[BACK COVER]
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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 Exempt Trust
Tax Free Fund
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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] KEYSTONE
LOGO] INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
S-4 SAR 1/96
93.5 M [RECYCLE LOGO]
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[FRONT COVER]
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K E Y S T O N E
[PHOTO OF GIRL WATERING FLOWERS]
SMALL COMPANY
GROWTH FUND (S-4)
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[KEYSTONE LOGO]
SEMIANNUAL REPORT
NOVEMBER 30, 1995
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PAGE 1
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Keystone Small Company Growth Fund (S-4)
Seeks long-term growth of capital by investing in emerging growth companies.
Dear Shareholder:
We are pleased to report to you on activities in Keystone Small Company
Growth Fund (S-4) for the six-month period which ended November 30, 1995.
Performance
A combination of lower interest rates and non-inflationary growth provided a
positive environment for small company (small-cap) stocks--one in which your
Fund produced strong results. For the six-month period, your Fund produced a
total return of 21.72%, outpacing the Russell 2000, a broad, unmanaged index
of small-company stocks, which returned 15.06%. For the twelve-month period,
which ended November 30, 1995, your Fund produced a total return of 40.08%.
The Russell 2000 produced a total return of 28.50%.
In addition, your Fund was recognized by Morningstar, an independent U.S.
mutual fund rating service, who assigned Keystone Small Company Growth Fund
(S-4) four stars (****)--its second highest rating--for the Fund's
risk-adjusted performance out of 2593 equity funds as of November 30, 1995.(1)
We consider this validation of your Fund's outstanding long-term performance and
our careful stock selection.
In selecting stocks for the portfolio, we seek small companies which we
believe are on the verge of accelerating earnings growth and characterized by
innovative products and services. In short, we look for tomorrow's market
leaders. These types of companies fared well during the period as economic
growth slowed and investors looked for companies that were continuing to grow
rapidly in the slower growth environment.
Technology stocks led the small-cap advance
In our search for companies with accelerating earnings growth, we found many
in the technology area. While we tend to make investment selections on an
individual basis for this Fund, our strategy resulted in a significant
weighting in technology stocks. At the end of the period, approximately 40%
of net assets were invested in technology companies, and your Fund benefitted
from this commitment.
We believe that much of the growth in technology companies is part of a
long-term, broad-based trend that should affect many industries for several
years. Demand for technology is coming from both businesses and consumers. To
compete in a global economy, U.S. companies must offer better products or
services at lower costs. We believe technology, whether electronic components,
computerized manufacturing systems or software, should play a major role in
improving corporate productivity. Many of the companies that are developing
technology-based solutions are small, and we believe there are opportunities for
the companies that can develop products that save time, reduce costs and improve
ease of use.
As individuals become more familiar with technology, they are more likely to
purchase products that have been improved or are easier to use as a result of
technology. For example, the growth in personal computers for home use has risen
significantly and, along with it, demand for software, peripheral equipment, and
on-line services.
--continued--
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(1)Source: Morningstar, Inc. Morningstar's proprietary ratings reflect this
historical risk-adjusted performance as of November 30, 1995. Ratings are
subject to change monthly. They are calculated based on the Fund's 3-, 5- and
10-year average annual return in excess or below the 90-day Treasury bill
return. Ratings are not adjusted for sales charges, but are adjusted for
other fees. The top 10% of the funds in an investment category receive 5
stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next
22.5% receive 2 stars and the bottom 10% receive 1 star. In the equity
category, the Fund received a 4-star rating for the 3-year and 5-year
periods, and a 3-star rating for the 10-year period. There were 1252 funds in
the 3-year, 915 funds in the 5-year, and 473 funds in the 10-year category.
Past performance does not guarantee future results.
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PAGE 2
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Keystone Small Company Growth Fund (S-4)
Characteristics of investing in small company stocks
We have been impressed with the strong performance of small-cap stocks,
especially this year. By themselves, these returns are outstanding. However,
as with any investment, understanding the potential risks and rewards is
critical to meeting your long term investment goals. Typically small
companies have had some of the most rapidly growing earnings rates, which
often have resulted in higher stock prices. Yet, the stock prices of these
companies also can reverse direction very quickly. We seek to reduce the
risks of investing in small-cap stocks through careful company research and
diversification. We think we have been reasonably successful at this over the
years. Yet, these risks remain inherent in small-cap stock investing.
Not surprisingly, small-cap stocks experienced a price correction towards the
end of the period. We think a short-term or temporary retreat is always possible
and should be expected as a normal part of investing in small- cap stocks.
Especially after such a period of strong performance in 1995, we think investors
should temper their expectations for small-cap returns in 1996. As a result, we
think shareholders should have a long-term approach to their investment in
Keystone Small Company Growth Fund (S-4).
Our outlook
We believe the combination of low interest rates, modest inflation, and
slower economic growth should continue to provide positive conditions for
small-cap stocks. We think small companies still offer room for growth and,
in our opinion, valuations of these stocks remain attractive. While our
long-term outlook for small-caps is positive, it is important to remember
that a correction can occur at any time, and that, historically, these stocks
have experienced broad price fluctuations. Over the years, however, small-cap
stocks have delivered superior returns to long- term investors.
We appreciate your continued support of Keystone Small Company Growth Fund
(S-4). If you have any questions or comments about your investment, please feel
free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
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Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
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George S. Bissell
Chairman of the Board
Keystone Funds
[PHOTO OF [PHOTO OF
ALBERT H. ELFNER, III] GEORGE S. BISSELL]
January 1996 Albert H. Elfner, III George S. Bissell
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PAGE 3
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A Discussion With
Your Fund Manager
[Photo of Christopher R. Ely]
Christopher R. Ely is head of Keystone's small-cap
growth team and is senior portfolio manager of
your Fund. Mr. Ely has 16 years of investment
experience and is a Chartered Financial Analyst.
He holds a BA in Mathematical Economics from Brown
University and an MBA from Babson College.
Together with small-cap portfolio manager David L.
Smith, the team searches for small companies with
accelerating earnings growth.
Q How did small-cap stocks perform during the six-month period?
A Small-cap stocks continued to rally, fueled by robust corporate earnings,
relatively low interest rates, and strong performance by technology
companies. Small-caps generated the strongest returns in June and July 1995.
In September and October, small-cap stocks experienced a correction, as
investors took profits. We viewed the pull back in small-cap stocks as a
temporary event and used it as an opportunity to purchase more stocks at
attractive prices.
Q How did the Fund perform?
A We were pleased with the Fund's strong performance which helped it surpass
small-cap stock indexes. Your Fund continued its long-term upward trend.
During 1995, small companies generated better-than-expected earnings growth
rates. This stimulated investor demand for small-company stocks, which
boosted stock prices.
Q Why have small-cap stocks performed so well for so long?
A Small-cap stocks tend to go through six-to-eight year performance cycles.
We believe we are in the midst of a positive cycle. While there are bound to
be some temporary pull backs in small-cap stock prices, we believe the
general trend is up. The cycle tends to be driven by earnings. Investors
begin to buy small-cap stocks because of the potential for superior earnings
growth. In some cases, the potential for earnings growth is not reflected in
the stock price. In other cases, investors are willing to pay more for
earnings growth.
During the most recent cycle, small-cap stocks have also benefited from
the trend toward productivity improvement. Small companies--especially
technology businesses--are helping corporate America become more competitive
in the global economy by reducing costs and enhancing productivity. The trend
toward productivity improvement has made the U.S. one of the world's low cost
producers of goods and services. We believe these factors, combined with a
low interest rate and low inflation environment, have been positive for
small-caps.
Q Do you expect small-cap stocks to continue to rise over the long-term?
A We believe there is still plenty of steam left in small-cap stocks. We
think we are in the fifth year of the six-to-eight year small-cap cycle and
believe there should still be room for growth. Nevertheless, we are watching
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Fund Profile
Objective: Seeks long-term growth of capital by investing in emerging growth
companies.
Commencement of investment operations: September 11, 1935
Number of stocks: 171
Net assets: $1,942 million
Newspaper listing: SCoGS4
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PAGE 4
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Keystone Small Company Growth Fund (S-4)
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[LINE CHART]
U.S. Small Cap Cycle
as of November 30, 1995
12/85 1.739 11/91 1.352
1.706 1.378
1.678 1.44
1.651 1.452
1.647 1.475
1.643 1.489
1.638 1.509
1.616 1.517
1.594 1.541
1.572 1.575
1.553 1.599
1.57 1.646
1.587 1.682
1.585 1.713
1.58 1.702
1.572 1.731
1.541 1.734
1.506 1.733
1.432 1.728
1.405 1.72
1.377 1.716
1.341 1.698
1.305 1.698
1.277 1.702
1.263 1.737
1.247 1.757
1.233 1.784
1.228 1.775
1.227 1.788
11/89 1.234 11/93 1.829
1.228 1.851
1.218 1.891
1.211 1.922
1.209 1.956
1.201 1.996
1.191 2.014
1.182 2.008
1.176 2.012
1.172 2.018
1.162 2.065
1.148 2.066
1.128 2.053
1.124 2.039
1.123 2.006
1.127 1.965
1.129 1.96
1.14 1.926
1.144 1.899
1.155 1.875
1.164 1.852
1.178 1.793
1.19 1.735
1.211 1.713
1.242 1.691
1.273 1.687
1.3 1.695
1.325 1.718
1.338 1.706
1.707
1.711
11/95 1.707
Ratio below 2.0 represents attractive value
[Key] 12 Month Moving Average
Comparison of price to earnings ratio (P/E) of Keystone Small Company Growth
Fund (S-4) to the S&P 500 Index.
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our valuations very carefully. One way we monitor valuations is by comparing
the price to earnings ratio (P/E) of small-cap stocks to the P/E of a broader
market average, such as the Standard and Poor's 500. When the estimated
relative P/E ratio on the chart is 1.0, that means the P/E for small and
large cap stocks are the same ratio. A P/E of 2.0 means that small-cap P/Es
are twice as expensive as large-cap stocks. We believe when the P/E is below
2.0, small-cap stocks are not fully valued compared to large-cap stocks. With
the estimated relative P/E at 1.47 as of November 30, 1995, we think that
small-cap stocks can rise further.
Q What is your investment philosophy in managing the Fund?
A We invest in small company 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. Generally, these
Top 5 Industries
as of November 30, 1995
Percentage of
Industry net assets
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Software services 19.7
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Electronics products 12.7
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Telecommunications 8.2
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Retail 7.8
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Finance 7.3
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stocks have market capitalizations (stock price multiplied by total shares
outstanding) of about $1 billion or less when we purchase them. 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. This strategy led to concentrations in certain areas, such as
technology, biotechnology, and specialty retailers.
Q Technology companies continued to be a major part of the Fund's portfolio.
Did you make changes in this sector?
A Technology stocks led the small-cap rally, and the Fund benefitted
significantly from its significant weighting in this sector. At the end of
the period on November 30, 1995, technology stocks comprised 40% of net
assets. We changed the mix of technology stocks we held in the portfolio. We
took profits in semiconductor stocks that had performed well and that we
believed had become overvalued.
We increased the Fund's holdings in software companies. We continue to
believe that businesses that have developed programs that have the potential
to save time or money have a great deal of growth potential. For example, we
invested in Adobe Systems, a leader in desktop publishing software. We also
continued to hold shares in Synopsys, a major supplier of electronic design
automation software, and Parametric Technology, a leader in mechanical design
software.
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PAGE 5
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Top 10 Holdings
as of November 30, 1995
Percentage of
Company Industry net assets
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Parametric Technology Software services 2.9
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HFS Amusements 2.9
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Adobe Systems Software services 2.8
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America On-Line Software services 1.9
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EMC Office and business equipment 1.8
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Staples Retail 1.8
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BMC Software Software services 1.8
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Cabletron Systems Telecommunications 1.7
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Solectron Electronics products 1.7
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Analog Devices Electronics products 1.5
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Their productivity enhancing solutions continue to fuel growth of over 30%
per year.
Q You began to build a position in biotechnology stocks. Why?
A The biotechnology industry is maturing, and we believe that it is less
speculative than it was a few years ago. There are several companies that
have made significant progress in the development of products for the
treatment of diseases such as cancer, the HIV virus, arthritis, and
neurological disorders. Some of these products have shown promise in early
testing trials. Many of the companies in which we invested tend to emphasize
one area of research. For example, Gilead Sciences and Agouron
Pharmaceuticals concentrate primarily on HIV research.
Q At about 7% of net assets, retail stocks are among the Fund's top five
industries. In what types of retail companies did you invest?
A We continued to emphasize specialty retailers. For example, Staples, a
large office supply store is among the Fund's top ten holdings. In the office
supply area, we also hold shares of Corporate Express and Office Max. We
added O'Reilly Automotive and Discount Auto Parts to the portfolio. We also
continued to hold shares of Sunglass Hut, an international retailer that
sells high fashion eyewear. The common theme among these companies is that
each has significant market share in its niche market, and each business is
growing rapidly.
Q Finance stocks have grown to about 7% of net assets. What companies were
attractive there?
A Two trends were beneficial to bank stocks-- declining interest rates and
the move toward consolidation in the banking industry. Declining rates
generally benefit financial companies, and many banks are reinventing
themselves through aggressive marketing and expansion. This can also make
them attractive takeover candidates. We added to our holdings of TCF, a
regional bank based in Minneapolis, to the portfolio. TCF has experienced
significant business growth and has acquired smaller banks. We also added
Boston Federal Savings and Queen's County Bank Corp. We invested in banks
that have the potential to generate attractive earnings and that may be
takeover candidates.
Q What is your outlook?
A Our long-term outlook for small-cap stocks is positive and we believe that
small-cap stock valuations continue to be attractive. We expect the U.S.
economy to grow at a sustainable pace with inflation and interest rates at
relatively low levels. While we think that the long-term trend for small-cap
stocks is up, we believe the trend may be punctuated with short-term
corrections. Over time, we believe small-cap stocks have the potential to
provide superior returns to long-term investors who are willing to ride out
the ups and downs of the market.
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, Inc.
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street,
Boston, Massachusetts 02116-5034.
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PAGE 6
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Keystone Small Company Growth Fund (S-4)
Your Fund's Performance
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[MOUNTAIN CHART]
Growth of an investment in
Keystone Small Company Growth Fund (S-4)
In Thousands
Initial Reinvested
Investment Distributions
11/85 10000 10000
10033 11363
11/87 7451 9397
7288 11153
11/89 9281 14328
8317 12955
11/91 12042 20018
11667 24742
11/93 12843 30452
12239 31783
11/95 15474 44522
Total Value: $44,522
A $10,000 investment in Keystone Small Company Growth Fund (S-4) made on
November 30, 1985 with all distributions reinvested was worth $44,522 on
November 30, 1995. Past performance is no guarantee of future results.
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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.
Six-Month Performance as of November 30, 1995
================================================================================
Total return* 21.72%
Net asset value 5/31/95 $ 8.62
11/30/95 $ 9.47
Dividends None
Capital gains $ 1.01
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of November 30, 1995
================================================================================
If you If you did
Cumulative total return redeemed not redeem
1-year 37.08% 40.08%
5-year 243.67% 243.67%
10-year 345.22% 345.22%
Average annual total return
1-year 37.08% 40.08%
5-year 28.01% 28.01%
10-year 16.11% 16.11%
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.
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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.
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PAGE 8
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Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS--November 30, 1995
(Unaudited)
Market
Shares Value
==================================================================
COMMON STOCKS (95.8%)
AEROSPACE (0.2%)
Tracor, Inc. (a) 250,000 $ 3,750,000
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3,750,000
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AIR TRANSPORTATION (0.7%)
Atlantic Southeast Airlines, Inc. 250,000 6,531,250
Midwest Express Hldgs., Inc. 122,000 3,599,000
Skywest, Inc. 241,000 3,328,813
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13,459,063
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AMUSEMENTS (6.6%)
Harrah's Entertainment, Inc. 500,000 12,437,500
HFS Inc. 800,000 55,400,000
Hollywood Casino Corp., Class A (a) 886,011 4,762,309
La Quinta Inns, Inc. 300,000 8,137,500
Mirage Resorts, Inc. (a) 700,000 23,712,500
Players International, Inc. 476,400 6,282,525
Promus Cos., Inc. (a) 450,000 9,956,250
Station Casinos, Inc. (a) 500,000 7,500,000
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128,188,584
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AUTOMOTIVE (1.8%)
Exide Securities Corp. 351,900 16,143,413
Lear Seating Corp. (a) 631,000 17,668,000
Safety Components International, Inc. 150,000 2,362,500
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36,173,913
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BUILDING MATERIALS (1.4%)
Centex Construction Co. (a) 253,500 3,549,000
Champion Enterprises, Inc. 292,000 8,760,000
Elcor Corp. 60,300 1,258,763
Mohawk Industries, Inc. (a) 300,000 5,212,500
Oakwood Homes Corp. 203,500 8,343,500
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27,123,763
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BUSINESS SERVICES (0.5%)
Safeguard Scientifics, Inc. 83,900 4,153,050
Security Dynamics Technologies, Inc. 117,400 5,825,975
- ------------------------------------------------------------------
9,979,025
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Market
Shares Value
==================================================================
CAPITAL GOODS (1.9%)
AGCO Corp. 502,000 $ 21,648,750
TriMas Corp. 200,000 3,850,000
Wabash National Corp. 400,000 11,200,000
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36,698,750
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CHEMICALS (0.3%)
Applied Extrusion Technologies, Inc. 300,000 3,825,000
Schulman (A.), Inc. 120,937 2,191,974
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6,016,974
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CONSUMER GOODS (2.2%)
Blyth Industries, Inc. (a) 135,000 7,576,875
Department 56, Inc. (a) 600,000 24,750,000
DeVry, Inc. (a) 410,000 10,916,250
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43,243,125
- ------------------------------------------------------------------
DRUGS (2.1%)
Agouron Pharmaceuticals, Inc. (a) 250,000 7,500,000
Amylin Pharmaceuticals, Inc. 433,600 3,008,100
Autoimmune, Inc. 300,000 3,150,000
Cephalon, Inc. 221,500 6,174,313
Gilead Sciences, Inc. 416,000 10,816,000
Human Genome Sciences, Inc. 166,000 4,482,000
Mylan Laboratories, Inc. 150,000 3,506,250
Sequus Pharmaceuticals, Inc. 284,000 3,514,500
- ------------------------------------------------------------------
42,151,163
- ------------------------------------------------------------------
ELECTRONICS PRODUCTS (12.7%)
Alliance Semiconductor Corp. (a) 400,000 8,925,000
Analog Devices, Inc. (a) 800,000 29,600,000
Cyberoptics Corp. 249,500 8,483,000
ElectroGlas, Inc. (a) 250,000 14,718,750
FEI Corp. 182,000 2,081,625
KLA Instruments Corp. (a) 658,900 22,896,775
LAM Research Corp. (a) 100,000 5,500,000
Linear Technology Corp. 320,000 14,400,000
Mattson Technology, Inc. (a) 400,000 8,950,000
Maxim Integrated Products, Inc. (a) 293,000 21,865,125
Merix Corp. (a) 300,000 10,950,000
Microchip Technology, Inc. (a) 450,000 18,112,500
SDL, Inc. (a)(d) 500,000 11,000,000
Solectron Corp. (a) 775,000 32,937,500
See Notes to Schedule of Investments.
<PAGE>
PAGE 9
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SCHEDULE OF INVESTMENTS--November 30, 1995
(Unaudited)
Market
Shares Value
==================================================================
ELECTRONICS PRODUCTS--continued
Teradyne, Inc. (a) 750,000 $ 19,593,750
Xilinx, Inc. (a) 500,000 16,093,750
- ------------------------------------------------------------------
246,107,775
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FINANCE (7.3%)
BISYS Group, Inc. (a) 630,500 17,772,219
BostonFed Bancorp, Inc. 300,000 3,562,500
Chronicle 2001 Mutual Fund (a) 1,653,374 611,408
First Empire State Corp. 25,000 5,200,000
Greenpoint Financial Corp. 335,000 8,751,875
Greentree Financial Corp. 470,000 13,277,500
Independent Bank Corp. 325,000 2,275,000
Long Islands Bancorp, Inc. 356,400 9,132,750
Mercury Finance Co. 600,000 8,550,000
Queen's County Bancorp 72,200 2,915,075
Schwab (Charles) & Co., Inc. 400,000 9,700,000
Standard Federal Bank, Troy Michigan 500,000 19,187,500
TCF Financial Corp. 371,500 22,429,313
Washington Mutual, Inc. 635,000 17,899,063
- ------------------------------------------------------------------
141,264,203
- ------------------------------------------------------------------
HEALTH CARE SERVICES (7.2%)
Arrow International, Inc. 175,400 7,849,150
ARV Assisted Living, Inc. 76,300 782,075
Avecor Cardiovascular, Inc. 400,000 6,250,000
Emeritus Corp. 400,000 6,000,000
Genzyme Corp. 300,000 5,231,250
Health Management Associates, Inc.,
Class A (a) 1,116,563 29,588,906
Idexx Laboratories, Inc. 213,300 9,491,850
I-STAT Corp. 221,389 7,665,594
Lifecore Biomedical, Inc. 365,000 4,904,688
Medisense, Inc. 200,000 5,125,000
Metra Biosystems, Inc. 300,000 6,300,000
Occusystems, Inc. (a) 300,000 5,887,500
Perclose, Inc. 51,000 714,000
Physician Reliance Network, Inc. (a) 400,000 14,350,000
Target Therapeutics, Inc. (a) 123,700 9,694,988
Thermo Cardiosystems, Inc. (a) 320,000 18,680,000
Total Renal Care Hldgs., Inc. 60,000 1,612,500
- ------------------------------------------------------------------
140,127,501
- ------------------------------------------------------------------
INSURANCE (1.6%)
Berkley (W.R.) Corp. 200,000 8,975,000
HCC Insurance Hldgs., Inc. 300,000 10,012,500
Meadowbrook Insurance Group, Inc. 10,500 291,375
NAC Re Corp. 137,500 4,537,500
SunAmerica, Inc. 163,500 7,704,938
- ------------------------------------------------------------------
31,521,313
- ------------------------------------------------------------------
NATURAL GAS (0.6%)
Cairn Energy USA, Inc. 300,000 3,731,250
Nuevo Energy Co. (a) 400,000 8,900,000
- ------------------------------------------------------------------
12,631,250
- ------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (2.5%)
Centigram Communications Corp. 232,200 4,963,275
EMC Corp. (a) 2,000,000 35,750,000
Network Appliance, Inc. 20,000 608,750
Read Rite Corp. (a) 243,200 6,657,600
- ------------------------------------------------------------------
47,979,625
- ------------------------------------------------------------------
OIL (0.4%)
Triton Energy Corp. 152,000 7,676,000
- ------------------------------------------------------------------
OIL SERVICES (2.0%)
Dual Drilling Co. (a) 500,000 5,093,750
Ensco International, Inc. 867,900 14,645,813
Falcon Drilling, Inc. 300,000 3,843,750
Newpark Resources, Inc. 370,545 6,692,961
Tidewater, Inc. 300,000 8,587,500
- ------------------------------------------------------------------
38,863,774
- ------------------------------------------------------------------
RESTAURANTS (2.7%)
Apple South, Inc. 400,000 8,450,000
Applebee's International, Inc. 500,000 13,906,250
Outback Steakhouse, Inc. (a) 475,000 17,278,125
Papa John's International, Inc. (a) 182,800 7,826,125
Starbucks Corp. (a) 150,000 6,337,500
- ------------------------------------------------------------------
53,798,000
- ------------------------------------------------------------------
RETAIL (7.8%)
Barnes and Noble, Inc. 400,000 14,700,000
Corporate Express, Inc. (a) 500,000 13,375,000
(continued on next page)
<PAGE>
PAGE 10
- -------------------------------------
Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS--November 30, 1995
(Unaudited)
Market
Shares Value
==================================================================
RETAIL--continued
Discount Auto Parts, Inc. 300,000 $ 8,325,000
Hollywood Entertainment Corp. 500,000 8,093,750
Kohl's Corp. (a) 183,600 9,914,400
Office Max, Inc. (a) 900,000 20,475,000
O'Reilly Automotive, Inc. 156,800 4,664,800
PETsMart, Inc. (a) 515,000 16,480,000
Sports Authority, Inc. 300,000 6,337,500
Staples, Inc. (a) 1,387,500 35,641,406
Sunglass Hut International, Inc. (a) 600,000 12,525,000
- ------------------------------------------------------------------
150,531,856
- ------------------------------------------------------------------
SERVICES (3.7%)
Allwaste, Inc. (a) 628,500 2,671,125
Equity Corporation International (a) 195,000 3,802,500
G & K Services, Class A 216,300 4,974,900
Loewen Group, Inc. 379,900 10,114,838
Molten Metal Technology, Inc. (a) 339,600 12,522,750
Peak Technologies Group, Inc. (a) 289,900 7,899,775
Sanifill, Inc. (a) 266,000 8,911,000
Thermedics, Inc. (a) 450,000 9,843,750
U.S. Filter Corp. (a) 500,000 11,000,000
- ------------------------------------------------------------------
71,740,638
- ------------------------------------------------------------------
SOFTWARE SERVICES (19.7%)
Adobe Systems, Inc. 800,000 54,250,000
America On-Line, Inc. 890,000 36,434,375
Arbor Software Corp. 11,600 498,800
Avant Corp. 251,400 11,187,300
BDM International, Inc. 267,600 7,108,125
BMC Software, Inc. 800,000 33,900,000
Broderbund Software, Inc. 375,000 24,187,500
Computron Software, Inc. 300,000 4,612,500
Dialogic Corp. 186,900 5,957,438
Edmark Corp. 263,400 10,766,475
Epic Design Technology, Inc. (a) 427,800 9,090,750
Geoworks, Inc. (a) 500,000 8,812,500
INSO Corp. (a) 368,500 14,832,125
Intuit, Inc. 47,100 3,968,175
Manugistics Group, Inc. 346,600 5,978,850
Maxis, Inc. (d) 351,500 14,543,313
McAfee Associates, Inc. (a) 74,400 3,552,600
Mercury Interactive Corp. (a) 500,000 11,687,500
Minnesota EDL Computing Corp. 56,000 1,850,375
Orion Network Systems, Inc. 257,000 1,782,938
Parametric Technology Corp. (a) 790,000 55,991,250
Platinum Software Corp. 217,500 1,454,531
Project Software & Development,
Inc. (a) 323,500 10,493,531
Seer Technologies, Inc. 249,500 3,680,125
Software Artistry, Inc. (a) 320,000 5,760,000
Summit Medical Systems, Inc. 197,500 4,431,406
Symantec Corp. 237,800 6,316,563
Synopsys, Inc. (a) 760,500 26,142,188
Walker Interactive Systems, Inc. 349,500 2,621,250
- ------------------------------------------------------------------
381,892,483
- ------------------------------------------------------------------
TELECOMMUNICATIONS (8.2%)
3Com Corp. (a) 500,000 22,906,250
Cabletron Systems, Inc. (a) 400,000 33,200,000
Cidco Group, Inc. (a) 346,900 9,279,575
DSC Communications Corp. (a) 395,100 15,631,144
FTP Software, Inc. 300,000 9,131,250
Heartland Wireless Communications,
Inc. 301,500 8,442,000
Netcom Online Communications (a) 300,000 22,050,000
Netmanage, Inc. (a) 700,000 15,881,250
P Comm, Inc. (a) 276,100 4,728,213
VTel Corp. 300,000 5,981,250
Winstar Communications, Inc. 800,000 11,200,000
- ------------------------------------------------------------------
158,430,932
- ------------------------------------------------------------------
TEXTILES (0.6%)
Authentic Fitness Corp. 535,700 11,316,663
Transportation (1.1%)
Landstar System, Inc. 276,400 7,082,750
Railtex, Inc. 325,000 6,662,500
Swift Transportation Co., Inc. (a) 407,500 6,774,688
- ------------------------------------------------------------------
20,519,938
- ------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$1,217,654,549) 1,861,186,311
==================================================================
See Notes to Schedule of Investments.
<PAGE>
PAGE 11
- -------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Maturity Maturity Par Market
Coupon Date Value Value Value
============================================================================================================
<S> <C> <C> <C> <C> <C>
INDUSTRIAL BONDS & NOTES (0.3%)
Amusements (0.3%)
Hemmeter Enterprises, Inc., Sr.
PIK Note (c)
12.00% 2000 $16,642,763 $16,642,763 $ 6,324,250
- ------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$17,670,920) 6,324,250
============================================================================================================
Maturity
Value
============================================================================================================
SHORT-TERM INVESTMENTS (3.7%)
Investments in repurchase agreements, in a joint trading account
purchased 11/30/95, 5.8811%, maturing 12/01/95 71,804,728 71,793,000
- ------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost--
$71,793,000) (b) 71,793,000
============================================================================================================
Expiration
Date Shares
============================================================================================================
WARRANTS/RIGHTS (0.0%)
Amusements (0.0%)
Hemmeter Enterprises, Inc. (a)(c) 12/15/99 292,400 292
Hemmeter Enterprises, Inc. (a)(c) 12/15/99 78,750 79
TOTAL WARRANTS/RIGHTS (Cost--$1,866,383) 371
============================================================================================================
TOTAL INVESTMENTS (Cost $1,308,984,852) 1,939,303,932
- ------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY HOLDINGS (Cost $965,450) (0.1%) 963,628
- ------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.1%) 1,954,305
- ------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $1,942,221,865
============================================================================================================
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(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 November 30, 1995.
(c) Each unit is comprised of $1,000 par Senior Secured PIK note and 15
warrants.
(d) 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).
See Notes to Financial Statements.
<PAGE>
PAGE 12
- -------------------------------------
Keystone Small Company Growth Fund (S-4)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Months Year Ended May 31,
Ended ---------------------------------------------------------------------
11/30/95 1995 1994 1993 (a) 1992 (a) 1991 (a)
===============================================================================================================
(Unaudited)
<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) (0.06) (0.07) (0.12) (0.12) (0.08) (0.04)
Net realized and
unrealized gains
(losses) on investments 1.92 1.68 0.63 1.82 0.98 1.17
- ---------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.86 1.61 0.51 1.70 0.90 1.13
- ---------------------------------------------------------------------------------------------------------------
Less distributions from:
Capital 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 $9.47 $8.62 $7.64 $7.95 $7.61 $7.17
===============================================================================================================
Total return (b) 21.72% 23.58% 6.84% 28.76% 13.45% 19.42%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.75%(b) 1.78% 1.73% 2.04% 1.47% 1.48%
Net investment (loss) (1.31%)(c) (1.10%) (1.49%) (1.68%) (1.09%) (0.68%)
Portfolio turnover rate 35% 38% 60% 78% 81% 73%
- ---------------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $1,942,222 $1,459,955 $1,005,595 $965,959 $702,442 $623,291
===============================================================================================================
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- -------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995 (Unaudited)
================================================================================
Assets (Note 1):
Investments at market value:
Unaffiliated issuers (identified cost $1,295,557,151) $1,928,303,932
Affiliated issuers (identified cost $13,427,701) 11,000,000
Foreign currency holdings (identified cost--$965,450) 963,628
- --------------------------------------------------------------------------------
Total investments and foreign currency holdings 1,940,267,560
Cash 291,986
Receivable for:
Investments sold 14,160,130
Fund shares sold 17,978,991
Interest and dividends 396,841
Prepaid expenses 49,776
Other assets 16,060
- --------------------------------------------------------------------------------
Total assets 1,973,161,344
- --------------------------------------------------------------------------------
Liabilities (Note 4):
Payable for:
Investments purchased 22,980,710
Fund shares redeemed 1,858,153
Distribution to shareholders 5,718,831
Other accrued expenses and liabilities 381,785
- --------------------------------------------------------------------------------
Total liabilities 30,939,479
- --------------------------------------------------------------------------------
Net assets $1,942,221,865
================================================================================
Net assets represented by (Notes 1 and 2):
Paid-in capital $1,274,461,615
Undistributed net investment income (loss) (3,627,360)
Accumulated net realized gains (losses) on investment
transactions and foreign currency related transactions 41,070,374
Net unrealized appreciation on investments and foreign
currency holdings 630,317,236
- --------------------------------------------------------------------------------
Total net assets applicable to outstanding shares of
beneficial interest ($9.47 per share on 205,062,404
shares outstanding) $1,942,221,865
================================================================================
STATEMENT OF OPERATIONS
Six Months Ended November 30, 1995 (Unaudited)
================================================================================
Investment income (Note 1):
Dividends (less foreign withholding tax of
$8,494) $ 1,632,086
Interest 2,034,372
- --------------------------------------------------------------------------------
Total income 3,666,458
- --------------------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $ 3,968,026
Transfer agent fees 2,020,846
Accounting, auditing and legal 28,454
Custodian fees 149,031
Printing 18,222
Trustees' fees and expenses 37,114
Distribution Plan expenses 8,475,917
Registration fees 34,165
Miscellaneous expenses 42,891
- --------------------------------------------------------------------------------
Total expenses 14,774,666
- --------------------------------------------------------------------------------
Net investment loss (11,108,208)
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions (Notes 1 and 3):
Net realized gain (loss) on:
Investments 155,462,966
Foreign currency related transactions (52,712)
- --------------------------------------------------------------------------------
Net realized gain on investment and foreign
currency related transactions 155,410,254
- --------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments 167,873,636
- --------------------------------------------------------------------------------
Net gain (loss) on investment and foreign
currency related transactions 323,283,890
- --------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $312,175,682
================================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 14
- -------------------------------------
Keystone Small Company Growth Fund (S-4)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1995 May 31, 1995
===================================================================================
(Unaudited)
<S> <C> <C>
Operations:
Net investment loss $ (11,108,208) $ (13,214,945)
Net realized gain on investment and
foreign currency related transactions 155,410,254 82,349,681
Net change in unrealized appreciation or
depreciation on investments 167,873,636 207,499,070
- -----------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 312,175,682 276,633,806
- -----------------------------------------------------------------------------------
Distributions to shareholders from net
realized gains on investment transactions
(Notes 1 and 5): (173,761,257) (85,473,776)
- -----------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold 715,486,004 776,843,226
Payments for shares redeemed (511,353,989) (582,622,286)
Net asset value of shares issued in
reinvestment of distributions from
capital gains 139,720,567 68,978,844
- -----------------------------------------------------------------------------------
Net increase in net assets resulting from
capital share transactions 343,852,582 263,199,784
- -----------------------------------------------------------------------------------
Total increase in net assets 482,267,007 454,359,814
Net assets:
Beginning of year 1,459,954,858 1,005,595,044
- -----------------------------------------------------------------------------------
End of year [including undistributed net
investment income (loss) as follows:
November 30, 1995--($3,627,360) and May
31, 1995--$7,480,848] (Note 1) $1,942,221,865 $1,459,954,858
===================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 15
- -------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Small Company Growth Fund (S-4), (the "Fund"), is a common law trust
for which Keystone Management, Inc. ("KMI") is the Investment Manager and
Keystone Investment Management Company ("Keystone") is the Investment
Adviser. The Fund is registered under the Investment Company Act of 1940 as a
diversified open-end investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is privately owned by an investor group consisting
of current and former members of management of Keystone and its affiliates.
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.
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. Short-term investments denominated in a
foreign currency are adjusted daily to reflect changes in exchange rates.
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 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. In addition
to market risk, the Fund is subject to the credit risk
<PAGE>
PAGE 16
- -------------------------------------
Keystone Small Company Growth Fund (S-4)
that the other party will not be able to complete the obligations of the
contract.
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/ depreciation of investments.
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. All discounts are
amortized for both financial reporting and federal income tax purposes.
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, and 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 collateralized by U.S.
Treasury and/or Federal Agency obligations.
E. The Fund distributes net investment income and net capital gains, if any,
annually. Distributions are determined in accordance with income tax
regulations. The significant differences between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulations are primarily due to the differing treatment of 12b-1
expenses prior to April 1995 and foreign currency gains and losses.
<PAGE>
PAGE 17
- -------------------------------------
(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:
Six Months Ended Year Ended
November 30, 1995 May 31, 1995
======================================================================
Shares sold 74,267,969 102,978,570
Shares redeemed (53,039,971) (75,737,013)
Shares issued in reinvestment of
distributions from capital gains 14,560,340 10,332,058
- ----------------------------------------------------------------------
Net increase 35,788,338 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 (formerly Keystone Distributors, Inc.) ("KIDC"), the
principal underwriter and a wholly-owned subsidiary of Keystone, amounts
which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDC generally pays brokers or others a commission 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
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent Fund shares purchased prior to January 1, 1992 are redeemed
within four calendar years of original issuance, depending on when these
shares were sold, the Fund may be eligible to receive a deferred sales charge
from the investor as partial reimbursement for sales commissions previously
paid on those shares. This charge is based on declining rates, which begin at
4.00%, applied to the lesser of the net asset value of shares redeemed or the
total cost of such shares.
The Distribution Plan provides that the Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.3125% of the Fund's average
daily net assets for any calendar quarter (approximately 1.25% annually)
occurring after the inception of the Distribution Plan. A rule of the
National Association of Securities Dealers, Inc. ("NASD") limits the annual
expenditures which the Fund may incur under the Distribution Plan to 1.00%,
of which 0.75% may be used to pay such distribution expenses and 0.25% may be
used to pay shareholder service fees. The NASD Rule also limits 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% on unpaid amounts thereof (less any
contingent deferred sales charges paid by the shareholders to KIDC).
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC intends to seek full payment of such
charges from the Fund (together with annual interest thereon at the prime
rate plus one percent) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC since January 1, 1992.
<PAGE>
PAGE 18
- -------------------------------------
Keystone Small Company Growth Fund (S-4)
Commencing on July 8, 1992, contingent deferred sales charges applicable to
shares of the Fund issued after January 1, 1992 have, to the extent permitted by
the NASD Rule, been paid to KIDC rather than to the Fund. During the six months
ended November 30, 1995, KIDC received $759,293 in contingent deferred sales
charges.
During the six months ended November 30, 1995, the Fund paid KIDC
$8,475,917 under its Distribution Plan. (1.00% of the Fund's average daily
net assets on an annualized basis). During the year, KIDC received $4,016,293
after payments of commissions on new sales to dealers and others of
$10,730,435.
Under the NASD Rule, the maximum uncollected amount for which KIDC may
seek from the Fund under its Distribution Plan is $7,585,663 as of November
30, 1995 (0.78% of the Fund's net assets at November 30, 1995.)
(3.) Securities Transactions
For the six months ended November 30, 1995 purchases and sales of investment
securities (including proceeds received at maturity) were as follows:
Cost of Proceeds
Purchases From Sales
==========================================================
Portfolio securities $ 695,654,000 $ 576,912,155
Short-term investments 4,400,416,696 4,351,501,000
- ----------------------------------------------------------
$5,096,070,696 $4,928,113,155
==========================================================
(4.) Investment Management Agreement and Other Transactions
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 determined by applying percentage rates, that start at
0.70% and declines 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 six months ended November 30, 1995, the Fund paid or accrued to
KMI investment management and administrative services fees of $3,968,026 which
represented 0.47% of the Fund's average net assets on an annualized basis. Of
such amount paid to KMI, $3,372,822 was paid to Keystone for its services to the
Fund.
During the six months ended November 30, 1995, the Fund paid or accrued
$15,901 to KII as reimbursement for certain accounting services. The Fund paid
or accrued $2,020,846 to KIRC for transfer agent services.
(5.) 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.
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Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
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.
