
responsibility as leader of Keystone's small-cap team and portfolio manager
of your Fund. Mr. Dates has extensive investment experience and most recently
served as director of Keystone's research department where he supervised the
activities of Keystone's stock analysts. He is a Chartered Financial Analyst
with over 35 years of investment experience.
Don will lead Keystone's small-cap team which is comprised of portfolio
manager Margery Parker and senior analyst David Benhaim. Ms. Parker has 14
years of investment experience and currently manages other Keystone funds
that invest in small-cap stocks. Mr. Benhaim has been a key component of
Keystone's small-cap research and analysis efforts in the technology sector.
We look forward to their contributions to your Fund's management.
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
/s/Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
July 1996
[Photos of Albert H. Elfner, III and George S. Bissell]
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear Keystone portfolio
managers discuss their latest strategies, or listen to Keystone's
overall market outlook from James McCall, chief investment officer. Of
course, your financial adviser can provide you with more complete information
on Keystone funds. This service is available 24 hours a day, seven days a
week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2 after the greeting
<PAGE>
PAGE 3
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A Discussion With Your Fund Manager
Donald C. Dates is head of Keystone's small-cap growth team and portfolio
manager of your Fund. Mr. Dates has over 35 years of investment experience
and is a Chartered Financial Analyst. He holds a BA from Lafayette College
and an MBA from Wharton School of Business. Together with portfolio manager
Margery C. Parker and senior analyst David S. Benhaim, he searches for small
companies with accelerating earnings growth.
Q What is your investment philosophy in managing the Fund?
A We invest in small company (small-cap) stocks. We find small-caps in a
variety of market sectors that we believe have superior growth rates and
accelerating earnings. Specifically, we seek out companies with projected
earnings growth rates of 20% or more each year. We look for companies with
high levels of profitability and attractive stock prices. These are typically
companies that have distinctive products or services which will set them
apart. In essence, we are looking for tomorrow's market leaders.
Q Please describe the market environment during the period.
A The past year provided a good example of how turbulent the small-cap
market can be. Small-cap stocks generally rose during the first several
months of the period. Between September and early January they declined, then
rebounded in mid-January and were still going strong as of May 31, 1996.
Technology stocks, which comprised a significant share of the small company
stock indexes, contributed significantly to price volatility both on the up
and down sides.
Q Did these conditions provide good opportunities for the Fund?
A Yes, we believe they did. The small-cap market correction in the last
months of 1995 created a good buying opportunity for the type of stocks we
favor. When the market improved in 1996, we think the portfolio was
well-positioned to take advantage of it.
Q Do the stocks you buy ever grow too large for the portfolio?
A Yes, we are frequently a victim of our own success. Generally our holdings
have market capitalizations (stock price multiplied by total shares
outstanding) of about $1 billion or less when we purchase them. But in strong
markets like what we've seen recently, some holdings grow too large to
maintain their rapid earnings growth. In the process, they also grow too
large for the Fund's portfolio, so we have to reduce or eliminate these
positions. During the past year examples included our holdings of Seagate,
Mirage and LSI Logic.
Q Technology stocks comprised about 35% of net assets on May 31, 1996. What
kinds of stock did you like?
A We continued to favor communications and software companies. Brisk personal
computer sales and stronger than expected first quarter earnings in 1996 helped
many computer and technology related issues. We saw a variety of good
opportunities related to the surge of interest in the Internet. We held shares
of Raptor Systems, which specializes in "firewall" software--security systems to
protect corporate networks that access the Internet. We also held shares of
Arbor Software Corporation, which designs and markets client/server software for
business and has successfully developed a new generation of database software.
In the telecommunications area, we saw good performance from Winstar
Communications, a major player in the recently deregulated local
telecommunications industry.
Fund Profile
Objective: Seeks long-term growth of capital by investing in stocks of small
companies.
Commencement of investment operations: September 11, 1935
Number of stocks: 180
Net assets: $2,006 million
Newspaper listing: "SCoGS4"
<PAGE>
PAGE 4
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Keystone Small Company Growth Fund (S-4)
Your Fund Invests In . . .
(bullet) stocks with market capitalizations [less than] billion at purchase
(bullet) projected earnings growth rates [greater than] 20%
(bullet) companies with solid management teams and balance sheets
Q Retail stocks accounted for 9.0% of the portfolio. What are their
strengths and which companies did you own?
A Retail stocks were strong, especially during the second half of the period
when an increase in consumer confidence spurred sales. Success in retailing
Top 5 Industries
as of May 31, 1996 Percentage of
Industry net assets
- ---------------------------------------
Software services 15.6
- ---------------------------------------
Health care services 10.7
- ---------------------------------------
Retail 9.0
- ---------------------------------------
Telecommunications 7.6
- ---------------------------------------
Electronic products 7.5
- ---------------------------------------
favored the extremes--the small, high-end specialty stores, such as Tiffany's
and Sunglass Hut on one side, and the giant "category killers" like PETsMART,
Men's Warehouse and Sports Authority on the other. Traditional mid-sized
department stores felt the squeeze from both sides and did not fare as well.
Q What other sectors did you favor?
A Biotechnology and health care stocks have been very strong. Biotech stocks
have matured over the past five years. In the early 1990s, many of the
fastest growing biotech companies were really just rising on publicity and
ideas. Today the focus is on products that are actually on the market or in
the final stages of testing. Our fourth largest holding, Gilead Sciences, is
in the forefront of developing treatments for HIV and CMV retinitis, a
complication associated with AIDS. We also held Sequus Pharmaceuticals whose
drug Doxil has proven effective in treating a variety of cancers. In a
related sector, we also have been favoring selected health care stocks. We
bought Emeritus which runs assisted living centers for older people and
MedCath which operates cardiovascular treatment centers.
Top 10 Holdings
as of May 31, 1996 Percentage of
Company Industry net assets
- ------------------------------------------------------------------------------
EMC Office and business equipment 1.9
- ------------------------------------------------------------------------------
BMC Software Software services 1.6
- ------------------------------------------------------------------------------
Thermo Cardiosystems Health care services 1.5
- ------------------------------------------------------------------------------
Gilead Sciences Drugs 1.5
- ------------------------------------------------------------------------------
Clear Channel
Communications Advertising and publishing 1.4
- ------------------------------------------------------------------------------
Ensco International Oil services 1.3
- ------------------------------------------------------------------------------
Amre Building materials 1.3
- ------------------------------------------------------------------------------
Winstar Communications Telecommunications 1.3
- ------------------------------------------------------------------------------
Hospitality Franchise
Systems Amusements 1.2
- ------------------------------------------------------------------------------
Oakwood Homes Buildings materials 1.2
- ------------------------------------------------------------------------------
<PAGE>
PAGE 5
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Q What is your outlook?
A We believe the volatility in the small-cap market over the past year was
consistent with the business cycle and created some good opportunities for
investors. We expect a continuation of the generally positive environment for
stocks, but would not be surprised if markets continue to remain volatile in
the coming year. Ultimately, we believe that the most successful companies
will be those that have the ability to execute a business plan and grow.
Q What advantages does the Fund offer investors?
A Keystone Small Company Growth Fund (S-4) gives investors access to some of
the fastest growing companies in the world. We think it is a good choice for
long-term investors who can ride out the greater price volatility that
characterizes small-cap stocks. It can also provide important diversification
to an investor's portfolio, and can help reduce the risks associated with
investing in individual small company stocks.
[Diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street,
Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
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Keystone Small Company Growth Fund (S-4)
[Mtn Chart]
Your Fund's Performance
Growth of an investment in
Keystone Small Company Growth Fund (S-4)
In Thousands
Total Value: $39,183
Reinvested Distributions
Initial Investment
Initial Investment Reinvested Distributions
5/86 10000 10000
10263 11624
5/88 5895 9021
7447 11497
5/90 8211 12789
9434 15272
5/92 10013 17326
10461 22309
5/94 10053 23835
11342 29455
5/96 13618 39183
A $10,000 investment in Keystone Small Company Growth Fund (S-4)
made on May 31, 1986 with all distributions reinvested was worth
$39,183 on May 31, 1996. Past performance is no guarantee of
future results.
[End Mountain Chart]
The "If you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) 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.
Twelve-Month Performance as of May 31, 1996
- -------------- -----------------------------
Total return* 33.03%
Net asset
value 5/31/95 $ 8.62
5/31/96 $10.35
Dividends None
Capital gains $ 1.01
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of May 31, 1996
- --------------------------------------
If you If you did
Cumulative total return redeemed not redeem
1-year 30.03% 33.03%
5-year 156.56% 156.56%
10-year 291.83% 291.83%
Average annual total return
1-year 30.03% 33.03%
5-year 20.74% 20.74%
10-year 14.63% 14.63%
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange 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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Growth of an Investment
[Line Chart]
Comparison of change in value of a $10,000 investment in Keystone
Small Company Growth Fund (S-4), the Russell 2000 Index, the
NASDAQ Composite Index and the Consumer Price Index.
In Thousands May 31, 1986 through May 31, 1996
Fund Average Annual Total Return
1 Year 5 Year 10 Year
30.03% 20.74% 14.63%
Fund
$39,183
NASDAQ
$31,088
Russell 2000
$29,425
CPI
$14,380
Fund Russell 2000 NASDAQ Consumer Price Index
The one-year average annual total return reflects the deduction of
the Funds contingent deferred sales charge of 3%. Past performance
is no guarantee of future results.
Fund NASDAQ Russell (CPI)
5/86 10000 10000 10000 10000
11624 10409.55 10613 10386
5/88 9021 9255.65 9531 10790
11497 11151.04 11780 11368
5/90 12789 11473.46 11830 11864
15272 12652.61 12743 12461
5/92 17326 14634.39 15131 12828
22309 17514.75 18049 13241
5/94 23835 18380.53 19622 13544
29455 21619.25 21643 13976
5/96 39183 31088.4 29425 14380
[End Line Chart]
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
With this report, the Fund's benchmark index was changed from the NASDAQ
Index to the Russell 2000 Index. The NASDAQ represents securities of small
and mid-sized companies that are traded in the over-the-counter market. The
Russell 2000 is comprised primarily of stocks of small companies, which we
believe may be more meaningful in understanding investment universe in which
your Fund invests.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Small Company Growth Fund (S-4)
The Fund seeks long-term growth of capital by investing in stocks of small
companies. The return is quoted after deducting sales charges (if
applicable), fund expenses and transaction costs and assumes reinvestment of
all distributions.
2. Russell 2000 Index
A broad-based securities market index, the Russell 2000 is an unmanaged index
of stocks with small market capitalizations. The Index represents companies
that may be less established, and may be more concentrated in certain
industries than other indexes. As a result, the Index may be more volatile
than other indexes such as the S&P 500. These securities are independently
selected and compiled according to criteria that may be unrelated to your
Fund's investment objective.
3. NASDAQ Index
A broad-based securities market index, the NASDAQ is an unmanaged principal
only index of securities traded under the sponsorship of the National
Association of Securities Dealers (NASD). It is comprised of several thousand
securities which are independently selected and compiled according to
criteria that may be unrelated to your Fund's investment objective.
4. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
<PAGE>
PAGE 8
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding what the chart means
The chart demonstrates your Fund's total return performance in relation to
well known investment indexes and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
Limitations of the chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance can be distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes do not include costs of investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of several measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future returns may be different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 9
- ---------------------------------------
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 10
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS--May 31, 1996
Market
Shares Value
- ----------------------------------- ---------- -----------------
COMMON STOCKS (98.2%) (d)
AEROSPACE (0.4%)
Rohr Industries, Inc. 419,500 $ 8,861,938
- ----------------------------------- -------- ---------------
ADVERTISING & PUBLISHING (1.5%)
Clear Channel Communications, Inc. 340,000 27,625,000
Outdoor Systems, Inc. 42,800 1,380,300
- ----------------------------------- -------- ---------------
29,005,300
- ----------------------------------- -------- ---------------
AIR TRANSPORTATION (0.6%)
America West Airlines, Inc. 300,000 6,112,500
Atlantic Southeast Airlines, Inc.
(e) 250,000 6,640,625
- ----------------------------------- -------- ---------------
12,753,125
- ----------------------------------- -------- ---------------
AMUSEMENTS (4.1%)
Harrah's Entertainment, Inc. 500,000 16,812,500
Hospitality Franchise Systems, Inc. 400,000 24,950,000
Hollywood Casino Corp., Class A 1,000,000 4,937,500
La Quinta Inns, Inc. (e) 300,000 9,450,000
Players International, Inc. 395,000 3,845,078
Promus Hotel Corp. 450,000 12,375,000
Station Casinos, Inc. 650,000 10,196,875
- ----------------------------------- -------- ---------------
82,566,953
- ----------------------------------- -------- ---------------
AUTOMOTIVE (1.0%)
Gentex Corp. 300,000 13,500,000
Tower Automotive, Inc. 307,500 7,380,000
- ----------------------------------- -------- ---------------
20,880,000
- ----------------------------------- -------- ---------------
BUILDING MATERIALS (3.1%)
Amre, Inc. (b) 940,300 25,153,025
Champion Enterprises, Inc. 292,000 11,826,000
Oakwood Homes Corp. (e) 500,000 24,250,000
- ----------------------------------- -------- ---------------
61,229,025
- ----------------------------------- -------- ---------------
BUSINESS SERVICES (2.7%)
Alternative Resources Corp. 216,000 8,370,000
Safeguard Scientifics, Inc. 250,000 22,031,250
Security Dynamics Technologies,
Inc. 213,400 19,072,625
Vincam Group, Inc. 152,000 4,294,000
- ----------------------------------- -------- ---------------
53,767,875
- ----------------------------------- -------- ---------------
CAPITAL GOODS (1.9%)
AGCO Corp. (e) 800,000 24,100,000
Cognex Corp. 740,500 13,236,437
- ----------------------------------- -------- ---------------
37,336,437
- ----------------------------------- -------- ---------------
CHEMICALS (0.5%)
OM Group, Inc. (e) 249,300 $ 10,034,325
- ----------------------------------- -------- ---------------
CONSUMER GOODS (2.2%)
Blyth Industries, Inc. 400,000 18,400,000
DeVry, Inc. Del 467,000 18,563,250
USA Detergents, Inc. 167,400 6,633,225
- ----------------------------------- -------- ---------------
43,596,475
- ----------------------------------- -------- ---------------
DRUGS (6.3%)
Agouron Pharmaceuticals, Inc. 200,000 8,550,000
Amylin Pharmaceuticals, Inc. 1,000,000 12,187,500
Autoimmune, Inc. 23,400 234,000
Cephalon, Inc. 200,000 5,425,000
Cytyc Corp. (e) 200,000 6,350,000
Cytotherapeutics 340,000 4,165,000
Gilead Sciences, Inc. 858,100 29,818,975
Human Genome Sciences, Inc. 253,500 9,316,125
Idexx Laboratories, Inc. 300,000 13,012,500
Magainin Pharmaceutical, Inc. 600,000 6,750,000
Matrix Pharmaceuticals, Inc. 188,000 4,136,000
Neurogen Corp. 390,000 11,261,250
Oncogene Science, Inc. 255,000 2,964,375
Sequus Pharmaceuticals, Inc. 564,800 12,072,600
- ----------------------------------- -------- ---------------
126,243,325
- ----------------------------------- -------- ---------------
ELECTRONICS PRODUCTS (7.5%)
Analog Devices, Inc. 600,000 16,575,000
BMC Industries, Inc. (e) 50,000 1,487,500
Gemstar International Group Ltd. 304,200 10,114,650
Kemet Corp. 379,600 8,541,000
Linear Technology Corp. (e) 320,000 11,000,000
Maxim Integrated Products, Inc. 586,000 19,960,625
Merix Corp. (b) 345,000 10,759,688
Microchip Technology, Inc. 450,000 11,671,875
SDL, Inc. (b) 450,000 19,293,750
Sheldahl Co. 5,000 128,438
Sipex Corp. 255,300 4,563,488
Solectron Corp. 300,000 13,012,500
Trimble Navigation Ltd. 244,900 5,877,600
Xilinx, Inc. 500,000 17,312,500
- ----------------------------------- -------- ---------------
150,298,614
- ----------------------------------- -------- ---------------
<PAGE>
PAGE 11
- ---------------------------------------
SCHEDULE OF INVESTMENTS---May 31, 1996
Market
Shares Value
- ----------------------------------- ---------- -----------------
FINANCE (6.4%)
Astoria Financial Corp. (e) 106,500 $ 5,917,406
BISYS Group, Inc. 500,000 18,281,250
BostonFed Bancorp, Inc. (e) 300,000 3,675,000
Chronicle 2001 Mutual Fund 1,653,374 714,469
CMAC Investment Corp. (e) 300,000 16,350,000
First Empire State Corp. (e) 25,000 5,900,000
Jayhawk Acceptance Corp. 300,000 4,218,750
Long Islands Bancorp, Inc. (e) 500,000 14,093,750
Queen's County Bancorp (e) 145,000 6,923,750
RAC Financial Group, Inc. 427,300 12,445,113
Standard Federal Bankcorporation,
Inc. (e) 500,000 19,687,500
TCF Financial Corp. (e) 600,000 20,550,000
- ----------------------------------- -------- ---------------
128,756,988
- ----------------------------------- -------- ---------------
HEALTH CARE SERVICES (10.7%)
Biopsys Med, Inc. 97,900 2,435,263
CNS, Inc. 300,000 6,581,250
Emeritus Corp. 500,000 10,125,000
Express Scripts, Inc., Class A 310,000 15,500,000
Health Management Associates, Inc.,
Class A 499,400 17,229,317
Heartport, Inc. 207,100 8,025,125
Heartstream, Inc. 390,300 5,659,350
Iridex Corp. 190,000 3,087,500
i-STAT Corp. 86,000 1,752,250
Lifecore Biomedical, Inc. 510,700 9,128,762
MedCath, Inc. 268,700 10,177,012
Novoste Corp. 65,000 905,938
Occusystems, Inc. 400,000 13,400,000
Optical Sensors, Inc. 226,600 2,761,688
Parexel International Corp. 203,500 10,989,000
Perclose, Inc. 250,000 5,625,000
PhyMatrix Corp. 600,000 14,812,500
Physician Reliance Network, Inc. 405,000 21,110,625
Sibia Neurosciences, Inc. 135,000 1,350,000
Target Therapeutics, Inc. 200,000 9,825,000
Thermo Cardiosystems, Inc. 600,000 30,600,000
Total Renal Care Hldgs., Inc. 295,000 12,168,750
Urologix, Inc. 100,000 1,487,500
- ----------------------------------- -------- ---------------
214,736,830
- ----------------------------------- -------- ---------------
INSURANCE (1.2%)
Blanch (E.W.) Hldgs., Inc. (e) 120,100 $ 2,552,124
Capital Re Corp. (e) 136,100 4,967,650
HCC Insurance Hldgs., Inc. 790,250 17,089,156
- ----------------------------------- -------- ---------------
24,608,930
- ----------------------------------- -------- ---------------
METALS & MINING (0.2%)
RMI Titanium Co. 220,000 4,427,500
- ----------------------------------- -------- ---------------
MISCELLANEOUS (0.6%)
Polymer Group, Inc. 461,000 8,874,250
Strategic Distribution, Inc. 350,000 2,909,375
- ----------------------------------- -------- ---------------
11,783,625
- ----------------------------------- -------- ---------------
NATURAL GAS (0.6%)
Nuevo Energy Co. 400,000 12,400,000
- ----------------------------------- -------- ---------------
OFFICE & BUSINESS EQUIPMENT (2.5%)
EMC Corp. 1,750,000 38,718,750
Natural Microsystems Corp. 200,000 7,500,000
Read Rite Corp. 171,900 3,953,700
- ----------------------------------- -------- ---------------
50,172,450
- ----------------------------------- -------- ---------------
OIL (0.4%)
Triton Energy Corp. 152,000 7,296,000
- ----------------------------------- -------- ---------------
OIL SERVICES (3.4%)
BJ Services Co. 260,800 8,802,000
Carbo Ceramics, Inc. 147,800 3,528,725
Dual Drilling Co. 11,400 218,025
Ensco International, Inc. 867,900 26,362,462
Falcon Drilling, Inc. 300,000 7,218,750
Global Industries, Inc. 272,800 8,525,000
Newpark Resources, Inc. 370,545 13,432,256
- ----------------------------------- -------- ---------------
68,087,218
- ----------------------------------- -------- ---------------
RESTAURANTS (2.1%)
Apple South, Inc. (d) 400,000 10,000,000
Applebee's International, Inc. (e) 400,000 11,275,000
HomeTown Buffet, Inc. 174,400 2,605,100
Lone Star Steakhouse & Saloon 150,000 6,037,500
Outback Steakhouse, Inc. 300,000 11,381,250
- ----------------------------------- -------- ---------------
41,298,850
- ----------------------------------- -------- ---------------
<PAGE>
PAGE 12
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS-May 31, 1996
Market
Shares Value
- ----------------------------------- ---------- -----------------
RETAIL (9.0%)
CDW Computer Centers, Inc. 204,600 $ 16,751,625
Corporate Express, Inc. 500,000 21,000,000
Global Directmail Corp. 300,000 13,462,500
Kohl's Corp. 314,000 10,401,250
Mens Wearhouse, Inc. 317,500 10,596,563
Nautica Enterprises, Inc. 486,000 12,150,000
Office Max, Inc. 575,000 15,021,875
O'Reilly Automotive, Inc. 166,600 6,455,750
PETsMART, Inc. 400,000 17,700,000
Saks Hldgs., Inc. 210,200 6,831,500
Sports Authority, Inc. 500,000 14,875,000
Sunglass Hut International, Inc. 600,000 16,612,500
Tiffany & Co. (e) 160,000 12,140,000
West Marine, Inc. 93,800 6,683,250
- ----------------------------------- -------- ---------------
180,681,813
- ----------------------------------- -------- ---------------
SERVICES (4.6%)
Equity Corporation International 387,400 11,379,875
G & K Services, Class A (e) 216,300 6,516,037
GTS Duratek, Inc. 300,000 5,175,000
Insituform Technologies, Inc.,
Class A 232,800 2,226,150
Molten Metal Technology, Inc. 466,100 14,099,525
Peak Technologies Group, Inc. 400,000 9,650,000
Sanifill, Inc. 266,000 11,936,750
Thermedics, Inc. 600,000 18,000,000
U.S. Filter Corp. 400,000 13,950,000
- ----------------------------------- -------- ---------------
92,933,337
- ----------------------------------- -------- ---------------
SOFTWARE SERVICES (15.6%)
America Online, Inc. 400,000 22,625,000
Arbor Software Corp. 177,000 10,797,000
BDM International, Inc. 402,000 17,788,500
BMC Software, Inc. 500,000 31,562,500
CBT Group Publishers, Ltd. 140,000 6,510,000
CMG Information Services, Inc. 441,100 10,420,987
Cambridge Technology Partners Mgmt. 183,000 13,953,750
Desktop Data, Inc. 250,000 8,312,500
Edify Corp. 97,000 4,098,250
Epic Design Technology, Inc. 500,000 14,937,500
Geoworks, Inc. 500,000 17,625,000
I2 Technologies, Inc. 189,000 7,560,000
INSO Corp. 300,000 $ 16,800,000
Integrated Systems, Inc., Class A 40,000 1,340,000
Intuit, Inc. 205,000 10,660,000
McAfee Associates, Inc. 450,000 16,762,500
Mechanical Dynamics, Inc. 150,000 2,671,875
MetaTools, Inc. 278,600 8,810,725
National Data Corp. (e) 337,000 12,721,750
Nova Corp. 17,800 676,400
Parametric Technology Corp. (c) 400,000 18,275,000
Project Software & Development,
Inc. 323,500 12,576,063
Raptor Systems, Inc. 96,500 2,985,469
Synopsys, Inc. 500,000 22,312,500
System Software Associates, Inc.
(e) 277,500 4,578,750
Verity, Inc. 260,400 10,057,950
Wind River Systems, Inc. 168,750 5,378,906
Wonderware Corp. 28,500 570,000
- ----------------------------------- -------- ---------------
313,368,875
- ----------------------------------- -------- ---------------
TELECOMMUNICATIONS (7.6%)
Allen Group, Inc. (e) 146,000 4,015,000
Brooks Fiber Properties, Inc. 306,100 10,292,612
CAI Wireless Systems, Inc. 277,500 2,965,781
Cidco, Inc. 400,000 15,800,000
Heartland Wireless Communications,
Inc. 700,000 18,681,250
Netmanage, Inc. 700,000 11,856,250
P-Com, Inc. 600,000 18,000,000
Premisys Communications, Inc. 231,200 13,207,300
Proxim, Inc. 132,500 5,482,188
Spectrian Corp. 374,400 7,254,000
Tel-Save Hldgs., Inc. 613,500 13,343,625
Westell Technologies, Inc., Class A 87,000 6,666,375
Winstar Communications, Inc. 800,000 25,000,000
- ----------------------------------- -------- ---------------
152,564,381
- ----------------------------------- -------- ---------------
TRANSPORTATION (1.5%)
Landstar System, Inc. 312,500 9,140,625
Railtex, Inc. 454,100 11,068,688
Swift Transportation Co., Inc. 500,000 9,187,500
- ----------------------------------- -------- ---------------
29,396,813
- ----------------------------------- -------- ---------------
TOTAL COMMON STOCKS
(Cost--$1,367,076,131) 1,969,087,002
- ----------------------------------- -------- ---------------
<PAGE>
PAGE 13
- ---------------------------------------
SCHEDULE OF INVESTMENTS--May 31, 1996
<TABLE>
<CAPTION>
Par Market
Value Value
- --------------------------------------------------------- ---------- --------------
<S> <C> <C>
FIXED INCOME (0.4%)
INDUSTRIAL BONDS & NOTES (0.4%)
AMUSEMENTS (0.4%)
Hemmeter Enterprises, Inc., Sr. PIK Note (c)(e)(g)
12.00%, 2000 $16,642,763 $ 7,655,671
- --------------------------------------------------------- -------- ------------
TOTAL FIXED INCOME
(Cost--$17,775,758) 7,655,671
- --------------------------------------------------------- -------- ------------
Maturity
Value
- --------------------------------------------------------- -------- ------------
SHORT-TERM INVESTMENTS (0.7%)
Investments in repurchase agreements, in a joint trading
account purchased 5/31/96, 5.3354%, maturing 06/01/96 14,769,564 14,763,000
- --------------------------------------------------------- -------- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost--$14,763,000)(e)(f) 14,763,000
- ----------------------------------------------------------------------- ------------
Market
Shares Value
- --------------------------------------------------------- -------- ------------
WARRANTS/RIGHTS (0.0%)
AMUSEMENTS (0.0%)
Hemmeter Enterprises, Inc. (c), expiration date of
12/15/99 292,400 292
Hemmeter Enterprises, Inc. (c), expiration date of
12/15/99 78,750 79
- --------------------------------------------------------- -------- ------------
TOTAL WARRANTS/RIGHTS (Cost--$1,866,383) 371
- --------------------------------------------------------- -------- ------------
TOTAL INVESTMENTS
(Cost $1,401,481,272) (a) 1,991,506,044
- --------------------------------------------------------- -------- ------------
FOREIGN CURRENCY HOLDINGS
(Cost $5,863) (0.0%) 5,781
- ----------------------------------------------------------------------- ------------
OTHER ASSETS AND LIABILITIES--NET (0.7%) 14,290,752
- --------------------------------------------------------- -------- ------------
NET ASSETS (100%) $2,005,802,577
- --------------------------------------------------------- -------- ------------
</TABLE>
<PAGE>
PAGE 14
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS-May 31,1996
(a) The cost of investments and foreign currency holdings for federal income
tax purposes amounted to $1,402,485,793. Gross unrealized appreciation
and depreciation on investments, based on identified tax cost, at May
31, 1996, are as follows:
Gross unrealized appreciation $632,810,492
Gross unrealized depreciation (43,784,460)
-----------
Net unrealized appreciation $589,026,032
===========
(b) Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
The Fund has never owned enough of the outstanding voting securities of
any issuer to have control (as defined in the Investment Company Act of
1940) of that issuer.
(c) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933) which are valued using market quotations where
readily available. In the absence of market quotations, the securities
are valued based upon their fair value determined under procedures
approved by the Board of Trustees. The Fund may make investments in an
amount up to 15% of the value of the Fund's net assets in such
securities. On the date of acquisition there was no market quotation on
similar securities and the above securities were valued at acquisition
cost. At May 31, 1996, the fair value of these restricted securities was
$8,212,790, (0.41% of net assets). The Fund will not pay the costs of
disposition of the above restricted securities other than ordinary
brokerage fees, if any.
(d) All securities unless otherwise indicated with a (e) are
non-income-producing.
(e) Income-producing security.
(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices on May 31, 1996.
(g) Each unit is comprised of $1,000 par Senior Secured PIK note and 15
warrants.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ---------------------------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended May 31,
1996 1995 1994 1993(a) 1992(a) 1991(a)
- ------------------------------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
year $8.62 $7.64 $7.95 $7.61 $7.17 $6.24
- ------------------------------- ------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income (loss) (0.13) (0.07) (0.12) (0.12) (0.08) (0.04)
Net realized and unrealized
gains (losses) on investments 2.87 1.68 0.63 1.82 0.98 1.17
Net commission paid on fund
share sales (b) 0.00 0.00 0.00 0.00 0.00 0.00
- ------------------------------- ------- ------- ------- ------- ------- -------
Total from investment
operations 2.74 1.61 0.51 1.70 0.90 1.13
- ------------------------------- ------- ------- ------- ------- ------- -------
Less distributions from
Net investment income 0.00 0.00 0.00 0.00 0.00 0.00
Net realized gains (1.01) (0.63) (0.82) (1.36) (0.46) (0.20)
- ------------------------------- ------- ------- ------- ------- ------- -------
Total distributions (1.01) (0.63) (0.82) (1.36) (0.46) (0.20)
- ------------------------------- ------- ------- ------- ------- ------- -------
Net asset value end of year $10.35 $8.62 $7.64 $7.95 $7.61 $7.17
- ------------------------------- ------- ------- ------- ------- ------- -------
Total return (c) 33.03% 23.58% 6.84% 28.76% 13.45% 19.42%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.73%(d) 1.78% 1.73% 2.04% 1.47% 1.48%
Net investment (loss) (1.34%) (1.10%) (1.49%) (1.68%) (1.09%) (0.68%)
Portfolio turnover rate 94% 38% 60% 78% 81% 73%
Average commission rate paid $0.0563 N/A N/A N/A N/A N/A
- ------------------------------- ------- ------- ------- ------- ------- -------
Net assets end of year
(thousands) $2,005,803 $1,459,955 $1,005,595 $965,959 $702,442 $623,291
- ------------------------------- ------- ------- ------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1990(a) 1989(a) 1988 1987
- ------------------------------- -------- -------- --------- --------
<S> <C> <C> <C> <C>
Net asset value beginning of
year $ 5.66 $ 4.48 $ 7.80 $ 7.60
- ------------------------------- ------- ------- ------- -------
Income from investment
operations
Net investment income (loss) 0.00 0.02 0.00 0.00
Net realized and unrealized
gains (losses) on investments 0.63 1.20 (1.64) 1.11
Net commission paid on fund
share sales (b) 0.00 0.00 0.00 (0.02)
- ------------------------------- ------- ------- ------- -------
Total from investment
operations 0.63 1.22 (1.64) 1.09
- ------------------------------- ------- ------- ------- -------
Less distributions from
Net investment income (0.05) (0.01) 0.00 (0.01)
Net realized gains 0.00 (0.03) (1.68) (0.88)
- ------------------------------- ------- ------- ------- -------
Total distributions (0.05) (0.04) (1.68) (0.89)
- ------------------------------- ------- ------- ------- -------
Net asset value end of year $ 6.24 $ 5.66 $ 4.48 $ 7.80
- ------------------------------- ------- ------- ------- -------
Total return (c) 11.24% 27.45% (22.39%) 16.24%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.40% 1.27% 1.17% 0.81%
Net investment (loss) 0.02% 0.47% 0.03% 0.04%
Portfolio turnover rate 77% 57% 80% 74%
Average commission rate paid N/A N/A N/A N/A
- ------------------------------- ------- ------- ------- -------
Net assets end of year
(thousands) $537,912 $503,908 $442,020 $679,281
- ------------------------------- ------- ------- ------- -------
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges. On June 11,
1987, the Securities and Exchange Commission adopted a Rule which
required for financial statements for periods ended on or after June 30,
1987, that net commissions paid under Rule 12b-1 Distribution Plans be
treated as operating expenses rather than as capital charges.
Accordingly, beginning with the fiscal year ended May 31, 1988, the
Fund's financial statements reflect 12b-1 Distribution Plan expenses
(i.e., shareholder service fees plus commissions paid net of deferred
sales charges received by the Fund) as a component of the net investment
income section of the financial highlights.
(c) Excluding applicable sales charges.
(d) "Ratio of total expenses to average net assets" for the year ended May
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended May 31, 1996, the expense ratio would have
been 1.72%.
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996
Assets (Note 1)
Investments at market value:
(identified cost--$1,401,481,272) $1,991,506,044
Foreign currency holdings: (identified cost--$5,863) 5,781
- ----------------------------------------------------- -----------
Total investments and foreign currency holdings 1,991,511,825
Cash 715
Receivable for:
Investments sold 23,564,465
Fund shares sold 10,403,168
Interest and dividends 107,434
Prepaid expenses 101,398
Other assets 151,154
- ----------------------------------------------------- -----------
Total assets 2,025,840,159
- ----------------------------------------------------- -----------
Liabilities (Note 4)
Payable for:
Investments purchased 16,857,162
Fund shares redeemed 2,974,701
Other accrued expenses and liabilities 205,719
- ----------------------------------------------------- -----------
Total liabilities 20,037,582
- ----------------------------------------------------- -----------
Net assets $2,005,802,577
- ----------------------------------------------------- -----------
Net assets represented by (Notes 1 and 2)
Paid-in capital $1,220,629,744
Accumulated distributions in excess on net
investment income (7,483)
Accumulated net realized gains on investment
transactions and foreign currency related
transactions 195,155,626
Net unrealized appreciation on investments and
foreign currency holdings 590,024,690
- ----------------------------------------------------- -----------
Total net assets applicable to outstanding shares
of beneficial interest ($10.35 a share on
193,826,852 shares outstanding) $2,005,802,577
- ----------------------------------------------------- -----------
STATEMENT OF OPERATIONS
Year Ended May 31, 1996
Investment income (Note 1)
Dividends (less foreign withholding
tax of $9,355) $ 3,276,217
Interest 3,732,102
- -------------------------------------- -------- -----------
Total income 7,008,319
- -------------------------------------- -------- -----------
Expenses (Notes 2 and 4)
Management fee $ 8,473,139
Transfer agent fees 3,683,215
Accounting, auditing and legal 82,553
Custodian fees 614,103
Printing 79,328
Trustees' fees and expenses 46,542
Distribution Plan expenses 18,458,861
Registration fees 175,282
Miscellaneous expenses 95,483
- -------------------------------------- -------- -----------
Total expenses 31,708,506
Less: Expenses paid indirectly (Note
4) (221,745)
- -------------------------------------- -------- -----------
Net expenses 31,486,761
- -------------------------------------- -------- -----------
Net investment loss (24,478,442)
- -------------------------------------- -------- -----------
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions (Notes
1 and 3)
Net realized gain (loss) on:
Investments 389,813,838
Foreign currency related
transactions (59,334)
- -------------------------------------- -------- -----------
Net realized gain on investments and
foreign currency related transactions 389,754,504
- ---------------------------------------------------- -----------
Net change in unrealized appreciation
on investments 127,581,090
- -------------------------------------- -------- -----------
Net gain on investment and foreign
currency related transactions 517,335,594
- -------------------------------------- -------- -----------
Net increase in net assets resulting
from operations $492,857,152
- -------------------------------------- -------- -----------
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ---------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1996 May 31, 1995
==================================================================== ============ ==============
<S> <C> <C>
Operations:
Net investment loss $ (24,478,442) $ (13,214,945)
Net realized gain on investments and foreign currency related
transactions 389,754,504 82,349,681
Net change in unrealized appreciation or depreciation on investments 127,581,090 207,499,070
- -------------------------------------------------------------------- ---------- ------------
Net increase in net assets resulting from operations 492,857,152 276,633,806
- -------------------------------------------------------------------- ---------- ------------
Distributions to shareholders from net realized gains on investment
transactions (Notes 1 and 5) (173,760,139) (85,473,776)
- -------------------------------------------------------------------- ---------- ------------
Capital share transactions (Note 2)
Proceeds from shares sold 1,354,600,987 776,843,226
Payments for shares redeemed (1,267,570,849) (582,622,286)
Net asset value of shares issued in reinvestment of distributions
from capital gains 139,720,568 68,978,844
- -------------------------------------------------------------------- ---------- ------------
Net increase in net assets resulting from capital share
transactions 226,750,706 263,199,784
- -------------------------------------------------------------------- ---------- ------------
Total increase in net assets 545,847,719 454,359,814
Net assets:
Beginning of year 1,459,954,858 1,005,595,044
- -------------------------------------------------------------------- ---------- ------------
End of year [including undistributed net investment income
(accumulated distributions in excess of net investment income) as
follows: 1996--($7,483) and 1995--$7,480,848] (Note 1) $ 2,005,802,577 $1,459,954,858
==================================================================== ========== ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Small Company Growth Fund (S-4), (the "Fund"), is an open-end
diversified management investment company. The Fund was created under
Pennsylvania law as a common law trust. Keystone Management, Inc. ("KMI") is
the Fund's investment manager and Keystone Investment Management Company
("KEYSTONE") is the Fund's investment adviser. The Fund's investment
objective is long-term growth of capital.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation predominately owned by
current and former members of management of Keystone and its affiliates. KMI
is a wholly-owned subsidiary of Keystone. Keystone Investor Resource Center,
Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
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 relative to the
net assets of the Fund.
A. 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 quotations. Management values the following securities at prices it
deems in good faith to be fair under the direction of the Board of Trustees:
(a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value
or if no sale occurred.
Short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount) which when combined with accrued interest
approximates market. Short-term investments maturing in more than sixty days
for which market quotations are readily available are valued at current
market value. Short-term investments maturing in more than sixty days when
purchased which are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount) which when combined with accrued interest
approximates market.
Market quotations are not considered to be readily available for long-term
corporate bonds and notes; such investments are stated at fair value on the
basis of valuations furnished by a pricing service, approved by the Trustees,
which determines valuations for normal institutional-size trading units of
such securities using methods based on market transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders.
The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract, the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or
<PAGE>
PAGE 19
- ---------------------------------------
losses by the Fund. For federal tax purposes, any futures contracts which
remain open at fiscal year-end are marked-to-market and the resultant net
gain or loss is included in federal taxable income.
Investments denominated in a foreign currency are adjusted daily to reflect
changes in exchange rates. Foreign currency amounts are translated into
United States dollars as follows: market value of investments, assets and
liabilities at the daily rate of exchange, purchases and sales of investment,
income and expenses at the rate of exchange prevailing on the respective
dates of such transactions. Net unrealized foreign exchange gains/losses are
a component of unrealized appreciation or depreciation of investments. In
addition to market risk, the Fund is subject to the credit risk that the
other party will not be able to complete the obligations of the contract.
B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded at the close of business on the ex-dividend date.
C. 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 ("Internal Revenue 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 excise tax liability by making the required distributions under the
Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of collateral falls below required levels, the
Fund intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks. The Fund will take
constructive receipt of all securities underlying repurchase agreements until
such agreements expire.
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.
E. In connection with portfolio purchases and sales of securities denominated
in foreign currency, the Fund may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time the Fund
may enter into contracts to hedge certain foreign currency assets. Contracts
are
<PAGE>
PAGE 20
- ---------------------------------------
Keystone Small Company Growth Fund (S-4)
recorded at market value and 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 is subject to the
credit risk that the other party will not complete the obligations of the
contract.
F. The Fund intends to distribute its net investment income and net capital
gains, if any, annually. Distributions are determined in accordance with
income tax regulations. Distributions from taxable net investment income and
net capital gains can exceed book basis net income and net capital gains. The
significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are primarily due to net operating losses generated by the Fund and
distributions paid through shareholder redemptions.
(2.) Capital Share Transactions
The 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:
Year Ended Year Ended
May 31, 1996 May 31, 1995
===================== ============ =============
Sales 141,592,081 102,978,570
Redemptions (131,599,635) (75,737,013)
Reinvestment of
distributions from
realized capital
gains 14,560,340 10,332,058
- --------------------- ---------- -----------
Net increase 24,552,786 37,573,615
===================== ========== ===========
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under the Distribution Plan, the Fund pays Keystone Investment Distributors
Company ("KIDCO"), the principal underwriter and a wholly- owned subsidiary
of Keystone, amounts which in total may not exceed the Distribution Plan
maximum.
The Fund's shares are offered for sale at net asset value without any
initial sales charge. In connection with the Distribution Plan, and subject
to the limitations discussed below, KIDCO generally re-allows to
broker-dealers or others commissions, equal to 4.00% of the price paid to the
Fund for each sale of Fund shares as well as a shareholder service fee at a
rate of 0.25% per annum of the net asset value of shares maintained by such
recipients and outstanding on the books of the Fund for specified periods.
The Distribution Plan provides that the Fund may expend up to 0.3125%
quarterly (approximately 1.25% annually) of the Fund's average daily net
assets to pay distribution costs for sale of its shares and to pay
shareholder service fees. Rules adopted by the National Association of
Securities Dealers, Inc. ("NASD") limit the annual expenditures that the Fund
may incur under the Distribution Plan to 1.00% of the Fund's average daily
net asset value, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. NASD rules also limit
the aggregate amount which the Fund may pay for such distribution costs to
6.25% of gross share sales since the inception of the Fund's Distribution
Plan, plus interest at the prime rate plus 1.00% per annum on unpaid amounts
thereof (less any contingent deferred sales charges paid by the shareholders
to KIDCO) remaining unpaid from time to time.
Contingent deferred sales charges applicable to shares of the Fund are to
the extent permitted by the NASD Rule, paid to KIDCO.
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and services which
<PAGE>
PAGE 21
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exceed current maximum annual payments it is permitted to receive from the
Fund. KIDCO intends to seek full payment of such amounts from the Fund
(together with annual interest thereon at the prime rate plus 1.00%) at such
time in the future as, and to the extent that, payment thereof by the Fund
would be within permitted limits. Unreimbursed expense in respect of fiscal
year end was $3,165,670 at fiscal year end.
The amount paid by the Fund under its Distribution Plan for the year ended
May 31, 1996 was $18,458,861 (1.00% of the Fund's average daily net asset
value during the year). During the year ended May 31, 1996, KIDCO made
payments of commissions on new sales to dealers and others of $21,624,531.
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities during the year ended May 31, 1996 were $1,720,676,250
and $1,686,968,962, respectively.
(4.) Investment Management and Transactions With Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily. The
management fee is calculated by applying percentage rates, which start at
0.70% and decline as net assets increase, to 0.35% per annum, to the net
asset value of the Fund. KMI has entered into an Investment Advisory
Agreement with Keystone under which Keystone provides investment advisory and
management services to the Fund and receives for its services an annual fee
representing 85% of the management fee received by KMI.
During the year ended May 31, 1996, the Fund paid or accrued to KMI
investment management and administrative services fees of $8,473,139 which
represented 0.46% of the Fund's average daily net asset value during the
period. Of such amount paid to KMI, $7,202,168 was paid to Keystone for its
services to the Fund.
During the year ended May 31, 1996, the Fund paid or accrued to KII and KIRC
$20,669 for certain accounting and printing services, and $3,683,215 for
transfer agent fees, respectively.
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended May 31, 1996 the Fund paid or accrued total custody fees
in the amount of $614,103 and received a credit of $221,745 pursuant to the
expense offset arrangement resulting in a net custody expense of $392,358.
The assets deposited with the custodian under the expense offset arrangement
could have been invested in income-producing assets.
(5.) Distributions to Shareholders
A distribution of $1.02 per share was declared on June 17, 1996 from the
taxable net long-term capital gains realized during the fiscal year ended May
31, 1996. This declaration was payable by July 5, 1996 to shareholders of
record June 25, 1996. This distribution is not reflected in the accompanying
financial statements.
(6.) Other
Shareholders will receive upon request a list of securities in the Fund's
portfolio as of the end of a fiscal quarter of the Fund.
<PAGE>
PAGE 22
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Keystone Small Company Growth Fund (S-4)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Small Company Growth Fund (S-4)
We have audited the accompanying statement of assets and liabilities of
Keystone Small Company Growth Fund (S-4), including the schedule of
investments as of May 31, 1996, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for
each of the years in the ten-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Small Company Growth Fund (S-4) as of May 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the ten-year period then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
June 28, 1996
<PAGE>
PAGE 23
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FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTION (Unaudited)
During the fiscal year ended May 31, 1996, long-term capital gain
distributions totalling $1.01 per share were paid in shares or cash.
In January 1997, we will send you complete information on the distributions
paid during the calendar year 1996 to help you in completing your federal tax
return.
<PAGE>
[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 prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
[Keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
S4-R-7/96
107M [Recycle logo]
<PAGE>
K E Y S T O N E
[Photo: Small Girl Smelling Flower]
SMALL COMPANY
GROWTH FUND (S-4)
[Keystone logo]
ANNUAL REPORT
MAY 31, 1996
