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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 pleased to report to you on the activities of Keystone Small Company
Growth Fund (S-4) for the twelve-month period that ended May 31, l997. Following
this letter, we have included an interview with the Fund's manager J. Gary
Craven, in which he discusses his portfolio strategy.
PERFORMANCE
For the twelve-month period, which ended May 31, l997, your Fund produced a
total return of -8.61%, exclusive of any deferred sales charge. The Russell 2000
Index rose 6.97% and the Russell 2000 Growth Index produced a total return of
- -5.48% for the same period.
Your Fund's results were disappointing. It is important to remember, though,
that they occurred during a time when small-company stocks in general, and
technology stocks in particular, lagged behind large-company stock indices.
During this period, particularly the last six months, we continued to reposition
the Fund for greater consistency by emphasizing the stocks of companies that we
believe have the potential to produce sustainable above-average growth over
time.
ENVIRONMENT
During the twelve months, concerns about the pace of economic growth,
accelerating inflation and higher interest rates held back the performance of
small-company stocks. From mid-l996 until late-April 1997, small-company stock
prices fluctuated broadly. During market corrections, small-cap stock prices
declined more than those of large-company stocks; and during market rallies,
their returns rose less than their large-cap counterparts. Finally, in the last
six weeks of the period, the small stock market began to rally as investors
appeared to recognize the attractive relative values there.
STRATEGY
Over the twelve-months, we emphasized companies with market capitalizations of
$1 billion and under. We cut back on the stocks of companies that we believed
had reached optimal price levels, and we invested in a variety of high-quality
companies that we believed were selling at attractive prices and that have the
potential to generate strong earnings over several years. In selecting stocks
for the portfolio, we focused on businesses that appear to have sustainable
above-average growth prospects. We sought companies in all sectors of the
market, and we emphasized firms that had distinguishing attributes, such as
strong management, unique product lines, and low-cost goods and services. We
diversified your Fund's investments among a number of economic sectors,
including technology, health care and finance.
OUTLOOK
Over the next several months, we believe small-company stocks should generate
stronger returns than they have in the recent past. We think economic growth
should be moderate and inflation and interest rates should be relatively low.
Historically, small-company stocks have tended to perform well in this type of
environment. In addition, small company stocks are relatively inexpensive. Even
after the small-cap stock rally of April and May, valuations on small-company
stocks, in comparison to large-cap stocks, were at their most attractive levels
in several years. We believe these favorable conditions should bode well for
small-cap stocks.
As a small-company investor, you should keep in mind that one of the
characteristics of small-company stocks is their volatility. They tend to
fluctuate in value over short periods of time. Historically, large gains in the
small-cap sector
-- CONTINUED--
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PAGE 2
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
have come during short time frames. Therefore, being invested in small-caps when
they rally is crucial to being a successful small-cap investor. As we continue
to restructure the portfolio, we believe that the companies in which we have
invested are poised to achieve their highest profitability and fastest growth.
In many areas, such as technology and health care, these companies are at a
stage in their development when they are introducing products and services that
have never existed. Generally, earnings growth in these types of companies is
less dependent on the general level of economic activity and more on the success
of their own particular product cycles.
Thank you for your continued support of Keystone Small Company Growth Fund
(S-4). If you have any questions or comments about your investment, we encourage
you to write to us.
Sincerely,
/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
<TABLE>
<S> <C>
(Photo of Albert H. (Photo of George S.
Elfner, III appears here) Bissell appears here)
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
June 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 L996,
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 WHAT WAS THE INVESTMENT ENVIRONMENT FOR SMALL-CAP STOCKS LIKE DURING THE
TWELVE-MONTH PERIOD?
A It was a volatile environment for small-cap stocks. Small caps generated very
strong gains in l995, but midway through l996, the environment changed. Concerns
about slower economic growth and rising interest rates made small-cap stocks
less appealing to investors, and they shifted money to large-company stocks.
Small company stocks were hit hardest during a market correction in the summer
of l996 and, again, during the market downturn that occurred in March and April
of l997. Toward the end of April, however, investors appeared to recognize that
small-cap stock prices were at very attractive price levels and began to favor
small-cap stocks. Small-cap stock prices rose and continued on an upward course
through May 1997.
Q WHAT WAS YOUR STRATEGY FOR MANAGING THE PORTFOLIO DURING THE PERIOD?
A We invested in companies with market capitalizations of $1 billion and under.
Our strategy was to reposition the portfolio to reduce volatility. We invested
in high-quality companies that we believe have above average long-term growth
prospects and that were relatively inexpensive. The companies we selected for
the portfolio tended to have strong competitive positions in their market
sectors and superior business models which have the potential to generate high
returns on capital. These business models can include: low cost production,
technological leadership, exceptional distribution systems and high-quality
management teams.
Q TECHNOLOGY STOCKS ACCOUNTED FOR THE LARGEST AREA OF INVESTMENT. WHAT WAS
ATTRACTIVE ABOUT TECHNOLOGY STOCKS?
A When we refer to technology stocks, we include a broad area that encompasses
telecommunications, software and hardware businesses. During the period, we
changed the composition of the technology portion of the portfolio. We sold
stocks that we believed had reached optimal price levels. For example, we
reduced two long-standing software holdings, McAfee Associates and BMC Software.
We found opportunity in a number of other companies that were attractively
priced and met our criteria for growth.
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PAGE 4
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
TOP 5 INDUSTRIES
AS OF MAY 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY NET ASSETS
<S> <C>
Information Services & Technology 19.4%
Healthcare Products & Services 11.2%
Finance & Insurance 9.8%
Oil 8.7%
Electronics 7.3%
</TABLE>
Q WHAT WERE SOME OF THE TECHNOLOGY COMPANIES YOU ADDED TO THE PORTFOLIO?
A We believe there are several dominant hardware companies in the technology
sector, including Microsoft, Intel and Cisco Systems. Because these are very
large companies, your Fund does not invest in them. However, we can take
advantage of their strength by investing in smaller firms that do business with
these larger firms. We increased our exposure to companies that we believe
should benefit from providing products and services to large, dominant
technology companies. Two examples are Avid Technology and Rational Software.
Avid Technology produces editing software for the television and movie
industries. It is currently developing this high-end technical equipment for the
corporate and consumer markets. Rational Software produces software that makes
it easier to write computer programs.
Q DID YOU MAKE ANY CHANGES IN THE FINANCE AREA?
A We made a number of changes in the finance sector. We eliminated stocks that
we believe had reached their target price levels. We also were concerned about
the impact that increases in interest rates could have on some lenders. As a
result, when the Federal Reserve Board raised rates in March, we repositioned
our investments from sub-prime lenders to higher quality lenders. We sold
automobile loan companies and mortgage lending businesses and increased our
emphasis on quality, regional banks. Going forward, we are optimistic about the
potential for financial stocks. We believe that the need for financial services
and products will increase for the rest of the decade and that the finance
sector of the market should be one of the strongest growth areas.
Q SIX MONTHS AGO, OIL SERVICES STOCKS WERE AN AREA OF EMPHASIS FOR THE FUND.
WERE THEY AS DOMINANT IN THE PORTFOLIO AT THE END OF THE PERIOD?
A We trimmed the Fund's exposure to oil services stocks as they reached their
price objectives. Even though energy and oil services stocks have produced
strong returns for more than a year, the level of drilling activity is
increasing. We have concentrated Fund holdings in companies we believe are well
positioned to participate in this activity. We cut back on ENSCO International,
which had been the Fund's largest holding. It is still among the portfolio's top
ten holdings, but we reduced its position in the portfolio.
Q HEALTH CARE STOCKS WERE AN IMPORTANT PART OF THE PORTFOLIO. HOW DID THESE
STOCKS PERFORM?
A In the health care area, prices on several companies declined because of
concerns about changes in Medicare regulations. We believe investors overreacted
to the possible changes in Medicare, and we invested in several health care
companies. These included Lincare, American Home Patients, and Rotech. These are
home health care businesses that specialize in respiration technology, that is,
they provide oxygen to patients with Asthma, Emphysema and Chronic Bronchitis.
We also increased the portfolio's exposure to biotechnology companies.
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PAGE 5
TOP 10 HOLDINGS
AS OF MAY 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY INDUSTRY NET ASSETS
<S> <C> <C>
BMC Software, Inc. Information Services 3.0%
& Technology
Synopsis, Inc. Information Services 2.2.%
& Technology
Maxim Integrated Electronics 1.7%
Products, Inc.
Seacor Smit, Inc. Oil 1.7%
Astoria Financial Corp Finance & Insurance 1.6%
ENSCO International, Inc. Oil 1.6%
Microchip Technology, Information Services 1.5%
Inc. & Technology
Health Management Healthcare Products & 1.5%
Associates, Inc. Services
USA Waste Services, Inc. Business Equipment 1.5%
TCF Financial Corp Finance & Insurance 1.4%
</TABLE>
Q WHAT IS YOUR OUTLOOK?
A We believe there are several factors that bode well for the future. Prices of
small-company stocks are very attractive, relative to their large-cap
counterparts. However, it is going to take earnings growth to drive small-cap
prices higher over the long term. We believe that the development of new
products and technologies should add the impetus that these stocks need to
perform well over the long term. We are optimistic about economic growth. We
believe that any increase in interest rates will be relatively small and will
set the stage for moderate economic growth, relatively low inflation, and lower
interest rates over the long term. We think this should be a positive backdrop
for small companies.
(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 KEYSTONE INVESTMENT SERVICES, INC.
ATTN. SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400,
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 6
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
Your Fund's Performance
(Charts appear here with the following information)
Growth of an investment in
Keystone Small Company Growth Fund
5/86 5/87 5/88 5/89 5/90 5/91 5/93 5/94 5/95 5/96 5/97
Dividend Reinvestment (Customer to supply plot points)
Initial Investment
A $10,000 investment in Keystone Small Company Growth Fund (S-4) made on
May 31, 1987 with all distributions reinvested was worth $30,805 on May 31,
1997. Past performance is no guarantee of future results.
Comparison of change in value of a $10,000 investment in
Keystone Small Company Growth Fund (S-4), the Russell
2000 Index, the NASDAQ Composite Index and the
Consumer Price Index.
5/31/87 5/88 5/89 5/90 5/91 5/92 5/93 5/94 5/95 5/96 5/97
Fund (Customer to supply plot points)
CPI
Russell 2000
NASDAQ
Past performance is no guarantee of future results. The Russell 2000 index and
NASDAQ Composite Index are unmanaged market indices. These indices do not
include transaction costs associated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
May 31, 1997.
<TABLE>
<S> <C>
The "If you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) for those investors who sold Fund shares after one
calendar year. Investors who retained their fund investment earned the returns
reported in the second column of the table.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<CAPTION>
</TABLE>
<TABLE>
<S> <C> <C>
TWELVE-MONTH PERFORMANCE AS OF MAY 31, 1997
Total Return* (8.61%)
Net asset value 5/31/96 $10.35
5/31/97 $ 8.44
Dividends None
Capital gain distributions $ 1.02
* BEFORE DEDUCTION OF CONTINGENT DEFERRED SALES CHARGES
(CDSC).
</TABLE>
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL RECORD AS OF MAY 31, 1997
<S> <C> <C>
IF YOU IF YOU DID NOT
REDEEMED REDEEM
<S> <C> <C>
CUMULATIVE TOTAL RETURN
1-year (11.06%) (8.61%)
5-year 106.68% 106.68%
10-year 208.05% 208.05%
AVERAGE ANNUAL TOTAL RETURN
1-year (11.06%) (8.61%)
5-year 15.63% 15.63%
10-year 11.91% 11.91%
</TABLE>
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PAGE 7
SCHEDULE OF INVESTMENTS-- MAY 31, 1997
[CAPTION]
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C> <C>
COMMON STOCKS-- 97.2%
<C> <S> <C> <C>
AUTOMOTIVE EQUIPMENT & MANUFACTURING--
1.7%
359,500 Gentex Corp.................. $ 7,190,000
411,160 Tower Automotive Inc......... 16,292,215
23,482,215
BANKS-- 1.7%
93,100 * Community First Bankshares
Inc........................ 3,217,769
233,160 * Hubco Inc.................... 6,076,732
390,080 * North Fork Bancorp, Inc...... 8,191,680
207,800 * Sovereign Bancorp Inc........ 2,740,362
61,646 * Westamerica Bancorp.......... 4,230,457
24,457,000
BUILDING, CONSTRUCTION & FURNISHINGS--
3.4%
631,020 Champion Enterprises, Inc.... 11,594,993
235,419 Furniture Brands
International, Inc......... 3,678,422
824,791 * Oakwood Homes Corp........... 19,588,786
125,000 Service Experts Inc.......... 3,546,875
194,160 Shaw Group Inc............... 3,373,530
299,420 Toll Brothers, Inc........... 5,464,415
47,247,021
BUSINESS EQUIPMENT & SERVICES-- 4.8%
235,660 Alternative Resources
Corp....................... 4,344,981
25,000 American Management Systems
Inc........................ 646,875
339,780 * Comdisco, Inc................ 12,529,388
325,121 * G&K Services................. 10,525,792
196,596 * Norrell Corporation Georgia.. 6,340,221
141,000 Renaissance Solutions,
Inc........................ 5,164,125
584,616 USA Waste Services, Inc...... 21,192,330
217,945 Vincam Group Inc............. 6,701,809
67,445,521
CHEMICAL & AGRICULTURAL PRODUCTS-- 0.7%
291,240 * OM Group, Inc................ 9,174,060
COMMERCIAL SERVICES-- 0.3%
116,967 Budget Group Inc............. 3,260,455
23,800 Hertz Corp................... 815,150
4,075,605
COMMUNICATION SYSTEMS & SERVICES--
0.5%
200,000 Data General Corp............ 4,275,000
200,000 Fore Systems................. 3,312,500
7,587,500
<CAPTION>
SHARES VALUE
<C> <S> <C> <C>
<CAPTION>
COMMON STOCKS (CONTINUED)
<C> <S> <C> <C>
CONSUMER PRODUCTS & SERVICES-- 3.0%
318,517 Action Performance Cos Inc... $ 7,664,315
69,880 Blyth Industries Inc......... 3,109,660
532,484 Devry Inc.................... 14,709,871
370,069 Equity Corporation
International.............. 8,812,268
200,000 * Stanhome Inc................. 6,275,000
172,007 USA Detergents Inc........... 2,214,590
42,785,704
ELECTRONICS-- 7.3%
53,200 ADFlex Solutions, Inc........ 871,150
353,857 Altron Inc................... 5,882,873
626,640 Analog Devices, Inc.......... 16,762,620
3,500 Asyst Technologies Inc....... 1,337,906
300,560 * BMC Industries Inc........... 9,880,910
150,000 Credence Systems Corp........ 4,443,750
291,240 DII Group Inc................ 9,210,465
488,320 ESS Technology Inc........... 7,538,440
50,000 Flextronics International.... 1,171,875
200,000 Integrated Process Equipment
Corp....................... 3,662,500
210,563 * Linear Technology Corp....... 10,541,310
433,889 Maxim Integrated Products
Inc........................ 23,375,770
289,007 Sipex Corp................... 8,597,958
103,277,527
FINANCE & INSURANCE-- 9.8%
389,582 Amerin Corp.................. 9,057,781
561,462 * Astoria Financial Corp....... 23,090,125
248,255 The BISYS Group Inc. (a)..... 9,418,174
291,240 * BostonFed Bancorp Inc........ 4,405,005
28,188 * Capital Re Corp.............. 1,236,749
342,126 * CMAC Investment Corp......... 14,240,995
216,489 * Everen Capital Corp.......... 5,358,103
90,648 First Alliance Company....... 2,232,207
582,480 Firstplus Financial Group
Inc........................ 14,780,430
361,023 * HCC Insurance Holdings Inc... 9,431,726
97,080 * Legg Mason, Inc.............. 4,477,815
266,970 * Long Islands Bancorp Inc..... 9,293,893
281,532 * Queens County Bancorp........ 11,648,386
465,980 * TCF Financial Corp........... 19,804,150
138,475,539
</TABLE>
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PAGE 8
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
SCHEDULE OF INVESTMENTS-- MAY 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS (CONTINUED)
<C> <S> <C> <C>
FOOD & BEVERAGE PRODUCTS-- 1.1%
351,527 * Applebee's International
Inc........................ $ 8,678,323
382,500 * Flowers Industries Inc....... 6,741,562
15,419,885
HEALTHCARE PRODUCTS & SERVICES-- 11.2%
85,800 Agouron Pharmaceuticals
Inc........................ 6,880,087
180,000 American Home Patient Inc.... 3,465,000
964,198 Amylin Pharmaceuticals Inc... 12,474,312
23,100 CRA Managed Care Inc......... 1,061,156
281,026 Cytotherapeutics............. 1,563,207
188,044 Cytyc Corp................... 4,595,325
292,502 Emeritus Corp................ 4,460,655
662,085 Gilead Sciences Inc.......... 17,834,915
727,226 Health Management Associates,
Inc........................ 21,271,360
213,673 Heartport Inc................ 5,141,507
167,985 Idexx Laboratories, Inc...... 2,383,287
369,584 Lifecore Biomedical Inc...... 5,151,077
150,000 Lincare Holdings, Inc........ 5,840,625
582,480 Magainin Pharmaceutical...... 4,295,790
255,569 Neurogen Corp................ 4,823,865
192,510 Norland Medical Systems
Inc........................ 1,672,431
329,684 Parexel International
Corp....................... 10,776,546
145,620 Pediatrix Med Group.......... 5,788,395
142,320 Perclose Inc................. 3,273,360
512,582 Phymatrix Corp............... 7,336,330
120,000 Polymer Group Inc............ 1,740,000
140,000 Rotech Medical Corp.......... 2,388,750
339,780 Strategic Distribution
Inc........................ 1,337,884
372,680 Thermo Cardiosystems Inc..... 10,015,775
235,711 Total Renal Care Holdings
Inc........................ 8,485,596
63,102 Urologix Inc................. 1,064,846
24,076 Virus Research Institute
Inc........................ 153,485
150,000
Weider Nutrition
International Inc.......... 1,912,500
157,188,066
<CAPTION>
SHARES VALUE
<C> <S> <C> <C>
<CAPTION>
COMMON STOCKS (CONTINUED)
<C> <S> <C> <C>
INDUSTRIAL SPECIALTY PRODUCTS &
SERVICES-- 2.3%
363,274 Brown & Sharpe Manufacturing
Co. Cl. A.................. $ 5,176,655
354,050 GTS Duratek Inc.............. 3,075,809
180,500 * Roper Industries............. 8,867,062
47,500 * Trimas Corp.................. 1,347,813
438,037 United States Filter Corp.... 13,798,165
32,265,504
INFORMATION SERVICES & TECHNOLOGY--
19.4%
130,000 ABR Information Services
Inc........................ 4,168,125
15,000 Acxiom Corp.................. 247,500
280,800 Avid Technology Inc.......... 6,598,800
415,864 BDM International Inc........ 10,656,515
133,097 Bitstream Inc................ 382,654
217,000 Black Box Corp............... 7,649,250
788,095 BMC Software, Inc............ 42,606,386
420,380 Cambridge Technology
Partners................... 12,847,864
80,182 Ciber Inc.................... 3,312,519
483,700 Clarify Inc.................. 5,834,631
485,400 Cognex Corp.................. 12,650,737
207,654 Dataworks Corp............... 3,932,448
485,400 Geoworks..................... 3,048,919
4,000 Inacom Corp.................. 129,250
227,184 INSO Corp.................... 6,346,953
48,540 Manugistics Group Inc........ 3,142,965
5,000 May & Speh Inc............... 55,937
205,290 McAfee Associates Inc........ 13,510,648
232,798 Mechanical Dynamics Inc...... 2,182,481
605,290 Microchip Technology Inc..... 21,601,287
237,054 * National Data Corp........... 10,400,744
291,240 Parametric Technology Corp... 13,087,597
236,681 Project Software &
Development Inc............ 4,556,109
150,000 Pure Atria Corp.............. 2,390,625
174,200 Radisys Corp................. 6,380,075
350,000 Rational Software Corp....... 6,584,375
504,816 Safeguard Scientifics Inc.... 13,630,032
348,323 Security Dynamics............ 12,844,411
832,455 Synopsys Inc................. 31,008,949
100,000 Vantive Corp................. 2,687,500
233,497 Wind River Systems Inc....... 7,880,524
272,356,810
</TABLE>
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PAGE 9
SCHEDULE OF INVESTMENTS-- MAY 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS (CONTINUED)
<C> <S> <C> <C>
LEISURE & TOURISM-- 2.0%
43,000 Anchor Gaming................ $ 1,832,875
49,395 Casino America Inc........... 494
479,589 Colorado Gaming &
Entertainment Company (c).. 2,158,150
291,240 * Louisiana Quinta Inns Inc.... 6,698,520
467,246 Promus Hotel Corp............ 16,879,262
27,569,301
MACHINERY-- DIVERSIFIED-- 0.5%
99,400 Omniquip International Inc... 1,994,213
215,324 Rental Service Corp.......... 4,683,297
6,677,510
METAL PRODUCTS & SERVICES-- 1.2%
452,490 Molten Metal Tech Inc........ 3,195,711
250,000 Oregon Metallurgical Corp.... 6,437,500
235,613 RMI Titanium Company......... 5,478,002
116,496 Special Metals Corp.......... 2,169,738
17,280,951
NATURAL GAS-- 1.2%
398,028 Nuevo Energy Company......... 17,363,972
OFFICE EQUIPMENT & SUPPLIES-- 2.0%
485,400 EMC Corp..................... 19,355,325
293,220 Komag Inc.................... 8,466,727
27,822,052
OIL-- 8.7%
191,240 BJ Services Company.......... 10,566,010
81,742 * Carbo Ceramics Inc........... 1,808,542
457,248 ENSCO International Inc...... 22,805,244
300,050 Falcon Drilling.............. 13,764,794
242,700 Forcenergy, Inc.............. 8,464,162
321,917 Global Industries, Inc....... 7,021,815
160,182 * KCS Energy Inc............... 6,667,576
316,039 Newpark Resources, Inc....... 16,592,047
448,999 Seacor Smit Inc.............. 23,235,698
24,950 Stone Energy Corp............ 698,600
83,586 * Saint Mary Land & Exploration
Company.................... 2,653,856
325,218 Swift Energy Company......... 8,699,581
122,977,925
<CAPTION>
SHARES VALUE
<C> <S> <C> <C>
<CAPTION>
COMMON STOCKS (CONTINUED)
<C> <S> <C> <C>
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 1.7%
371,040 Cox Radio Inc................ $ 8,302,020
388,320 Jacor Communications, Inc.... 13,421,310
75,800 Young Broadcasting Inc.
Cl. A...................... 2,032,387
23,755,717
RETAILING & WHOLESALE-- 5.4%
390,055 Abercrombie & Fitch Company.. 6,777,205
882,480 Corporate Express Inc........ 12,244,410
181,877 Global Directmail Corp....... 4,319,579
141,240 Kohl's Corp.................. 7,609,305
187,680 Nautica Enterprises, Inc..... 4,422,210
485,400 Saks Holdings Inc............ 12,074,325
493,200 Sports Authority Inc......... 8,877,600
310,656 * Tiffany & Company New........ 14,406,672
236,293 West Marine Inc.............. 6,187,923
76,919,229
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 6.1%
77,800 ACC Corp..................... 1,993,625
427,288 Aspect Telecommunications
Corp....................... 9,613,980
398,978 Billing Information Concepts
Corp....................... 11,470,618
138,300 Boston Communications Group.. 1,339,781
346,768 Brooks Fiber Properties
Inc........................ 8,907,603
435,000 McLeod USA Incorporated...... 10,222,500
326,286 Natural Microsystems Corp.... 8,014,400
300,000 Pairgain Technologies Inc.... 6,281,250
161,444 Proxim Inc................... 4,106,732
121,700 Spectrian.................... 2,692,612
829,053 Tel-Save Holdings Inc........ 12,746,690
582,480 Winstar Communications Inc... 8,227,530
85,617,321
TRANSPORTATION-- 0.3%
146,399 Coach USA Inc................ 3,842,974
TRANSPORTATION-- 0.9%
242,700 * ASA Holdings, Inc............ 6,310,200
77,320 Railtex Inc.................. 1,420,755
153,956 Swift Transportation Inc..... 4,965,082
12,696,037
<CAPTION>
TOTAL COMMON STOCKS
(COST $1,056,771,773)......................... 1,367,760,946
<C> <S> <C> <C>
</TABLE>
<PAGE>
PAGE 10
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
SCHEDULE OF INVESTMENTS-- MAY 31, 1997
<TABLE>
<CAPTION>
PAR
VALUE VALUE
<C> <S> <C> <C>
<CAPTION>
SHORT-TERM INVESTMENTS-- 1.9%
<C> <S> <C> <C>
GOVERNMENT AGENCIES-- 0.7%
10,000,000 FHLB Discount Notes
5.50%, 6/2/97.................... $ 9,998,472
REPURCHASE AGREEMENTS-- 1.2%
16,205,000 Keystone Joint Repurchase Agreement
(investments in repurchase
agreements, in joint trading
account, purchased 5/30/97,
5.5734%, maturing 6/2/97,
maturity value $16,212,526)(b)...
16,205,000
<CAPTION>
TOTAL SHORT-TERM INVESTMENTS
(COST $26,203,472)............................ 26,203,472
<C> <S> <C> <C>
<CAPTION>
TOTAL INVESTMENTS
(COST-- $1,082,975,245) 99.1% 1,393,964,418
<C> <S> <C> <C>
OTHER ASSETS AND LIABILITIES--
NET 0.9 12,804,201
NET ASSETS 100.0% $1,406,768,619
</TABLE>
* Income producing securities.
FHLB-- Federal Home Loan Bank
(a) At May 31, 1997, the Fund owned 248,255 shares of common stock of The BISYS
Group, Inc. at a cost of $6,474,363. During the year ended May 31, 1997 the
Fund earned no dividend income from this investment. These shares were
purchased prior to Evergreen Keystone Distributors 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 May 31, 1997.
(c) Investment in non-controlled affiliate holding over 5% of outstanding
shares. At May 31, 1997, the Fund held 479,589 of Colorado Gaming &
Entertainment Company with a value of $2,158,150 and acquisition cost of
$2,766,251. The Fund has not earned any income from this investment.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997(A) 1996 1995 1994 1993(A) 1992(A) 1991(A) 1990(A) 1989(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR $10.35 $8.62 $7.64 $7.95 $7.61 $7.17 $6.24 $5.66 $4.48
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) (0.11) (0.13) (0.07) (0.12) (0.12) (0.08) (0.04) 0.00 0.02
Net realized and
unrealized gain (loss)
on investments (0.78) 2.87 1.68 0.63 1.82 0.98 1.17 0.63 1.20
Total from investment
operations (0.89) 2.74 1.61 0.51 1.70 0.90 1.13 0.63 1.22
LESS DISTRIBUTIONS FROM
Net investment income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.05) (0.01)
Net realized gain on
investments (1.02) (1.01) (0.63) (0.82) (1.36) (0.46) (0.20) 0.00 (0.03)
Total distributions (1.02) (1.01) (0.63) (0.82) (1.36) (0.46) (0.20) (0.05) (0.04)
NET ASSET VALUE END OF
YEAR $8.44 $10.35 $8.62 $7.64 $7.95 $7.61 $7.17 $6.24 $5.66
TOTAL RETURN (B) (8.61%) 33.03% 23.58% 6.84% 28.76% 13.45% 19.42% 11.24% 27.45%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 1.75% 1.73% 1.78% 1.73% 2.04% 1.47% 1.48% 1.40% 1.27%
Total expenses,
excluding indirectly
paid expenses 1.73% 1.72% N/A N/A N/A N/A N/A N/A N/A
Net investment income
(loss) (1.32%) (1.34%) (1.10%) (1.49%) (1.68%) (1.09%) (0.68%) 0.02% 0.47%
PORTFOLIO TURNOVER RATE 48% 94% 38% 60% 78% 81% 73% 77% 57%
AVERAGE COMMISSION RATE
PAID $0.0551 $0.0563 N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF YEAR
(THOUSANDS) $1,406,769 $2,005,803 $1,459,955 $1,005,595 $965,959 $702,442 $623,291 $537,912 $503,908
<CAPTION>
1988
<S> <C>
NET ASSET VALUE
BEGINNING OF YEAR $7.80
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss) 0.00
Net realized and
unrealized gain (loss)
on investments (1.64)
Total from investment
operations (1.64)
LESS DISTRIBUTIONS FROM
Net investment income 0.00
Net realized gain on
investments (1.68)
Total distributions (1.68)
NET ASSET VALUE END OF
YEAR $4.48
TOTAL RETURN (B) (22.39%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 1.17%
Total expenses,
excluding indirectly
paid expenses N/A
Net investment income
(loss) 0.03%
PORTFOLIO TURNOVER RATE 80%
AVERAGE COMMISSION RATE
PAID N/A
NET ASSETS END OF YEAR
(THOUSANDS) $442,020
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value (identified
cost, $1,082,975,245) $1,393,964,418
Cash 4,911
Foreign currency at market value
(identified cost, $1,122,855) 1,110,711
Receivable for investments sold 18,176,302
Receivable for Fund shares sold 6,513,064
Interest and dividends receivable 225,195
Prepaid expenses 102,776
Other assets 103,431
Total assets 1,420,200,808
LIABILITIES
Payable for investments purchased 8,028,277
Payable for Fund shares redeemed 3,920,705
Distribution fees payable 718,600
Accrued expenses and other liabilities 764,607
Total liabilities 13,432,189
NET ASSETS $1,406,768,619
NET ASSETS REPRESENTED BY
Paid-in capital $ 983,582,840
Accumulated net investment loss (7,516)
Accumulated net realized gains on
investments 112,216,266
Net unrealized appreciation on investments
and foreign currency 310,977,029
Total net assets $1,406,768,619
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST OUTSTANDING
Net assets of $1,406,768,619 / 166,737,931
shares outstanding $ 8.44
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 2,562,283
Interest 4,364,898
Total income 6,927,181
EXPENSES
Management fee $ 7,788,033
Distribution plan expenses 16,641,755
Transfer agent fees 3,702,109
Accounting expenses 17,039
Custodian fees 700,665
Professional fees 150,577
Trustees' fees and expenses 54,381
Miscellaneous expenses 244,220
Total expenses 29,298,779
Less: Expenses paid indirectly (231,796)
Net expenses 29,066,983
Net investment loss (22,139,802)
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments
and foreign currency related
transactions 117,982,561
Net change in unrealized
appreciation on investments
and foreign currency (279,047,661)
Net realized and unrealized loss
on investments and foreign
currency (161,065,100)
Net decrease in net assets
resulting from operations $(183,204,902)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment loss $ (22,139,802) $ (24,478,442)
Net realized gain on investments 117,982,561 389,754,504
Net change in unrealized appreciation on investments and foreign currency (279,047,661) 127,581,090
Net increase (decrease) in net assets resulting from operations (183,204,902) 492,857,152
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS ON INVESTMENTS (200,508,632) (173,760,139)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 1,018,919,437 1,354,600,987
Payments for shares redeemed (1,402,606,782) (1,267,570,849)
Net asset value of shares issued in reinvestment of distributions 168,366,921 139,720,568
Net increase (decrease) in net assets resulting from capital share
transactions (215,320,424) 226,750,706
Total increase (decrease) in net assets (599,033,958) 545,847,719
NET ASSETS:
Beginning of year 2,005,802,577 1,459,954,858
End of year [including accumulated net investment loss of $7,516 and $7,483,
respectively] $ 1,406,768,619 $ 2,005,802,577
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 14
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Small Company Growth Fund (S-4) (the "Fund") is a Pennsylvania common
law trust for which Keystone Investment Management Company ("Keystone") is the
investment advisor and manager. Keystone was formerly a wholly owned subsidiary
of Keystone Investments, Inc ("KII") and is currently 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 to seek 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. 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 Evergreen Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. Treasury and/or federal agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amount actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gain (loss) on
foreign currency transactions.
D. 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
<PAGE>
PAGE 15
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. 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. Interest income is recorded on the accrual basis and includes
amortization of discount and premium. 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 the reclassification of certain gains related
to the sale of passive foreign investment company securities.
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>
YEAR ENDED MAY 31,
1997 1996
<S> <C> <C>
Shares sold 121,645,715 141,592,081
Shares redeemed (168,659,715) (131,599,635)
Shares issued in
reinvestment of
distributions 19,925,079 14,560,340
Net increase (decrease) (27,088,921) 24,552,786
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities for the year ended May 31, 1997, were $766,944,947 and
$1,214,970,663, respectively.
On May 31, 1997, the cost of investments for federal income tax purposes was
$1,085,389,073, gross unrealized appreciation of investments was $394,159,617
and gross unrealized depreciation of investments was $85,584,272, resulting in
net unrealized appreciation of $308,575,345 for federal income income tax
purposes.
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 Fund pays its principal underwriter amounts which are calculated daily and
paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributors, Inc. (Formerly, Evergreen Fund
Distributor, Inc.) ("EKD"), a wholly owned subsidiary of The BISYS Group, Inc.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(Formerly Keystone Investment Distributors Company) ("EKIS"), a
<PAGE>
PAGE 16
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
wholly owned subsidiary of Keystone, served as the Fund's principal underwriter.
Under the Plan, the Fund pays a distribution fee amount which may not exceed
1.00% of the Fund's average daily net assets. Of that amount, 0.75% is used to
pay distribution expenses and 0.25% may be used to pay service fees. Contingent
deferred sales charges paid by redeeming shareholders may be paid to EKD.
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.
5. INVESTMENT MANAGEMENT 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. As such,
Keystone manages the Fund's investments, provides certain administrative
services and supervises the Fund's daily business affairs. In return, 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.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under an investment advisory
agreement between KMI and Keystone, Keystone served as investment adviser and
provided investment advisory and management services to the Fund. In return for
its services, Keystone received an annual fee equal to 85% of the management fee
received by KMI.
During the year ended May 31, 1997, the Fund paid or accrued $17,039 to
Keystone for certain administrative and accounting services. Evergreen Keystone
Service Company (formerly Keystone Investor Resource Center, Inc.), a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend
disbursing agent.
Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate
of EKD, began serving as the Fund's sub-administrator. As sub-administrator,
BISYS provides the officers of the Fund. For this service, BISYS was paid a fee
by Keystone, which was 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. For
the year ended May 31, 1997, the Fund incurred total custody fees of $700,665
and received a credit of $231,796 pursuant to this expense offset arrangement,
resulting in a net custody expense of $468,869. The assets deposited with the
custodian under this expense offset arrangement could have been invested in
income-producing assets.
7. DISTRIBUTIONS TO SHAREHOLDERS
A distribution of $0.70 per share was declared on July 2, 1997 from the taxable
net long-term capital gains realized during the fiscal year ended May 31, 1997.
This distribution was payable on July 8, 1997 to shareholders of record at the
close of business on July 2, 1997. This distribution is not reflected in the
financial statements
<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
May 31, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
ten-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 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 May 31, 1997, the results of its
operations for the year then ended, the changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the ten-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
June 27, 1997
<PAGE>
PAGE 18
KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
ADDITIONAL INFORMATION
(UNAUDITED)
The Fund held a special meeting of shareholders on Monday, December 9, 1996. On
October 18, 1996, the record date for the meeting, the Fund had 212,762,098
shares outstanding, of which 144,843,580 shares were represented at the meeting.
The votes at the meeting were as follows:
PROPOSAL 1: TO ELECT THE FOLLOWING PERSONS AS TRUSTEE OF THE FUND:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NOMINEES FOR TRUSTEE AFFIRMATIVE WITHHELD
<S> <C> <C>
Lawrence B. Ashkin 141,046,717 3,796,863
Frederick Amling 141,122,165 3,721,415
Charles A Austin, III 141,183,433 3,660,148
Foster Bam 141,056,902 3,786,678
George S. Bissell 141,083,525 3,760,055
Edwin D. Campbell 141,090,815 3,752,765
Charles F. Chapin 141,112,237 3,731,343
K. Dun Gifford 141,185,185 3,658,395
James S. Howell 141,002,239 3,841,341
Leroy Keith, Jr. 141,180,151 3,663,429
F. Ray Keyser 141,079,535 3,764,045
Gerald M. McDonnell 141,117,661 3,725,919
Thomas L. McVerry 141,139,537 3,704,043
William Walt Pettit 141,105,380 3,738,200
David M. Richardson 141,188,804 3,654,776
Russell A Salton, III M.D. 141,132,530 3,711,050
Michael S. Scofield 141,121,690 3,721,890
Richard J. Shima 141,179,300 3,664,280
Andrew J. Simons 141,170,649 3,672,931
</TABLE>
PROPOSAL 2: TO APPROVE AN INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN
KEYSTONE INVESTMENT MANAGEMENT COMPANY AND THE FUND:
<TABLE>
<S> <C>
Affirmative 137,959,295
Against 2,706,790
Abstain 4,177,495
</TABLE>
FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS
(UNAUDITED)
During the fiscal year ended May 31, 1997, long-term capital gains distributions
totalling $1.02 per share were paid in shares or cash.
In January 1998, we will send to you complete information on the distributions
paid during the calendar year 1997 to help you in completing your federal income
tax return.
<PAGE>
This Page Left 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.
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 Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
Evergreen Keystone
(Tree appears here) FUNDS (SM) (Keystone symbol appears here)
P.O. Box 2121
Boston, Massachusetts 02106-2121
(Recycle symbol appears here)
S4-R 541255 7/97
KEYSTONE
(Graphic appears here)
SMALL COMPANY
GROWTH FUND (S-4)
Evergreen Keystone
(Tree appears here) FUNDS (SM) (Keystone symbol appears here)
ANNUAL REPORT
MAY 31, 1997
