PAGE 1
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
Seeks long-term growth of capital by investing in emerging growth companies.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Small Company
Growth Fund (S-4) for the six-month period ending November 30, 1996. Following
this letter, we have included an interview with your new Fund manager, J. Gary
Craven, discussing portfolio strategy. Mr. Craven joined the Keystone team on
November 4.
Performance
For the six-month period ending November 30, 1996, your Fund produced a return
of -8.61%. For the 12-month period, your Fund produced a -0.12% return. This
trailed the Russell 2000 Index, which declined -1.35% for the six-month time
frame and returned 16.57% for one year. The Russell 2000 Growth Index had a
- -8.83% return for six months and returned 11.56% for the 12-month period.
In contrast to your Fund's long-term record of positive performance, its
most recent performance was disappointing. We believe these short-term results
reflect the repositioning of the Fund into smaller capitalization stocks in the
first two quarters of 1996. Not only did small-cap stocks bear the brunt of a
midsummer market sell-off, but the smaller-sized small companies, which your
Fund was emphasizing, witnessed the greatest stock price declines. In addition,
there were problems in stock and industry selection, particularly in the
technology industries, which were heavily hit in the June-July market
correction.
We are reviewing the risk profile of your Fund, and are dedicated to
providing more consistent results from period to period. Following this letter,
Portfolio Manager J. Gary Craven discusses his risk management strategy in
managing Keystone Small Company Growth Fund (S-4).
As we have stated in the past, this small company stock investing strategy
offers investors attractive long-term growth potential, but is accompanied by
risks. Investors should keep in mind that short-term losses, such as we have
seen in the past six months, are a normal part of investing in small company
stocks. We remain convinced that our strategy can play an important role in
helping investors reach their long-term financial goals.
Longer-term, we intend to maintain a philosophy of seeking the stock of
small companies that appear to have sustainable above-average growth prospects,
not necessarily the companies which have the highest growth rates, or the
greatest momentum. Our investment process requires that the present value of
projected earnings justify the stock price. We seek to buy stocks of small
companies that have attractive prospects with a two-year perspective. We believe
this discipline can produce consistent returns over the long term.
Market Review
The last six months have seen the largest stocks outperform their smaller
counterparts by one of the largest margins in the last two decades. From the end
of May through the end of November, the Dow Jones Industrial Average leaped
15.6%, to 6,521.70. Meanwhile, the Russell 2000, the premier index of
small-stock performance, declined 1.35%. It appears investors were flocking to
safer, more liquid blue-chip names in light of concerns that the economy may
slow down.
Technology stocks led the market up for most of the past six years. This
summer they demonstrated that they can lead it down too. At the bottom of the
slide, on July 16, the Dow was off 10% from an all-time high set on May 22.
Smaller firms fared worse. At its low, on July 16, the technology-heavy NASDAQ
Composite Index was off 19% from its record high.
Valuation 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
--continued--
<PAGE>
PAGE 2
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
large-cap stocks. Historically, the ratio of small caps versus the S&P 500 has
ranged between 1.0 and 2.2. A ratio of 1.0 indicates that small-cap stocks offer
good value 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 November 30, 1996, this ratio was 1.58.
Our Outlook
Looking at the next six months, our outlook for small company stocks is
positive. Given the moderate pace of economic growth in the second half of 1996,
we expect small-cap stocks to post stronger earnings growth than larger
companies. Also, the valuation of small caps has become more attractive relative
to large caps and other asset classes after the November rally. We believe the
current economic backdrop of moderate economic growth, low inflation and
moderate interest rates should bode well for the small company stock market in
1997.
Keystone Acquired By First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired by
First Union Corporation. First Union, based in Charlotte, North Carolina, is the
nation's sixth largest bank holding company with assets of approximately $130
billion. Keystone Investment Management Company will continue to be the
investment adviser responsible for managing your Fund's portfolio. Your Fund
will continue to be managed with the same style and philosophy as in the past.
First Union is also the parent company of the investment advisers to another
mutual fund family, the Evergreen Family of Funds. Together, the investment
advisers to the Evergreen and Keystone Fund families manage approximately $30
billion in assets. Some services will now be conducted under the "Evergreen
Keystone Funds" umbrella.
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
Thank you for your continued support of Keystone Small Company Growth Fund
(S-4). If you have any questions or comments about your investments, we
encourage you to write to us.
Sincerely, [photos of Elfner and Bissell]
/s/Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
January 1997
[photo captions] Albert H. Elfner, III George S. Bissell
<PAGE>
PAGE 3
- --------------------------------------------------------------------
A Discussion With
Your Fund Manager
[photo of J. Gary Craven]
[photo caption
J. Gary Craven is head of Keystone's Small Company Stock Team and senior
portfolio manager of your Fund. Mr. Craven is a Chartered Financial Analyst.
Prior to joining Keystone on November 4, he was a portfolio manager at Invista
Capital Management, Inc., a subsidiary of The Principal Financial Group. At
Invista, he managed an $860 million small company growth pension account and
co-managed Princor Emerging Growth Fund and Princor Growth Fund, all of which
had attractive performance records relative to small-cap benchmarks while under
his management. Keystone's Small Company Stock Team is comprised of Mr. Craven
and portfolio manager Margery C. Parker, with support from Keystone's 11 equity
analysts. Together, they search for stocks of small companies with sustainable
above-average growth rates.
Q What is your investment philosophy?
A As a growth-style investment manager, I strive to allocate capital to
companies with strong competitive positions. We look for ways to increase
sustainable above-average growth prospects in the portfolio, at prices that are
economically sensible. The price you pay for a growth stock is reflected in the
price-to-earnings ratio, or P/E. It is how many times earnings the market thinks
a stock is worth. We look for strong growth at a reasonable price.
We analyze numerous factors before selecting a stock for the portfolio.
First of all, we look at the need for a product or service the company offers.
Secondly, does the company have an advantage over its competition. We also look
at the growth prospects for the next two to five years, and how the earnings
growth will look.
Q What about your sell discipline?
A If we choose the stock correctly, we will graduate it from the small-cap
asset class. This generally takes two to six years. I have a set methodology
that is pretty strict on weeding stocks out of a portfolio. I sell a stock when
I feel it has obtained its optimal price, or if the fundamental outlook
deteriorates. Also, if a stock does not develop as anticipated, I will sell it
to make room for more compelling ideas.
Q What is the small-cap universe that the Fund invests in?
A The bottom 20% of the stock market capitalization. This is generally in the
$1 billion and under market capitalization range.
Q How do you manage the risk inherent in small company stocks in your
portfolio, especially during volatile periods?
A First of all, volatility is a part of the small company asset class. But
above-average growth prospects is also a characteristic of this asset class.
Therefore, investing in small company stocks requires patience.
Risk management is a key element of my investment strategy. First of all,
my main emphasis is on finding small companies with what I believe are the best
business models. These models can include: low cost production, technological
leaders, exceptional distribution systems or management teams that run companies
smarter than their competition. Gravitating to companies with the best business
models I believe is one way to manage risk. That's because these companies,
which I consider to be high quality companies, tend to be able to better deal
with problems when they occur and therefore usually carry less risk. Also, we
analyze the two- to five-year business outlook for every small-cap issue we add
to the Fund. Additionally, I believe attention to valuation lowers risk and
improves the risk/reward ratio.
<PAGE>
PAGE 4
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Keystone Small Company Growth Fund (S-4)
[boxed text]
Stock Selection Criteria
[bullet] High quality companies
[bullet] Improving growth prospects
[bullet] Reasonable valuation
Sell Discipline
[bullet] Low portfolio turnover is a goal
[bullet] Overvalued and dynamic forces moving prices are in danger of
dissipating
[bullet] Fundamental performance varies from expectation
[bullet] More promising ideas discovered
[end boxed text]
Q How has this risk control strategy affected your decisions recently?
A In an effort to minimize risk during the past few months, we shifted some
of the Fund's assets to interest-rate-sensitive stocks. As the economy slows,
we expect interest rates to be lowered to stop the economy from weakening too
much. Financial stocks tend to go up when interest rates slide, as do mortgage
and home building firms. Everen Capital, Legg Mason, North Fork Bancorp. and
Toll Brothers are all names added to the portfolio that we feel will benefit
from declining interest rates.
We also trimmed back on some issues that had high price-to-earnings ratios
to again minimize risk in the portfolio.
Q How would you describe the overall investment environment for small company
stocks during the past six months?
A It has been a difficult six months for small company stocks. Small company
stocks were hit the hardest during a midsummer market correction. In the third
quarter, the
Top 5 Industries
as of November 30, 1996
<TABLE>
<CAPTION>
Percentage of
Industry net assets
- --------------------- ---------------
<S> <C>
Software services 18.4%
- --------------------- ---------------
Retail 9.7%
- --------------------- ---------------
Health care services 8.3%
- --------------------- ---------------
Finance 8.1%
- --------------------- ---------------
Electronics products 7.7%
- --------------------- ---------------
</TABLE>
market witnessed a rotation into large company stocks and away from small
company stocks due to fears of a weakening economy in the United States.
Historically, small caps have been more susceptible to market mood swings than
large caps when there are signs of a slowing economy. This was reflected in the
stock market during the past few months, as evidenced by the Russell 2000
Index's decline of 1.35% from May 31 to November 30. Meanwhile, the Dow Jones
average of 30 blue-chip stocks gained 15.6% for that time frame.
Q The Fund's technology holdings were trimmed back a little from 35% of the
Fund's total assets during the past six months. It seems that you've directed
more of the fund's assets into the financial services sector?
A I am bullish on financial service firms. I believe there are numerous
attractive growth prospects in this sector. But I also remain bullish on select
tech stocks. Financial stocks have been experiencing strong earnings growth, and
lower interest rates should help their earnings even more.
As the mortgage industry continues to evolve in favor of low-cost, high
personal service marketing firms, we believe several mortgage firms will
experience attractive earnings growth. One example is First Alliance Co., which
has a niche in non-conventional mortgage loans. The company originates,
purchases, sells and services non-conventional mortgage loans secured primarily
by first mortgages on single-family residences. First Alliance is expected to
grow earnings at 20% over the next few years.
<PAGE>
PAGE 5
- --------------------------------------------------------------------
Top 10 Holdings
as of November 30, 1996
<TABLE>
<CAPTION>
Percentage of
Company Industry net assets
- ----------------------------- --------------------- ---------------
<S> <C> <C>
Ensco International Oil services 1.96
- ----------------------------- --------------------- ---------------
BMC Software Software services 1.96
- ----------------------------- --------------------- ---------------
McAfee Associates Software services 1.76
- ----------------------------- --------------------- ---------------
Maxim Integrated Products Electronic products 1.49
- ----------------------------- --------------------- ---------------
TCF Financial Corp. Finance 1.49
- ----------------------------- --------------------- ---------------
Seacor Holdings, Inc. Oil services 1.43
- ----------------------------- --------------------- ---------------
CDW Computer Centers, Inc. Retail 1.26
- ----------------------------- --------------------- ---------------
CMAC Investment Corp. Finance 1.26
- ----------------------------- --------------------- ---------------
Synopsys, Inc. Software services 1.23
- ----------------------------- --------------------- ---------------
HCC Insurance Holdings, Inc. Insurance 1.22
- ----------------------------- --------------------- ---------------
</TABLE>
Q What other sectors do you favor?
A Energy and oil services companies are benefitting from the escalation of
oil prices as well as operating leverage based on exploration budgets of larger
oil companies. We expect this trend to continue in 1997.
As I previously mentioned, I remain high on technology stocks. I believe
software, telecommunications infrastructure and computer service firms are some
of the most exciting areas to be invested in throughout the 1990s. I believe
there is a technology revolution going on right now. New technology should spur
further earnings growth around the globe as companies through technological
advances push to become more productive and more efficient.
We believe several of the Fund's positions will benefit from this worldwide
trend. For example, one of the Fund's largest holdings, BMC Software (accounted
for 1.96% of the Fund's assets as of November 30), develops and sells
systems-software-products for use in large-scale transaction-intensive computing
environments. Microchip Technology (accounted for 1.19% of the Fund's assets as
of November 30), which develops field-programmable microcontrollers and related
memory products for systems used in consumer, automotive, office-automation and
industrial markets, is another example. It has tapped into foreign markets, and
overseas sales now account for about 65% of the company's total sales.
Q What is your outlook for the next six to ten months?
A Our outlook for small company stocks is very positive. They have lagged
large company stocks during the past six months. However, we expect small caps
to catch up over the next several months. Given the moderate pace of economic
growth thus far in the second half of 1996, small-cap stocks are expected to
post stronger earnings growth than larger companies. Also, the valuation of
small caps has become more attractive relative to large caps after the November
rally of large caps.
We believe moderate economic growth of around 2.5%, tame inflation and
moderate interest rates are creating a positive economic backdrop for small
company stocks. We have had a moderate economic growth environment in the United
States for several years now. Therefore, we do not expect to witness a recession
as there are no excesses to be wrung out of the system.
There are a lot of new and exciting opportunities emerging in software,
telecommunications and business services. We believe small companies are best
situated to profit from such cutting-edge innovations.
Q What should investors reasonably expect from this Fund over a three- to
five-year period?
A With long-term interest rates below 7%, the longer parade of time looks
positive for small company stocks. Historically, small company stocks have
returned an average of 11% to 12% for the long-term. With the economic
environment the way it is, we expect the performance of small company stocks to
remain in that range. Of course, it is important to remember that small caps can
be volatile for the short-term.
[boxed text]
If you have a question about your Fund, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
[end boxed text]
<PAGE>
PAGE 6
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Keystone Small Company Growth Fund (S-4)
Your Fund's Performance
[typeset representation of mountain chart]
Growth of an investment in
Keystone Small Company Growth Fund (S-4)
Initial Reinvested
Investment Distributions
11/86 10000 10000
7426.71 8269.68
11/88 7263.84 9814.62
9250.81 12608.7
11/90 8289.9 11400.5
12003.3 17615.8
11/92 11628.7 21773.6
12801.3 26798.3
11/94 12198.7 27969.6
15423.5 39180.2
11/96 13745.9 39134
A $10,000 investment in Keystone Small Company Growth Fund (S-4) made on
November 30, 1986 with all distributions reinvested was worth $39,134 on
November 30, 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 bought and 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
Six-Month Performance as of November 30, 1996
- --------------------------------------
<TABLE>
<S> <C> <C>
Total return* -8.61%
Net asset value 5/31/96 $ 10.35
11/29/96 $ 8.44
Dividends None
Capital gains $ 1.02
</TABLE>
*Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of November 30, 1996
- --------------------------------------
<TABLE>
<CAPTION>
If you If you did
Cumulative total return redeemed not redeem
<S> <C> <C>
1-year -2.79% -0.12%
5-year 122.15% 122.15%
10-year 291.34% 291.34%
Average annual total return
1-year -2.79% -0.12%
5-year 17.31% 17.31%
10-year 14.62% 14.62%
</TABLE>
worth more or less than their original cost. You may exchange your shares for
another Keystone fund by calling or writing to Keystone directly, or through
Keystone's Automated Response Line (KARL). The Fund reserves the right to change
or terminate the exchange offer.
<PAGE>
PAGE 7
- --------------------------------------------------------------------
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type (usually
common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities from
its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a capital
gain distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 8
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS--November 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
- --------------------------------------- ---------- -------------
<S> <C> <C>
COMMON STOCKS (96.7%) (a)
ADVERTISING & PUBLISHING (1.6%)
Clear Channel Communications, Inc. 300,000 $ 20,700,000
Outdoor Systems, Inc. 291,750 7,421,391
- --------------------------------------- ---------- -------------
28,121,391
- --------------------------------------- ---------- -------------
AEROSPACE (0.3%)
Rohr Industries, Inc. 349,100 6,109,250
- --------------------------------------- ---------- -------------
AIR TRANSPORTATION (0.3%)
Atlantic Southeast Airlines, Inc. (b) 250,000 5,718,750
- --------------------------------------- ---------- -------------
AMUSEMENTS (1.9%)
Casino America, Inc. 254,027 889,095
Colorado Gaming & Entertainment Co. 494,014 2,470,070
Hollywood Casino Corp., Class A 67,100 285,175
La Quinta Inns, Inc. (b) 300,000 5,775,000
Promus Hotel Corp. 650,000 20,962,500
Station Casinos, Inc. 395,400 4,201,125
- --------------------------------------- ---------- -------------
34,582,965
- --------------------------------------- ---------- -------------
AUTOMOTIVE (1.6%)
Gentex Corp. 600,000 11,737,500
Tower Automotive, Inc. 517,700 16,566,400
---------- -------------
28,303,900
- --------------------------------------- ---------- -------------
BUILDING MATERIALS (2.4%)
Amre, Inc. 880,500 2,421,375
Champion Enterprises, Inc. 650,000 13,568,750
Oakwood Homes Corp. (b) 900,000 19,912,500
Toll Brothers, Inc. 390,200 7,755,225
- --------------------------------------- ---------- -------------
43,657,850
- --------------------------------------- ---------- -------------
BUSINESS SERVICES (1.6%)
Alternative Resources Corp. 700,000 11,856,250
Rental Service Corp. 250,000 6,437,500
Strategic Distribution, Inc. 350,000 2,428,125
Vincam Group, Inc. 250,300 8,744,856
- --------------------------------------- ---------- -------------
29,466,731
- --------------------------------------- ---------- -------------
CHEMICALS (0.7%)
OM Group, Inc. (b) 326,800 13,398,800
- --------------------------------------- ---------- -------------
Market
Shares Value
- --------------------------------------- ---------- -------------
CONSUMER GOODS (3.1%)
Action Performance Cos., Inc. 499,800 $ 8,496,600
Blyth Industries, Inc. 200,000 8,675,000
DeVry, Inc. Del 367,000 16,377,375
Furniture Brands International, Inc. 700,000 8,662,500
USA Detergents, Inc. 384,500 14,418,750
- --------------------------------------- ---------- -------------
56,630,225
- --------------------------------------- ---------- -------------
DIVERSIFIED COMPANIES (0.3%)
Brown & Sharpe Manufacturing Co. 415,000 5,965,625
- --------------------------------------- ---------- -------------
DRUGS (3.6%)
Agouron Pharmaceuticals, Inc. 200,000 11,025,000
Amylin Pharmaceuticals, Inc. 993,200 11,980,475
Cytotherapeutics 345,000 3,105,000
Gilead Sciences, Inc. 681,000 17,493,187
Magainin Pharmaceutical, Inc. 600,000 5,025,000
Neurogen Corp. 390,000 7,215,000
Sequus Pharmaceuticals, Inc. 600,000 8,550,000
Virus Research Institute, Inc. 200,000 1,187,500
- --------------------------------------- ---------- -------------
65,581,162
- --------------------------------------- ---------- -------------
ELECTRONICS PRODUCTS (7.7%)
Altron, Inc. 394,900 7,404,375
Analog Devices, Inc. 600,000 19,275,000
BMC Industries, Inc. (b) 309,600 8,901,000
DII Group, Inc. 248,000 6,107,000
Dupont Photomasks, Inc. 154,400 6,388,300
ETEC Systems, Inc. 245,200 7,187,425
Linear Technology Corp. (b) 268,400 12,698,675
Maxim Integrated Products, Inc. 586,000 27,139,125
Microchip Technology, Inc. 450,000 21,543,750
Sipex Corp. 310,400 8,788,200
Xilinx, Inc. 312,400 13,745,600
- --------------------------------------- ---------- -------------
139,178,450
- --------------------------------------- ---------- -------------
FINANCE (8.1%)
Amerin Corp. 129,800 2,936,725
Astoria Financial Corp. (b) 583,500 21,954,188
BISYS Group, Inc. 500,000 18,562,500
BostonFed Bancorp, Inc. (b) 300,000 4,462,500
Chronicle 2001 Mutual Fund 1,653,374 817,409
CMAC Investment Corp. (b) 300,000 22,875,000
</TABLE>
<PAGE>
PAGE 9
- --------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
- ------------------------------------ --------- -------------
<S> <C> <C>
FINANCE--continued
Everen Capital Corp. (b) 223,000 $ 5,017,500
First Alliance Co. 84,000 2,425,500
First Merchants Acceptance Corp. 14,000 291,375
Hubco, Inc. 4,300 105,350
Jayhawk Acceptance Corp. 400,000 4,875,000
Legg Mason, Inc. 13,100 509,263
Long Islands Bancorp, Inc. (b) 275,000 8,782,812
North Fork Bancorporation, Inc. 25,000 850,000
Queen's County Bancorp (b) 193,333 9,038,318
RAC Financial Group, Inc. 300,000 16,200,000
TCF Financial Corp. (b) 600,000 27,000,000
Westamerica Bancorporation, Inc. 2,900 167,112
- ------------------------------------ --------- -------------
146,870,552
- ------------------------------------ --------- -------------
FOODS (1.2%)
Flowers Industries, Inc. (b) 500,000 11,812,500
Hudson Foods, Inc. (b) 600,000 10,950,000
- ------------------------------------ --------- -------------
22,762,500
- ------------------------------------ --------- -------------
HEALTH CARE SERVICES (8.3%)
CNS, Inc. 600,000 8,437,500
Cytyc Corp. (b) 193,700 4,939,350
Emeritus Corp. 306,200 4,210,250
Health Management Associates, Inc.,
Class A 749,100 16,573,854
Heartport, Inc. 220,100 5,062,300
Idexx Laboratories, Inc. 288,200 10,159,050
Lifecore Biomedical, Inc. 510,700 7,979,688
Norland Medical Systems, Inc. 216,400 1,217,250
Occusystems, Inc. 400,000 11,650,000
Parexel International Corp. 291,000 15,041,063
Pediatrix Medical Group 150,000 5,793,750
Perclose, Inc. 382,500 6,550,313
PhyMatrix Corp. 600,000 9,150,000
Target Therapeutics, Inc. 200,000 6,912,500
Thermo Cardio Systems, Inc. 600,000 20,775,000
Total Renal Care Hldgs., Inc. 445,000 15,241,250
Urologix, Inc. 65,000 958,750
- ------------------------------------ --------- -------------
150,651,868
- ------------------------------------ --------- -------------
Market
Shares Value
- ------------------------------------ --------- -------------
INSURANCE (1.5%)
Capital Re Corp. (b) 136,100 $ 5,222,838
HCC Insurance Hldgs., Inc. (b) 793,850 22,227,800
- ------------------------------------- --------- -------------
27,450,638
- ------------------------------------ --------- -------------
METALS & MINING (0.3%)
RMI Titanium Co. 242,700 5,642,775
- ------------------------------------- --------- -------------
NATURAL GAS (1.1%)
Nuevo Energy Co. 400,000 20,000,000
- ------------------------------------- --------- -------------
OFFICE & BUSINESS EQUIPMENT (1.6%)
Applied Magnetics Corp. 500,000 13,687,500
EMC Corp. 500,000 16,125,000
- ------------------------------------- --------- -------------
29,812,500
-------------
OIL (0.4%)
Triton Energy Corp. 152,000 7,220,000
- ------------------------------------- --------- -------------
OIL SERVICES (6.5%)
BJ Services Co. 300,000 14,325,000
Carbo Ceramics, Inc. (b) 175,300 3,549,825
Ensco International, Inc. 810,025 35,539,847
Falcon Drilling, Inc. 400,000 15,975,000
Global Industries, Inc. 549,600 9,618,000
Newpark Resources, Inc. 370,545 12,969,075
Seacor Hldgs., Inc. 411,000 25,995,750
- ------------------------------------- --------- -------------
117,972,497
- ------------------------------------ --------- -------------
RESTAURANTS (0.9%)
Applebee's International, Inc. (b) 362,100 10,591,425
Quality Dining, Inc. 219,200 4,986,800
- ------------------------------------- --------- -------------
15,578,225
- ------------------------------------ --------- -------------
RETAIL (9.7%)
Abercrombie and Fitch Co. 340,600 6,258,525
Black Box Corp. 250,000 10,187,500
CDW Computer Centers, Inc. 343,950 22,915,669
Corporate Express, Inc. 400,000 11,225,000
Global Directmail Corp. 275,000 12,375,000
Kohl's Corp. 300,000 11,962,500
Mens Wearhouse, Inc. 250,300 5,741,256
Nautica Enterprises, Inc. 600,000 19,050,000
O'Reilly Automotive, Inc. 166,600 5,664,400
</TABLE>
<PAGE>
PAGE 10
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
SCHEDULE OF INVESTMENTS--November 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
- ------------------------------------ --------- -------------
<S> <C> <C>
RETAIL--continued
PETsMART, Inc. 600,000 $ 15,450,000
Saks Hldgs., Inc. 500,000 16,250,000
Sports Authority, Inc. 750,000 18,562,500
Tiffany & Co. (b) 320,000 11,800,000
West Marine, Inc. 243,400 8,275,600
- ------------------------------------ --------- --------------
175,717,950
- ------------------------------------ --------- --------------
SERVICES (5.2%)
Equity Corporation International 588,450 12,357,450
G & K Services, Class A (b) 334,900 12,223,850
GTS Duratek, Inc. 400,000 5,075,000
Molten Metal Technology, Inc. 466,100 7,049,762
Peak Technologies Group, Inc. 400,000 4,625,000
Thermedics, Inc. 600,000 12,525,000
USA Waste Services, Inc. 602,200 19,420,950
U.S. Filter Corp. 600,000 20,550,000
- ------------------------------------ --------- --------------
93,827,012
- ------------------------------------ --------- --------------
SOFTWARE SERVICES (18.4%)
America Online, Inc. 200,000 7,075,000
Applix, Inc. 255,000 5,052,188
BDM International, Inc. 402,000 18,994,500
BMC Software, Inc. 811,800 35,516,250
Bitstream, Inc. 150,000 712,500
CMG Information Services, Inc. 53,200 837,900
Cambridge Technology Partners Mgmt. 600,000 18,450,000
Ciber, Inc. 165,000 5,362,500
Cognex Corp. 500,000 9,937,500
Comdisco, Inc. (b) 350,000 11,375,000
Dataworks Corp. 58,900 1,295,800
Epic Design Technology, Inc. 500,000 12,500,000
Geoworks, Inc. 500,000 11,093,750
INSO Corp. 307,000 13,105,061
Integrated Systems, Inc. 132,500 2,799,062
McAfee Associates, Inc. 675,000 32,062,500
Mechanical Dynamics, Inc. 239,800 3,492,088
National Data Corp. (b) 500,200 19,945,475
Natural Microsystems Corp. 396,800 10,192,800
Parametric Technology Corp. 300,000 16,331,250
Project Software & Development, Inc. 309,900 13,015,800
Safeguard Scientifics, Inc. 520,000 18,200,000
Market
Shares Value
- ------------------------------------ --------- --------------
SOFTWARE SERVICES--continued
Security Dynamics Technologies, Inc. 358,800 $ 14,822,925
SQA, Inc. 277,400 8,044,600
Synopsys, Inc. 500,000 22,312,500
Transaction System Architects, Inc.,
Class A 160,000 5,880,000
Wind River Systems, Inc. 286,250 14,151,484
Xionics Document Technologies, Inc. 204,000 2,601,000
- -------------------------------------- --------- --------------
335,159,433
- -------------------------------------- --------- --------------
TELECOMMUNICATIONS (6.7%)
Aspect Telecommunications Corp. 130,300 7,150,212
Boston Communications Group 142,500 1,282,500
Brooks Fiber Properties, Inc. 437,800 13,599,163
CAI Wireless Systems, Inc. 330,500 877,891
Comverse Technology, Inc. 200,000 6,800,000
Cox Radio, Inc. 382,200 6,688,500
Heartland Wireless
Communications, Inc. 700,000 8,400,000
Jacor Communications, Inc. 400,000 9,625,000
Mastec, Inc. 98,600 4,683,500
P-Com, Inc. 600,000 18,900,000
Proxim, Inc. 166,300 3,128,519
TCSI Corp. 642,100 5,658,506
Tel-Save Hldgs., Inc. 593,500 12,760,250
TSX Corp. 46,000 428,375
Winstar Communications, Inc. 600,000 12,487,500
Young Broadcasting, Inc. 305,500 9,203,187
- -------------------------------------- --------- --------------
121,673,103
- -------------------------------------- --------- --------------
TEXTILES (0.5%)
Polymer Group, Inc. 217,100 2,795,162
- -------------------------------------- --------- --------------
TRANSPORTATION (1.5%)
Coach USA, Inc. 130,200 3,303,825
Landstar System, Inc. 79,500 1,813,594
Railtex, Inc. 400,000 9,850,000
Swift Transportation Co., Inc. 500,000 12,031,250
- -------------------------------------- --------- --------------
26,998,669
- -------------------------------------- --------- --------------
TOTAL COMMON STOCKS
(Cost--$1,343,133,313) 1,756,847,983
- -------------------------------------- --------- --------------
</TABLE>
<PAGE>
PAGE 11
- --------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Maturity Market
Value Value
-------------- -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.4%)
NOTES (1.8%)
Federal Home Loan Mortgage Co., Discount notes, purchased 11/29/96, 5.700%,
maturing 12/02/96 $33,235,205 $33,251,000
- ------------------------------------------------------------------------------------- ------------ ------------
REPURCHASE AGREEMENTS (1.5%)
Investments in repurchase agreements, in a joint trading account purchased 11/29/96,
5.6740%, maturing 12/02/96 25,650,123 25,638,000
- ------------------------------------------------------------------------------------- ------------ ------------
State Street Bank & Trust Co., purchased 11/29/96 (Collateralized by $2,115,000
Federal Home Mortgage Loan, 6.070% due 11/20/98), maturing 12/02/96 2,072,691 2,072,000
- ------------------------------------------------------------------------------------- ------------ ------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$60,961,000) (b)(c) 60,961,000
- ------------------------------------------------------------------------------------- ------------
</TABLE>
<TABLE>
<CAPTION>
Expiration
Date Shares
------------ ---------
<S> <C> <C> <C>
WARRANTS\RIGHTS (0.2%)
AMUSEMENTS (0.0%)
Casino America, Inc. 5/03/2001 49,395 49,395
- ------------------------------------------------ ----------- -------- -------------
SOFTWARE (0.2%)
Sanchez Computer Associates, Inc. 12/18/96 52,000 253,500
- ------------------------------------------------ ----------- -------- -------------
TOTAL WARRANTS\RIGHTS (Cost--$1,866,383) 302,895
- ------------------------------------------------ -------------
TOTAL INVESTMENTS (Cost--$1,405,960,696) 1,818,111,878
- ------------------------------------------------ -------------
FOREIGN CURRENCY HOLDINGS (Cost--$7,366) (0.0%) 7,330
- ------------------------------------------------ -------------
OTHER ASSETS AND LIABILITIES--NET (-0.1%) (1,490,863)
- ------------------------------------------------ -------------
NET ASSETS (100%) $1,816,628,345
- ------------------------------------------------ -------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) All securities unless otherwise indicated with a (b) are non-income
producing.
(b) Income-producing security.
(c) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices on November 30, 1996.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
November 30, 1996
------------------------
(Unaudited)
<S> <C>
Net asset value beginning of period $10.35
- ------------------------------------------- ------------------
Income from investment operations:
Net investment income (loss) (0.06)
Net realized and unrealized gain (loss) on
investments (0.83)
- ------------------------------------------- ------------------
Total from investment operations (0.89)
- ------------------------------------------- ------------------
Less distributions from
Net realized gain on investments (1.02)
- ------------------------------------------- ------------------
Total distributions (1.02)
- ------------------------------------------- ------------------
Net asset value end of period $8.44
- ------------------------------------------- ------------------
Total return (b) 1.06%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.80%(c)
Net investment (loss) (1.32%)
Portfolio turnover rate 29%
Average commission rate paid $0.0610
- ------------------------------------------- ------------------
Net assets end of period (thousands) $1,816,628
- ------------------------------------------- ------------------
<CAPTION>
Year Ended May 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 (a) 1992 (a)
--------- --------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $8.62 $7.64 $7.95 $7.61 $7.17
- ------------------------------------------- --------- --------- --------- ----------- ----------
Income from investment operations:
Net investment income (loss) (0.13) (0.07) (0.12) (0.12) (0.08)
Net realized and unrealized gain (loss) on
investments 2.87 1.68 0.63 1.82 0.98
- ------------------------------------------- --------- --------- --------- ----------- -----------
Total from investment operations 2.74 1.61 0.51 1.70 0.90
- ------------------------------------------- --------- --------- --------- ----------- -----------
Less distributions from
Net realized gain on investments (1.01) (0.63) (0.82) (1.36) (0.46)
- ------------------------------------------- --------- --------- --------- ----------- -----------
Total distributions (1.01) (0.63) (0.82) (1.36) (0.46)
- ------------------------------------------- --------- --------- --------- ----------- -----------
Net asset value end of period $10.35 $8.62 $7.64 $7.95 $7.61
- ------------------------------------------- --------- --------- --------- ----------- -----------
Total return (b) 33.03% 23.58% 6.84% 28.76% 13.45%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.73%(c) 1.78% 1.73% 2.04% 1.47%
Net investment (loss) (1.34%) (1.10%) (1.49%) (1.68%) (1.09%)
Portfolio turnover rate 94% 38% 60% 78% 81%
Average commission rate paid $0.0563 N/A N/A N/A N/A
- ------------------------------------------- --------- --------- --------- ----------- -----------
Net assets end of period (thousands) $2,005,803 $1,459,955 $1,005,595 $ 965,959 $ 702,442
- ------------------------------------------- --------- --------- --------- ----------- -----------
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding the indirectly paid expenses, the expense ratio would
have been 1.79% and 1.72% for the six month period ended November 30, 1996
and the year ended May 31, 1996, respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments at market value:
(identified cost--$1,405,960,696) $1,818,111,878
Foreign currency holdings: (identified cost--$7,366) 7,330
- ------------------------------------------------------ --------------
Total investments and foreign currency holdings 1,818,119,208
Receivable for:
Investments sold 2,994,008
Fund shares sold 5,781,317
Interest and dividends 168,519
Prepaid expenses 62,137
Other assets 16,421
- ------------------------------------------------------ --------------
Total assets 1,827,141,610
- ------------------------------------------------------ --------------
Liabilities
Payable for:
Investments purchased 6,353,353
Fund shares redeemed 3,134,805
Other accrued expenses and liabilities 1,025,107
- ------------------------------------------------------ --------------
Total liabilities 10,513,265
- ------------------------------------------------------ --------------
Net assets $1,816,628,345
- ------------------------------------------------------ --------------
Net assets represented by
Paid-in capital $1,406,963,422
Accumulated distributions in excess on net
investment income (12,007,475)
Accumulated net realized gains on investment
transactions and foreign currency related
transactions 7,654,869
Net unrealized appreciation on investments and
foreign currency holdings 414,017,529
- ------------------------------------------------------ --------------
Total net assets applicable to outstanding shares of
beneficial interest ($8.44 a share on 215,279,315
shares outstanding) $1,816,628,345
- ------------------------------------------------------ --------------
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended November 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment income
Dividends $ 1,048,334
Interest 3,265,193
- ------------------------------------------ -------------
Total income 4,313,527
- ------------------------------------------ -------------
Expenses (Notes 2 and 4)
Management fee $4,156,308
Transfer agent fees 2,467,867
Accounting, auditing and legal 55,228
Custodian fees 434,497
Printing 44,677
Trustees' fees and expenses 46,816
Distribution Plan expenses 9,037,342
Registration fees 140,171
Miscellaneous expenses 47,529
- ------------------------------------------ -----------
Total expenses 16,430,435
Less: Expenses paid indirectly (Note 4) (116,916)
- ------------------------------------------ -------------
Net expenses 16,313,519
- ------------------------------------------ -------------
Net investment loss (11,999,992)
- ------------------------------------------ -------------
Net realized and unrealized
gain (loss) on investments
Net realized gain on investments 13,012,552
- ------------------------------------------ -------------
Net change in unrealized
appreciation or depreciation
on investments (176,007,161)
- ------------------------------------------ -------------
Net realized and unrealized gain
on investments (162,994,609)
- ------------------------------------------ -------------
Net decrease in net assets resulting
from operations ($174,994,601)
- ------------------------------------------ -------------
</TABLE>
<PAGE>
PAGE 14
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1996 May 31, 1996
==================== =================
(Unaudited)
<S> <C> <C>
Operations
Net investment loss ($ 11,999,992) ($ 24,478,442)
Net realized gain on investments 13,012,552 389,754,504
Net change in unrealized appreciation or depreciation on investments (176,007,161) 127,581,090
- ------------------------------------------------------------------------ ------------- ---------------
Net increase (decrease) in net assets resulting from operations (174,994,601) 492,857,152
- ------------------------------------------------------------------------ ------------- ---------------
Distributions to shareholders from net realized gains on investment
transactions (200,513,309) (173,760,139)
- ------------------------------------------------------------------------ ------------- ---------------
Capital share transactions (Note 2)
Proceeds from shares sold 717,839,185 1,354,600,987
Payments for shares redeemed (699,872,428) (1,267,570,849)
Net asset value of shares issued in reinvestment of distributions from
capital gains 168,366,921 139,720,568
- ------------------------------------------------------------------------ ------------- ---------------
Net increase in net assets resulting from capital share transactions 186,333,678 226,750,706
- ------------------------------------------------------------------------ ------------- ---------------
Total increase (decrease) in net assets (189,174,232) 545,847,719
Net assets
Beginning of period 2,005,802,577 1,459,954,858
- ------------------------------------------------------------------------ ------------- ---------------
End of period [including undistributed net investment income
(distributions in excess of net investment income) as follows:
November, 1996--($12,007,475) and May, 1996--($7,483)] $1,816,628,345 $2,005,802,577
======================================================================== ============= ===============
</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 Pennsylvania common
law trust for which Keystone Management, Inc. ("KMI") is the Investment Manager
and Keystone Investment Management Company ("Keystone") is the Investment
Adviser. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") and KMI is in turn a wholly-owned subsidiary of Keystone. On December
11, 1996 KII and in directly each of its subsidiaries, were acquired by First
Union National Bank of North Carolina (Note 7). The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified,
open-end investment company. The Fund's investment objective is long-term growth
of capital.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
Investments are usually valued at the closing sales price, or, in the absence of
sales and for over-the-counter securities, the mean of the bid and asked prices.
Securities for which valuations are not available from an independent pricing
service (including restricted securities) are valued at fair value as determined
in good faith according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other Keystone funds, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent
<PAGE>
PAGE 16
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
sale trade date is included in realized gain (loss) on foreign currency
transactions.
D. Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and are marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain (loss) on foreign currency related transactions. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
E. Securities Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Dividend income is recorded on the ex-dividend date.
F. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income tax is required.
G. Distributions
The Fund distributes net investment income and net capital gains, if any, at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to net operating
losses generated by the Fund, and distributions paid through shareholder
redemptions.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1996 May 31, 1996
==================== =================
<S> <C> <C>
Shares sold 84,759,624 141,592,081
Shares redeemed (83,232,240) (131,599,635)
Shares issued in
reinvestment of
distributions 19,925,079 14,560,340
- ----------------- ------------ -------------
Net increase 21,452,463 24,552,786
================= ============ =============
</TABLE>
3. Securities Transactions
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities for the six months ended November 30, 1996 were
$497,393,612 and $554,087,779, respectively.
4. Distribution Plan
The Fund bears some of the costs of selling its shares under a Distribution Plan
(the "Plan") adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the
<PAGE>
PAGE 17
- --------------------------------------
Fund pays its principal underwriter, Keystone Investment Distributors Company
("KIDC"), a wholly-owned subsidiary of Keystone, amounts that are calculated and
paid daily.
Under the Plan, the Fund pays a distribution fee that may not exceed 1.00%
of the Fund's average daily net assets. Of that amount, 0.75% is used to pay
distribution expenses and 0.25% may be used to pay service fees.
Contingent deferred sales charges paid by redeeming shareholders may be
paid to KIDC. During the six months ended November 30, 1996, the Fund received
$2,370,791 in contingent deferred sales charges.
The Plan may be terminated at any time by vote of the Independent Trustees
or by vote of a majority of the outstanding voting shares of the Fund. However,
after the termination of the Plan, at the discretion of the Board of Trustees,
payments to KIDC may continue as compensation for its services that had been
earned while the Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. KIDC intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
Total unpaid distribution costs at November 30, 1996 amounted to
$5,611,687.
5. Investment Management Agreement and Other Affiliated 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 calculated by applying percentage rates starting at 0.70% and declining
as net assets increase to 0.35% per annum, to the average daily net asset value
of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone under
which Keystone provides investment advisory and management services to the Fund.
In return for its services, Keystone receives an annual fee equal to 85% of the
management fee received by KMI.
During the six months ended November 30, 1996, the Fund paid or accrued
$7,514 to Keystone for certain accounting services. The Fund paid or accrued
$2,467,867 to Keystone Investor Resource Center, Inc., a wholly-owned subsidiary
of Keystone, for services rendered as the Fund's transfer and dividend
disbursing agent.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the six months ended November 30, 1996, the Fund incurred total custody fees of
$434,497 and received a credit of $116,916 pursuant to this expense offset
arrangement, resulting in a net custody expense of $317,581. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-
producing assets.
7. Agreement and Plan of Acquisition
On December 11, 1996, KII and indirectly each of its subsidiaries, including
Keystone, the Fund's investment adviser, were acquired (the "acquisition") by
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union").
<PAGE>
PAGE 18
- --------------------------------------
Keystone Small Company Growth Fund (S-4)
Consequently, the Fund entered into a new Investment Advisory and
Management Agreement (the "New Advisory Agreement") with Keystone. Under the New
Advisory Agreement, Keystone will provide the Fund with all the services that
previously may have been provided by KMI. As a result of the Acquisition, KMI no
longer acts as investment manager to the Fund. The annual fee paid by the Fund
remains unchanged.
In addition, the Fund has entered into a principal underwriting agreement
with Evergreen Keystone Distributors, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly- owned subsidiary of BISYS Fund Services.
EKD replaces Evergreen Keystone Investment Services, Inc. (formerly, Keystone
Investment Distributors Company ("KIDC") as the Fund's principal underwriter.
Also, in connection with the Acquisition, the KIRC changed its name to
Evergreen Keystone Service Company.
It is expected that the Acquisition will not affect services provided to
the Fund.
<PAGE>
PAGE 19
- --------------------------------------------------------------------
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.
<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
I N V E S T M E N T S
P.O. Box 2121
Boston, Massachusetts 02106-2121
S-4 SAR 1/97 [recycle logo]
107.5 M
K E Y S T O N E
[photo of little girl smelling flower]
SMALL COMPANY
GROWTH FUND (S-4)
[Keystone logo]
SEMIANNUAL REPORT
NOVEMBER 30, 1996
