<PAGE>
PAGE 1
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
Dear Shareholders:
We have pleasant news to share with you in this report.
(Photo of The U.S. stock market delivered exceptionally strong
William M. performance during the 12 months that ended on September 30,
Ennis appears 1997. Investors in Keystone Small Company Growth Fund (S-4)
here.) certainly had the opportunity to participate in this pleasant
experience, particularly at the end of the period when the
markets began recognizing the values in small company stocks.
Riding a friendly, rising tide of moderate growth and modest
inflation, the stock market rose higher and higher, with the
steady ascent interrupted just briefly for pauses in the late
winter and late summer of 1997.
MARKET LEADERSHIP
The 12 months from October 1, 1996 through September 30, 1997
were especially rewarding WILLIAM M. ENNIS
for the biggest of the largest capitalization companies. Stocks
of the largest companies, particularly those with strong
positions in the global markets, tended to be the market leaders. Funds, such as
Keystone Small Company Growth Fund (S-4), lagged funds that emphasized these
large cap companies during most of the year. However, in the final three months
of the period, small and mid-size company stocks began to show new strength.
It is important to keep these returns in perspective.
MARKET CYCLES
History has shown that the markets move in cycles, and one year's performance
does not often indicate the following year's performance. History also has
taught us, however, that over longer periods of time, the winning investment
strategies are those that have consistent disciplines and that remain faithful
to those disciplines, even during periodic market slumps.
At Evergreen Funds, we encourage you to remain focused on your long-term goals
and to remain disciplined in your personal investment strategies. No one can
confidently say whether next year's market or the following year's market will
be as rewarding as last year's market. We can say, however, that the most likely
winners in the long run are those who consistently follow long-term investment
strategies.
UPCOMING DEVELOPMENTS
In the next few weeks and months, you will begin to see some changes which we
believe will enhance the investment experience of shareholders of Keystone Funds
and Evergreen Funds.
You are scheduled to receive a proxy statement explaining a number of proposed
changes. Among these are proposals that would give shareholders of Keystone
Funds exchange privileges with a wide range of investment choices in the
Evergreen Funds family and that would introduce multiple classes for many
traditional Keystone Funds. This latter proposal may bring lower expenses for
many long-term fund shareholders. As part of these changes, all Keystone Funds
would become part of the Evergreen Fund family and be renamed as Evergreen Funds
early in 1998.
-- CONTINUED--
<PAGE>
PAGE 2
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
We have made these proposals after very serious consideration. We encourage
you to consider them carefully when you receive the proxy.
If you should have any questions about these or other issues affecting your
investments, please consult your financial adviser or call Evergreen Funds at
1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
November, 1997
<PAGE>
PAGE 3
- ---------------------------------------------------------
A Discussion With
Your Fund Manager
(Photo of J. Gary Craven appears here.)
J. GARY CRAVEN IS SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER,
SMALL COMPANY STOCKS AND PORTFOLIO MANAGER OF YOUR FUND. MR. CRAVEN IS A
CHARTERED FINANCIAL ANALYST. PRIOR TO JOINING KEYSTONE IN NOVEMBER 1996,
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 COMPOSED OF THREE
PORTFOLIO MANAGERS AND SUPPORTED BY FIVE EQUITY ANALYSTS. TOGETHER, THEY
SEARCH FOR STOCKS OF SMALL COMPANIES WITH SUSTAINABLE ABOVE-AVERAGE GROWTH
RATES.
Q HOW DID THE FUND PERFORM DURING THE PERIOD?
A For the four-month period that ended September 30, 1997, your Fund produced a
total return of 21.43%, exclusive of any deferred sales charge. The Russell 2000
Index rose 19.81%, and the Russell 2000 Growth Index produced a total return of
20.88% for the same period. For the twelve-month period that ended September 30,
1997, your Fund produced a total return of 18.48%, and the Russell 2000 Growth
Index produced a total return of 23.26%. Your Fund's impressive return reflects
a general upward trend in small-company stock prices. After lagging
large-company stocks for more than two years, small-company stocks took the
lead, as their compelling relative valuations fueled investor demand.
WHAT WAS THE ECONOMIC ENVIRONMENT LIKE DURING THE PERIOD?
A The economic environment was ideal for small-company stocks. Economic growth
was strong, inflation remained under control, and interest rates were relatively
low. Against this back drop, small-company stocks generated strong returns. In
fact, for the third calendar quarter of 1997, small-company stocks were market
leaders.
Q HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
A We sought companies with market capitalizations of $1 billion and under with
improving prospects. We invested in a variety of businesses in several economic
sectors, including, technology, healthcare, finance, and energy. At the end of
the period, your Fund's portfolio was composed of 198 stocks in 25 industries.
Q AT 37.8% ON SEPTEMBER 30, 1997, TECHNOLOGY STOCKS CONTINUED TO ACCOUNT FOR THE
LARGEST PORTION OF PORTFOLIO ASSETS. DID YOU MAKE CHANGES IN THIS AREA?
A The Fund's technology holdings included telecommunications, information
services and electronics companies. We built up the Fund's exposure to companies
that are benefitting from the production of the next generation of semiconductor
equipment. For example, we added Asyst Technologies, a company that creates
"clean room" environments for the production of semiconductors and Credence
Systems, a business that tests semiconductor designs.
<PAGE>
PAGE 4
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
TOP FIVE INDUSTRIES
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY NET ASSETS
<S> <C>
- -------------------------------------------------------------
Information Services & Technology 19.2%
- -------------------------------------------------------------
Electronic Technology 9.8%
- -------------------------------------------------------------
Telecommunication Services & Equipment 8.8%
- -------------------------------------------------------------
Health Technology & Services 7.7%
- -------------------------------------------------------------
Banks 7.6%
- -------------------------------------------------------------
</TABLE>
Q THE FINANCE INDUSTRY IS AMONG THE TOP FIVE INDUSTRIES REPRESENTED IN THE
PORTFOLIO. WHY WERE FINANCE STOCKS ATTRACTIVE?
A In the finance area, we focused on regional banks, insurance companies and
brokerages. In general, these types of companies are benefitting from lower
interest rates. Regional banks are reaping the rewards of cost reduction and
growth from consolidation. We also increased the number of insurance companies
in the portfolio. Insurance companies are at the beginning of a restructuring
and consolidation cycle. We believe that such activity should lead to increased
earnings growth, and ultimately, higher stock prices.
Q WHERE ELSE DID YOU FIND OPPORTUNITY?
A Energy-related companies were strong contributors to your Fund's performance.
They accounted for 8.6% of the portfolio's net assets. These types of companies
supply oil fields with the drilling rigs and other equipment needed to explore
and produce gas and oil. Energy services companies are benefitting from a strong
growth trend in gas and oil exploration that has been triggered by dwindling
reserves and increased worldwide energy demand.
Q WHAT IS YOUR OUTLOOK?
A As we look toward 1998, we find ourselves in one of the most positive
investment environments in memory, with moderate economic growth, stable-to-
falling interest rates, and low inflation. Relative to other
TOP 10 HOLDINGS
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY INDUSTRY NET ASSETS
<S> <C> <C>
- --------------------------------------------------------------------
Synopsys, Inc. Information Services
& Technology 2.3%
- --------------------------------------------------------------------
Maxim Integrated Products Electronic
Technology 1.9%
- --------------------------------------------------------------------
BMC Software, Inc. Information Services
& Technology 1.8%
- --------------------------------------------------------------------
Astoria Financial Corp. Banks 1.8%
- --------------------------------------------------------------------
TCF Financial Corporation Banks 1.8%
- --------------------------------------------------------------------
Firstplus Financial Group, Inc. Finance & Insurance 1.6%
- --------------------------------------------------------------------
Newpark Resources, Inc. Oil Field Services 1.6%
- --------------------------------------------------------------------
USA Waste Services, Inc. Industry Specialty
Products & Services 1.5%
- --------------------------------------------------------------------
Roper Industries Industry Specialty
Products & Services 1.4%
- --------------------------------------------------------------------
Oakwood Homes Corp. Building,
Construction &
Furnishings 1.4%
- --------------------------------------------------------------------
</TABLE>
investments, we believe that small-company stocks are among the most compelling
investments available. Nevertheless, a word of caution is in order. While your
Fund made superior gains over the past several months, it would be unrealistic
to expect that such high returns will continue without interruption. Over the
long term, there will be upswings and downturns, as there have always been with
small-company investments. That is why, we encourage you to take a long-term
perspective when reviewing your Fund's performance. Over time, we believe
small-company stocks have the potential to provide strong returns to long-term
investors.
(Diamond appears here.)
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 600
CHARLOTTE, N.C. 28288-0969
Funds that invest in stocks of small companies, also called small-cap stocks,
involve certain risks and, therefore, may not be appropriate
for all investors. Although they may offer the potential for greater long-term
returns, they also may experience greater price volatility due to their limited
focus on a particular industry, market, product, or service, or because they
invest in smaller, less established companies.
<PAGE>
PAGE 5
- ---------------------------------------------------------
Growth of an Investment
(Chart appears here with the following plot points.)
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge 18.48%
1 year w/sales charge* 15.48%
5 years 154.62%
10 years 269.06%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 18.48%
1 year w/sales charge* 15.48%
5 years 20.55%
10 years 13.95%
</TABLE>
* THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 3.0%
<PAGE>
PAGE 6
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------------
COMMON STOCKS-- 99.6%
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.7%
256,860 Tower Automotive, Inc........ $ 11,558,700
--------------
BANKS-- 7.6%
561,462 * Astoria Financial Corp....... 28,231,011
291,240 * Bostonfed Bancorp, Inc....... 6,134,243
244,160 * Hubco, Inc................... 7,698,670
266,970 * Long Island Bancorp, Inc..... 12,555,933
390,080 * North Fork Bancorp., Inc..... 11,312,320
171,532 * Queens County Bancorp, Inc... 8,882,141
600,000 * Sovereign Bancorp, Inc....... 10,462,500
465,980 * TCF Financial Corp........... 27,230,706
61,646 * Westamerica Bancorp.......... 5,378,614
--------------
117,886,138
--------------
BUILDING, CONSTRUCTION &
FURNISHINGS-- 3.9%
581,020 Champion Enterprises, Inc.... 11,112,007
150,000 Essex International, Inc..... 5,775,000
235,419 Furniture Brands
International, Inc......... 4,443,534
150,000 General Cable Corp........... 5,325,000
774,791 * Oakwood Homes Corp........... 21,984,695
194,160 Shaw Group, Inc.............. 4,259,385
299,420 Toll Brothers, Inc........... 6,961,515
--------------
59,861,136
--------------
BUSINESS EQUIPMENT &
SERVICES-- 5.0%
248,255 BISYS Group, Inc. (The) (a).. 7,967,434
509,670 * Comdisco, Inc................ 16,596,129
512,484 Devry, Inc................... 15,310,459
370,069 Equity Corp. International... 8,627,234
175,121 * G & K Services............... 6,118,290
354,050 GTS Duratek, Inc............. 5,200,109
196,596 * Norrell Corp................. 6,757,988
165,324 Rental Service Corp.......... 3,709,457
217,945 Vincam Group, Inc............ 6,293,162
--------------
76,580,262
--------------
CHEMICAL & AGRICULTURAL
PRODUCTS-- 0.7%
266,240 * OM Group, Inc................ 10,632,960
--------------
<CAPTION>
SHARES VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
COMMUNICATION SYSTEMS &
SERVICES-- 1.4%
200,000 * Belden Inc................... $ 7,537,500
200,000 Cable Design Technologies
Corp....................... 7,612,500
300,000 Xylan Corp................... 6,628,125
--------------
21,778,125
--------------
CONSUMER PRODUCTS &
SERVICES-- 1.6%
248,517 Action Performance Cos.,
Inc........................ 7,206,993
116,967 Budget Group, Inc............ 3,859,911
380,000 Coleman Co., Inc............. 6,127,500
200,000 Peapod, Inc.................. 2,500,000
129,000 * Russ Berrie & Co., Inc....... 3,773,250
150,000 * Weider Nutrition
International, Inc......... 1,743,750
--------------
25,211,404
--------------
ELECTRONIC TECHNOLOGY-- 9.8%
100,900 ADFlex Solutions, Inc........ 2,459,438
626,640 Analog Devices, Inc.......... 20,992,440
261,100 Asyst Technologies, Inc...... 11,594,472
250,560 * BMC Industries, Inc.......... 7,970,940
66,100 Brooks Automation, Inc....... 2,536,587
100,000 Credence Systems Corp........ 4,887,500
200,000 Cymer Inc.................... 5,468,750
382,480 DII Group, Inc............... 12,538,172
137,700 Electroglas, Inc............. 4,673,194
75,000 Kulicke & Soffa Industries
Inc........................ 3,471,094
210,563 * Linear Technology Corp....... 14,535,427
240,000 Mattson Technology, Inc...... 3,510,000
418,889 Maxim Integrated
Products, Inc.............. 29,858,932
300,000 Radisys Corp................. 15,112,500
378,014 Sipex Corp................... 12,072,822
--------------
151,682,268
--------------
</TABLE>
<PAGE>
PAGE 7
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
FINANCE & INSURANCE-- 6.1%
59,000 * Allied Group, Inc............ $ 2,997,937
24,000 American Capital
Strategies Ltd............. 475,500
389,582 Amerin Corp.................. 11,163,959
15,900 * ARM Financial Inc............ 378,619
232,126 * CMAC Investment Corp......... 12,447,757
100,000 Delphi Financial Group,
Inc........................ 4,293,750
216,489 * Everen Capital Corp.......... 8,794,866
131,548 First Alliance Corp.......... 4,119,097
452,480 Firstplus Financial Group,
Inc........................ 25,395,440
78,800 * Frontier Insurance Group,
Inc........................ 2,994,400
186,023 * HCC Insurance Holdings Inc... 4,941,236
50,900 * Horace Mann Educators Corp... 2,856,762
129,440 * Legg Mason, Inc.............. 6,827,960
58,200 * Penn-America Group, Inc...... 1,191,281
100,000 * Vesta Insurance
Group, Inc................. 5,700,000
--------------
94,578,564
--------------
FOOD & BEVERAGE PRODUCTS-- 1.2%
211,527 * Applebee's International,
Inc........................ 5,274,955
382,500 * Flowers Industries Inc....... 7,793,437
15,100 Landry's Seafood
Restaurants Inc............ 444,506
55,000 Morningstar Group, Inc....... 2,365,000
122,400 * Worthington Foods, Inc....... 2,807,550
--------------
18,685,448
--------------
HEALTH TECHNOLOGY &
SERVICES-- 7.7%
180,400 Cyberonics, Inc.............. 2,903,313
411,044 Cytyc Corp................... 10,250,410
292,502 Emeritus Corp................ 4,387,530
300,000 Graham Field Health
Products, Inc.............. 4,875,000
577,226 Health Management Associates,
Inc........................ 18,254,772
213,673 Heartport, Inc............... 5,208,279
327,985 Idexx Laboratories, Inc...... 5,503,998
369,584 Lifecore Biomedical, Inc..... 6,652,512
88,000 Megabios Corp................ 1,485,000
292,510 Norland Medical Systems,
Inc........................ 2,650,872
252,684 Parexel International
Corp....................... 9,886,261
165,620 Pediatrix Medical Group...... 7,307,982
142,320 Perclose, Inc................ 3,148,830
336,582 Phymatrix Corp............... 5,027,694
194,500 Spine-Tech, Inc.............. 7,330,219
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
HEALTH TECHNOLOGY &
SERVICES-- CONTINUED
372,680 Thermo Cardiosystems, Inc.... $ 10,295,285
235,711 Total Renal Care
Holdings, Inc.............. 11,785,550
60,000 Vivus........................ 2,229,375
--------------
119,182,882
--------------
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 4.2%
363,274 Brown & Sharpe
Manufacturing Co. Cl. A.... 5,153,950
100,000 * Kaydon Corp.................. 6,000,000
660,000 * Roper Industries............. 22,275,000
122,280 Strategic Distribution,
Inc........................ 676,361
188,737 United States Filter Corp.... 8,127,487
584,616 USA Waste Services, Inc...... 23,311,563
--------------
65,544,361
--------------
INFORMATION SERVICES &
TECHNOLOGY-- 19.2%
150,000 American Management Systems
Inc........................ 2,859,375
148,100 Aspen Technology, Inc........ 5,211,269
230,800 Avid Technology, Inc......... 7,457,725
438,095 BMC Software, Inc............ 28,352,961
320,380 Cambridge Technology
Partners................... 11,443,573
150,000 Cognos, Inc.................. 3,557,813
360,000 Computer Products, Inc....... 10,788,750
101,250 Comverse Technology Inc...... 5,347,266
500,000 Data General Corp............ 13,312,500
165,000 Dataworks Corp............... 3,052,500
226,300 Discreet Logic, Inc.......... 6,011,094
28,200 Documentum, Inc.............. 934,125
40,000 EMC Corp..................... 2,335,000
371,000 Geoworks..................... 6,098,312
75,000 HTE, Inc..................... 1,134,375
178,600 JDA Software Group, Inc...... 6,507,737
353,380 Manugistics Group, Inc....... 12,589,162
400,000 Mapics, Inc.................. 5,150,000
28,700 Maximus, Inc................. 830,506
155,290 McAfee Associates, Inc....... 8,220,664
63,898 Mechanical Dynamics, Inc..... 501,200
205,290 Microchip Technology, Inc.... 9,302,203
237,054 * National Data Corp........... 9,719,214
</TABLE>
<PAGE>
PAGE 8
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
INFORMATION SERVICES & TECHNOLOGY-- CONTINUED
291,240 Parametric Technology Corp... $ 12,841,864
336,681 Project Software and
Development, Inc........... 7,764,706
200,000 PSW Technologies Inc......... 2,600,000
64,600 QAD, Inc..................... 1,191,063
889,000 Rational Software Corp....... 14,196,219
504,816 Safeguard Scientifics,
Inc........................ 14,765,868
348,323 Security Dynamics
Technology Inc............. 12,887,951
832,455 Synopsys, Inc................ 35,353,323
400,000 System Software Associates
Inc........................ 5,875,000
35,000 Transition Systems, Inc...... 717,500
1,000,000 Unisys Corp.................. 15,312,500
100,000 Vantive Corp................. 2,406,250
233,497 Wind River Systems Inc....... 9,631,751
--------------
296,261,319
--------------
LEISURE & TOURISM-- 1.9%
49,395 Casino America, Inc.
Warrant.................... 494
176,000 * CKE Restaurants Inc.......... 7,392,000
479,589 Colorado Gaming and
Entertainment Co. (c)...... 2,757,637
17,500 Pegasus Systems, Inc......... 317,734
167,246 Promus Hotel Corp............ 7,494,712
230,000 Regal Cinemas, Inc........... 6,166,875
347,000 Sodak Gaming, Inc............ 4,890,531
--------------
29,019,983
--------------
MACHINERY-- DIVERSIFIED-- 0.1%
99,400 Omniquip International,
Inc........................ 1,857,538
--------------
METAL PRODUCTS & SERVICES-- 2.1%
321,917 Global Industries, Inc....... 12,856,560
250,000 Oregon Metallurgical
Corp....................... 6,257,813
116,496 Special Metals Corp.......... 2,198,862
200,000 Steel Dynamics Inc........... 4,718,750
200,000 * Trimas Corp.................. 6,100,000
--------------
32,131,985
--------------
OFFICE EQUIPMENT & SUPPLIES-- 0.5%
227,900 Cognex Corp.................. 7,520,700
--------------
OIL-- EXPLORATION & PRODUCTION-- 3.6%
242,700 Forcenergy, Inc.............. 9,419,794
320,364 * KCS Energy Inc............... 9,450,738
138,000 Newfield Exploration Co...... 3,872,625
398,028 Nuevo Energy Co.............. 19,055,590
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
OIL-- EXPLORATION & PRODUCTION-- CONTINUED
83,586 * St. Mary Land and
Exploration Co............. $ 3,756,146
24,950 Stone Energy Corp............ 838,944
325,218 Swift Energy Co.............. 9,167,082
--------------
55,560,919
--------------
OIL FIELD SERVICES-- 5.0%
191,240 BJ Services Co., Inc......... 14,199,570
56,742 * Carbo Ceramics, Inc.......... 1,879,579
400,000 ENSCO International, Inc..... 15,775,000
400,100 Falcon Drilling.............. 14,128,531
632,078 Newpark Resources, Inc....... 24,848,566
108,999 Seacor Smit, Inc............. 6,757,938
--------------
77,589,184
--------------
PHARMACEUTICALS-- 3.1%
200,000 Agouron Pharmaceuticals,
Inc........................ 9,612,500
964,198 Amylin Pharmaceuticals,
Inc........................ 8,165,552
100,000 Dura Pharmaceuticals, Inc.... 4,381,250
250,000 Guilford Pharmaceuticals,
Inc........................ 7,328,125
50,000 Incyte Pharmaceuticals,
Inc........................ 4,198,438
582,480 Magainin Pharmaceutical...... 6,607,507
255,569 Neurogen Corp................ 6,868,417
--------------
47,161,789
--------------
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 1.1%
33,300 * Central Newspapers, Inc...... 2,472,525
93,000 Hearst Argyle Television,
Inc........................ 2,807,437
259,000 Jacor Communications, Inc.... 11,436,469
--------------
16,716,431
--------------
RETAILING & WHOLESALE-- 3.2%
203,000 Central Garden & Pet Co...... 6,204,187
882,480 Corporate Express, Inc....... 18,587,235
138,000 Cutter & Buck, Inc........... 2,829,000
300,000 Gadzooks, Inc................ 6,318,750
168,000 Michaels Stores, Inc......... 5,139,750
87,500 Stage Stores Inc............. 3,762,500
184,600 * Stanhome, Inc................ 5,457,238
35,000 Tefron Ltd................... 700,000
--------------
48,998,660
--------------
</TABLE>
<PAGE>
PAGE 9
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 8.8%
305,500 ACC Corp..................... $ 9,966,938
342,288 Aspect Telecommunications
Corp....................... 7,936,803
25,000 Associated Group, Inc. (The)
Cl. A...................... 1,765,625
128,000 Associated Group, Inc. (The)
Cl. B...................... 8,944,000
388,978 Billing Info Concepts Corp... 13,565,608
138,300 Boston Communications Group.. 2,031,281
75,000 Boston Technology, Inc....... 2,540,625
246,768 Brooks Fiber Properties
Inc........................ 11,513,270
501,000 McLeod-USA, Inc.............. 19,742,531
329,686 Natural Microsystems Corp.... 12,486,857
300,000 Ortel Corp................... 6,656,250
300,000 Pairgain Technologies, Inc... 8,540,625
170,000 Smartalk Teleservices,
Inc........................ 4,186,250
56,700 Spectrian Corp............... 3,625,256
150,000 United States Cellular
Corp....................... 5,531,250
89,000 Univision Communications,
Inc. Cl. A................. 4,828,250
550,000 Westell Technologies......... 12,185,937
--------------
136,047,356
--------------
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
TRANSPORTATION-- 1.1%
242,700 * ASA Holdings, Inc............ $ 6,803,184
146,399 Coach USA, Inc............... 4,401,120
100,000 Fritz Cos., Inc.............. 1,478,125
153,956 Swift Transportation, Inc.... 4,907,348
--------------
17,589,777
--------------
TOTAL COMMON STOCKS
(COST $1,044,099,031)...... 1,539,637,889
--------------
<CAPTION>
SHORT-TERM INVESTMENTS-- 0.7%
<S> <C> <C> <C>
REPURCHASE AGREEMENTS-- 0.7%
11,360,000 Keystone Joint Repurchase
Agreement (investments in
repurchase agreements, in
joint trading account,
purchased 9/30/97, 6.15%,
maturing 10/1/97, maturity
value $11,361,941) (b)..... 11,360,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $11,360,000)......... 11,360,000
--------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS--
(COST $1,055,459,031)................. 100.3% 1,550,997,889
OTHER ASSETS AND
LIABILITIES-- NET..................... (0.3) (5,252,371)
------ --------------
NET ASSETS.............................. 100.0% $1,545,745,518
------ --------------
</TABLE>
* Income producing securities.
(a) At September 30, 1997, the Fund owned 248,255 shares of common stock of The
BISYS Group, Inc. at a cost of $6,474,363. During the four months ended
September 30, 1997 the Fund earned no dividend income from this investment.
These shares were purchased prior to Evergreen Keystone Distributor, Inc.,
a wholly owned subsidiary of The BISYS Group, Inc., becoming the Fund's
principal underwriter and BISYS Fund Services, Inc. becoming the Fund's
sub-administrator.
(b) The repurchase agreement is fully collateralized by U.S. Government and/or
agency obligations based on market prices at September 30, 1997.
(c) Investment in a non-controlled affiliate. The Fund owns over 5% of
outstanding shares. At September 30, 1997, the Fund held 479,589 shares of
Colorado Gaming and Entertainment Company with a value of $2,757,637 and
acquisition cost of $2,766,251. The Fund has not earned any income from
this investment.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOUR-MONTH
PERIOD ENDED YEAR ENDED MAY 31,
SEPTEMBER 30, ---------------------------------------------------------
1997(A)(D) 1997(A) 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $8.44 $10.35 $8.62 $7.64 $7.95 $7.61
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.04) (0.11) (0.13) (0.07) (0.12) (0.12)
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions 1.74 (0.78) 2.87 1.68 0.63 1.82
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.70 (0.89) 2.74 1.61 0.51 1.70
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income 0 0 0 0 0 0
Net realized gain on investments and foreign currency
related transactions (0.70) (1.02) (1.01) (0.63) (0.82) (1.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.70) (1.02) (1.01) (0.63) (0.82) (1.36)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $9.44 $8.44 $10.35 $8.62 $7.64 $7.95
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (B) 21.43% (8.61%) 33.03% 23.58% 6.84% 28.76%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.77%(c) 1.75% 1.73% 1.78% 1.73% 2.04%
Total expenses, excluding indirectly paid expenses 1.77%(c) 1.73% 1.72% N/A N/A N/A
Net investment income (loss) (1.43%)(c) (1.32%) (1.34%) (1.10%) (1.49%) (1.68%)
PORTFOLIO TURNOVER RATE 28% 48% 94% 38% 60% 78%
AVERAGE COMMISSION RATE PAID PER SHARE $0.0525 $0.0551 $0.0563 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (MILLIONS) $ 1,546 $ 1,407 $ 2,006 $1,460 $1,006 $ 966
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------
1992(A) 1991(A) 1990(A) 1989(A) 1988
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF PERIOD $7.17 $6.24 $5.66 $4.48 $7.80
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.08) (0.04) 0 0.02 0
Net realized and unrealized gain (loss) on investments and
foreign currency
related transactions 0.98 1.17 0.63 1.20 (1.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.90 1.13 0.63 1.22 (1.64)
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income 0 0 (0.05) (0.01) 0
Net realized gain on investments and foreign currency related
transactions (0.46) (0.20) 0 (0.03) (1.68)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.46) (0.20) (0.05) (0.04) (1.68)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD $7.61 $7.17 $6.24 $5.66 $4.48
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (B) 13.45% 19.42% 11.24% 27.45% (22.39%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.47% 1.48% 1.40% 1.27% 1.17%
Total expenses, excluding indirectly paid expenses N/A N/A N/A N/A N/A
Net investment income (loss) (1.09%) (0.68%) 0.02% 0.47% 0.03%
PORTFOLIO TURNOVER RATE 81% 73% 77% 57% 80%
AVERAGE COMMISSION RATE PAID PER SHARE N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (MILLIONS) $ 702 $ 623 $ 538 $ 504 $ 442
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Annualized
(d) Effective September 30, 1997, the Fund changed its fiscal year end from May
31 to September 30.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
- ---------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------
ASSETS
Investments, at value
(identified cost, $1,055,459,031) $1,550,997,889
Foreign currency, at value (identified
cost, $2,962) 2,886
Cash 950,787
Receivable for investments sold 16,246,483
Receivable for Fund shares sold 4,709,494
Receivable for interest and dividends 103,774
Prepaid expenses 94,377
Other assets 56,466
- ------------------------------------------------------------
Total assets 1,573,162,156
- ------------------------------------------------------------
LIABILITIES
Payable for investments purchased 19,428,049
Payable for Fund shares redeemed 6,380,739
Distribution Plan expenses payable 800,832
Management fee payable 603,983
Due to affiliates 10,000
Accrued expenses and other liabilities 193,035
- ------------------------------------------------------------
Total liabilities 27,416,638
- ------------------------------------------------------------
NET ASSETS $1,545,745,518
- ------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital $ 946,410,059
Accumulated net investment loss (16,648)
Accumulated net realized gains on
investments and foreign currency related
transactions 103,813,325
Net unrealized appreciation on investments
and foreign currency related transactions 495,538,782
- ------------------------------------------------------------
Total net assets $1,545,745,518
- ------------------------------------------------------------
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST OUTSTANDING
Net assets of $1,545,745,518 (divided by)
163,756,330 shares outstanding $ 9.44
- ------------------------------------------------------------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1997* MAY 31, 1997
<S> <C> <C>
- ------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 978,024 $ 2,562,283
Interest 678,271 4,364,898
- ------------------------------------------------------------
Total income 1,656,295 6,927,181
- ------------------------------------------------------------
EXPENSES
Management fee $ 2,387,425 $ 7,788,033
Distribution Plan
expenses 4,928,079 16,641,755
Transfer agent fees 942,732 3,702,109
Administrative
expenses 165,513 17,039
Custodian fees 92,345 700,665
Professional fees 16,509 150,577
Trustees' fees and
expenses 63,443 54,381
Miscellaneous
expenses 128,797 244,220
- ------------------------------------------------------------
Total expenses 8,724,843 29,298,779
Less: Expenses
paid indirectly (3,184) (231,796 )
- ------------------------------------------------------------
Net expenses 8,721,659 29,066,983
- ------------------------------------------------------------
Net investment loss (7,065,364) (22,139,802 )
- ------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized gain on
investments and
foreign currency
related
transactions 110,149,243 117,982,561
Net change in
unrealized
appreciation on
investments and
foreign currency
related
transactions 184,561,753 (279,047,661 )
- ------------------------------------------------------------
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
related
transactions 294,710,996 (161,065,100 )
- ------------------------------------------------------------
Net increase
(decrease) in net
assets resulting
from operations $ 287,645,632 $(183,204,902)
- ------------------------------------------------------------
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE
FUND CHANGED ITS FISCAL YEAR END
FROM MAY 31 TO SEPTEMBER 30.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOUR-MONTH YEAR ENDED MAY 31,
PERIOD ENDED ----------------------------------
SEPTEMBER 30, 1997* 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (7,065,364) $ (22,139,802) $ (24,478,442)
Net realized gain on investments and foreign currency
related transactions 110,149,243 117,982,561 389,754,504
Net change in unrealized appreciation on investments and
foreign currency related transactions 184,561,753 (279,047,661) 127,581,090
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 287,645,632 (183,204,902) 492,857,152
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS ON
INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS (114,171,454) (200,508,632) (173,760,139)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 243,488,031 1,018,919,437 1,354,600,987
Payments for shares redeemed (369,839,740) (1,402,606,782) (1,267,570,849)
Net asset value of shares issued in reinvestment of
distributions 91,854,430 168,366,921 139,720,568
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
capital share transactions (34,497,279) (215,320,424) 226,750,706
- -------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 138,976,899 (599,033,958) 545,847,719
NET ASSETS:
Beginning of period 1,406,768,619 2,005,802,577 1,459,954,858
- -------------------------------------------------------------------------------------------------------------------------
End of period, including accumulated net investment loss of
$16,648, $7,516 and $7,483, respectively $ 1,545,745,518 $ 1,406,768,619 $ 2,005,802,577
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31
TO SEPTEMBER 30.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
- ---------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Small Company Growth Fund (S-4), (the "Fund") is a Pennsylvania trust
for which Keystone Investment Management Company ("Keystone") is the investment
adviser and manager. Keystone is a subsidiary of First Union Corporation ("First
Union").
The Fund is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a diversified, open-end management investment company. The
Fund's investment objective is long-term growth of capital through investments
in emerging growth companies.
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. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
The Fund values securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Fund values securities traded on an
exchange or NMS for which there has been no sale and other securities traded in
the over-the-counter market at the mean between the last reported bid and asked
price. 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 an amortized cost, which approximate market value.
B. REPURCHASE AGREEMENTS
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 including accrued interest. The Fund will only enter into
repurchase agreements with banks and other financial institutions which are
deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other funds managed by Keystone, 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. government and/or Federal Agency obligations.
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 and gains and losses resulting from the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized
<PAGE>
PAGE 14
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
gain (loss) on investments and foreign currency related 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 investments and foreign currency related
transactions. The Fund bears the risk of an unfavorable change in the foreign
currency exchange rate underlying the forward contract and is subject to the
credit risk that the other party will not fulfill their obligations under the
contract. Forward contracts involve elements of market risk in excess of the
amount reflected in the statement of assets and liabilities.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
F. FEDERAL 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 investment company taxable income and net capital
gains, if any, to its shareholders. The Fund also intends to avoid any excise
tax liability by making the required distributions under the Code. Accordingly,
no provision for federal taxes is required. To the extent that realized capital
gains can be offset by capital loss carryforwards, it is the Fund's policy not
to distribute such gains.
G. DISTRIBUTIONS
The Fund distributes net investment income quarterly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distribution and distributions made in accordance with
income tax regulations are primarily due to differing treatment for net realized
gains and losses from foreign currency related transactions and net operating
losses.
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>
FOUR-MONTH
PERIOD ENDED YEAR ENDED MAY 31,
SEPTEMBER 30, ---------------------------
1997* 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------
Shares sold 27,990,885 121,645,715 141,592,081
Shares redeemed (42,215,378) (168,659,715) (131,599,635)
Shares issued in
reinvestment
of
distributions 11,242,892 19,925,079 14,560,340
- -------------------------------------------------------------
Net increase
(decrease) (2,981,601) (27,088,921) 24,552,786
- -------------------------------------------------------------
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31
TO SEPTEMBER 30.
<PAGE>
PAGE 15
- ---------------------------------------------------------
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the four-month period ended September 30, 1997 and
year ended May 31, 1997 were as follows:
<TABLE>
<CAPTION>
FOUR-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1997* MAY 31 1997
<S> <C> <C>
- ----------------------------------------------------------
Purchases $ 403,741,271 $ 766,944,947
Sales 526,578,104 1,214,970,663
</TABLE>
* EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31
TO SEPTEMBER 30.
On September 30, 1997, the cost of investments for federal income tax purposes
was $1,056,265,261, gross unrealized appreciation of investments was
$519,501,950 and gross unrealized depreciation of investments was $24,769,322
resulting in net unrealized appreciation of $494,732,628 for federal income tax
purposes.
4. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan (the "Plan") as allowed by Rule 12b-1
of the 1940 Act. The Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the fund, are paid by shareholders
through expenses called "Distribution Plan expenses". The Fund pays a service
fee equal to 0.25% of its average daily net assets and a distribution fee equal
to 0.75% of its average daily net assets. Distribution Plan expenses are
calculated daily and paid monthly.
With respect to the Fund's shares, the principal underwriter may incur
distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
The Plan may be terminated at any time by vote of the Independent Trustees or
by vote of a majority of the outstanding voting shares of the Fund. However,
after the termination of the Plan, and subject to the discretion of the
Independent Trustees, payments to EKD and/or EKIS may continue as compensation
for services which had been earned while the Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
Contingent deferred sales charges paid by redeeming shareholders may be paid
to EKD or its predecessor.
5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of the investment advisory agreement dated December 11, 1996,
Keystone serves as the investment adviser and manager to the Fund. In return for
providing investment advisory and management services to the Fund, Keystone is
paid a management fee, computed daily and paid monthly, which is determined by
applying percentage rates starting at 0.70% and declining as net assets increase
to 0.35% per annum, to the average daily net asset value of the Fund.
During the four-month period ended September 30, 1997 and year ended May 31,
1997, the Fund paid or accrued $165,513 and $17,039, respectively, to Keystone
for certain administrative services. Additionally, Evergreen Keystone Services
Company ("EKSC"), a wholly-owned subsidiary of Keystone, serves as the Fund's
transfer and dividend disbursing agent.
BISYS Fund Services, Inc. ("BISYS"), an affiliate of EKD, serves as the Fund's
sub-administrator. As sub-
<PAGE>
PAGE 16
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
administrator, BISYS provides the officers of the Fund. For this service, BISYS
is paid a fee by Keystone, which is not a Fund expense.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets
7. YEAR END CHANGE
The Fund changed its fiscal year end from May 31 to September 30, effective
September 30, 1997.
<PAGE>
PAGE 17
- ---------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
We have audited the accompanying statement of assets and liabilities of Keystone
Small Company Growth Fund (S-4), including the schedule of investments, as of
September 30, 1997, and the related statements of operations for the four-month
period then ended and the year ended May 31, 1997, the statements of changes in
net assets for the four-month period ended September 30, 1997 and for each of
the years in the two-year period ended May 31, 1997 and financial highlights for
the four-month period ended September 30, 1997 and for each of the years in the
ten-year period ended May 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Small Company Growth Fund (S-4) as of September 30, 1997, the results
of its operations for the four-month period then ended and the year ended May
31, 1997, its changes in net assets for the four-month period ended September
30, 1997 and for each of the years in the two-year period ended May 31, 1997 and
its financial highlights for the four-month period ended September 30, 1997 and
for each of the years in the ten-year period ended May 31, 1997 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 31, 1997
<PAGE>
PAGE 18
- ---------------------------------------------------------
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
(UNAUDITED)
During the four month period ended September 30, 1997, the Fund paid
distributions of $114,171,454. These distributions were paid entirely from
long-term capital gains. The above figures may differ from those previously
reported and those cited elsewhere in this report due to differences in the
calculation of income and capital gains for accounting (book) purposes and
internal revenue service (tax) purposes.
In January 1998, we will send you complete information on the distributions paid
during calendar year 1997 to help you in completing your federal tax return.
<PAGE>
(blank intentionally)
<PAGE>
KEYSTONE
FAMILY OF FUNDS
(Diamond appears here.)
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
<TABLE>
<S> <C>
- -----------------------------------
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
- -------------------------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Evergreen KeystoneSM is a Service Mark of
Evergreen
Keystone Investment Services, Inc.
Copyright 1997.
(Recycle logo appears here.)
</TABLE>
S4-R 541255 REV01 11/97
KEYSTONE
(Photo Exists in Film ONLY.
Will See on Dylux)
SMALL COMPANY
GROWTH FUND (S-4)
(Evergreen tree appears here.)
Evergreen Funds(SM)
SINCE 1932
ANNUAL REPORT
SEPTEMBER 30, 1997
