PAGE 1
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Keystone Omega Fund
Seeks maximum capital growth from common stocks.
Dear Shareholder:
We would like to take this opportunity to report on the activities of
Keystone Omega Fund for the fiscal year which ended December 31, 1996.
Following our letter to you, we have included a discussion with your Fund's
manager and complete financial information.
Performance
For the twelve-month period which ended December 31, 1996, your Fund produced
the following investment results:
Class A shares returned 11.31%.
Class B shares returned 10.31%.
Class C shares returned 10.29%.
During the same period, the Standard & Poor's 500 Stock Index (S&P 500)
returned 22.95%, but those results were in large measure fueled by a handful
of large, established companies, which were performance leaders in 1996. Your
Fund's performance in 1996 did not meet our expectations. In contrast to our
excellent long-term record, the timing of some of our investments during the
past year and individual stock selection could have been better, particularly
in the first six months. The Fund did better in the second half of the year,
posting a 7.81% total return for Class A shares.
To understand your Fund's strategy during the year, it is helpful to recall
the market environment in January 1996. After the record returns in 1995, we
believed that such strong performance was not likely to be repeated in 1996.
Our conservative stance was amplified by the indications of economic weakness
and slower earnings growth in January. Therefore, we began the 1996 fiscal
year by reducing our exposure to small- and mid-cap stocks in the technology
area and focusing on larger, more established companies with consistent
earnings growth rates. While this restructuring was successful and
significantly boosted performance in the second part of the year, the timing
and execution resulted in lost opportunities and held back your Fund's
performance in the first six months.
Improved conditions in the second half of the year
Despite the early signs of slower growth, the economy grew at a healthy clip
in the first six months of the year, prompting new fears--this time of
inflation and higher interest rates. In hindsight, the entire year was
punctuated by investors' confusion in trying to react to often-conflicting
economic reports, resulting in an overall preference for large, established
companies. Those sentiments propelled blue-chip stock indexes to another year
of record returns.
During the second half of 1996, your Fund began to benefit from the
repositioning of the portfolio. Our performance generally improved, but it
did not make up entirely for the missed opportunities early in the year.
Looking ahead, we expect the favorable economic conditions of 1996 to
continue into 1997. We believe that the economy will grow at a moderate rate
and inflation, despite some wage pressures, should remain under control. We
think this mild economic climate should allow interest rates to remain
stable.
--Continued--
<PAGE>
PAGE 2
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Keystone Omega Fund
New Portfolio Manager Named
We are pleased to announce a new portfolio manager for Keystone Omega Fund.
Warren Isabelle, who recently joined Keystone as Senior Vice President and
Chief Investment Officer, Equities, will be the portfolio manager. A
professional with 15 years' experience in investment management and research,
Mr. Isabelle has compiled an outstanding record at Pioneering Management,
where he managed the Pioneer Capital Growth Fund. He succeeds Maureen
Cullinane, who achieved an excellent record as manager of the Fund since
1989. Ms. Cullinane will focus on the management of Keystone Strategic Growth
Fund (K-2). Following this letter, we present an interview with your new
portfolio manager.
Keystone Acquired By First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired
by First Union Corporation. First Union, based in Charlotte, N.C., is the
nation's sixth largest bank holding company with assets of approximately $140
billion. Keystone Investment Management Company will continue to be the
investment adviser, responsible for managing your Fund's portfolio. Your Fund
will continue to be managed with the same style and philosophy as in the
past. First Union also owns another mutual fund management company, Evergreen
Asset Management Corp. Together, Evergreen and Keystone oversee approximately
$30 billion in assets. Some services will now be provided under the
"Evergreen Keystone Funds" umbrella.
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
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
February 1997
[photo]
Albert H. Elfner, III
[photo]
George S. Bissell
<PAGE>
PAGE 3
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A Discussion With
Your Fund Manager
[Photo of Warren Isabelle]
Senior Vice President and Chief Investment Officer for equities Warren
Isabelle is portfolio manager of Keystone Omega Fund. A Chartered Financial
Analyst, Mr. Isabelle has 15 years of investment experience. He is a graduate
of Lowell Technological Institute and holds an M.B.A. from the Wharton
School, University of Pennsylvania.
Q How would you describe your investment management philosophy?
A I buy stocks based on my assessment of the company's economic value as a
business. I try to find the intrinsic or fundamental worth of a company. To
me, a company is only worth what its assets can generate in terms of
cashflow. If I am confident that a company's economic value is sufficiently
greater than its current stock price, I buy the stock, regardless of the
current economic cycle, interest rates, economic growth and other
macroeconomic factors. Two things that are important in my investment
approach are:
1) I buy businesses.
2) I have a long-term investment horizon.
Q What is your approach to stock picking?
A I try to relate stock picking to the real world. I select stocks from the
perspective of a rational buyer of the business. In that sense, I buy
businesses, not stocks.
Q Specifically, what type of information do you look for?
A As a rational buyer of the business, I seek out information from any source
that is relevant. While I might use information from others, I rely on
independent analysis of every company considered. I use both qualitative and
quantitative considerations to help me distill the points that I think are
important in buying a business. The quantitative aspect of my approach uses a
company's historical operating financial data. This helps me determine the
company's future financial performance. The qualitative appraisal provides a
way to place the numbers in the company's unique context: its management,
products, technology, business dynamics, and industry standing. Together, the
numbers, and the right context, allow me to form an outlook on the company's
operating capabilities, which is the foundation I need to begin the
decision-making process.
Q What is your investment style?
A To re-iterate, I pick stocks. I have an investment horizon of approximately
three years. This is long enough for the underlying potential of a company to
be realized, yet not so long as to force a blind extrapolation into the
future. We try to determine the impact that our thesis will have on the
economic value of a business, and therefore we can look to a target price at
which to sell if we are correct. This target price would reflect the economic
value, giving us a clear investment discipline. I will buy large positions in
the businesses I have confidence in, which provides the greatest impact on
the portfolio's performance, thereby leveraging our research
Fund Profile
Objective: Maximum capital growth from common stocks.
Number of stocks: 68
Net assets: 262.4 million
Commencement of investment operations: February 8, 1968
Newspaper listing: Omeg
<PAGE>
PAGE 4
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Keystone Omega Fund
effort. I don't believe in owning excessive numbers of stocks. Investment
risk is minimized by following a consistent and disciplined research process.
Instead of running a portfolio with a very large number of stocks, I prefer
to concentrate on a number of businesses that I understand and believe in,
mindful of the need to also provide diversification for the Fund.
Q How do you narrow the universe of stocks to those you want to consider?
A There are several steps, but by no means is this a cookie-cutter approach.
First, we filter the universe to look for anomalies that would interest us.
These anomalies might be low institutional ownership, increased insider
buying, an attractive market price, or the discovery of an emerging business.
Next, we identify the potential and probability of positive change occurring
within our investment horizon.
Finally, we do an in-depth analysis of the company.
The result will determine whether our investment decision is to buy or not
to buy. To buy, we have to determine that the economic value of the company
is significantly more than the stock price.
Q What are the characteristics of the companies you buy?
A There are essentially four types of companies that find their way into our
portfolios.
The first would be turnaround companies, which can offer two ways to make
money. If you buy the company before the turnaround, you can often buy it so
inexpensively that a lot of money stands to be made if the company just
recovers to becoming "average". More happily, if the management is able to
turn the company around and it starts to grow, momentum investors will
eventually arrive on the scene, driving up the stock and creating the
liquidity that allows us to make a timely exit.
The second type of company would be a cyclical company. These companies
exhibit many of the characteristics of the turnaround. Different industries
may have different cyclical patterns. If we understand the industry and the
duration and magnitude of the cycle, and if we know the players, it stands to
reason that we should be able to buy the right companies at the bottom and
sell them at the top.
The third type of company is the transitional company. This is a company
that has changed, but the change is not yet recognized by the market.
The fourth type of company is the emerging company. We find those we like
through the same kind of analysis. Although there is generally no established
historical performance to guide you, similar information can be found by
examining the markets in which the company hopes to participate. The trick is
to match a small market cap to a much larger, but less well-served market,
relying on the strength of management and the potential of the technology or
service the company offers.
With all these types of companies, we try to buy at depressed prices. We
know, if we can do so, the old saying, "buy low and sell high" is true.
Q What should the shareholders expect from Keystone Omega Fund in the
future?
A Shareholders should expect consistent returns over the long term. Over
time, shareholders should look for returns of a high caliber growth fund, but
with less risk. It is important to note that although performance is measured
on a relative basis. We don't like to lose money.
I am investing in real businesses, and over the long term the economic value
is reflected in the price. However, over any given period of time, strange
things can happen. When markets are really hot and speculative, you will not
get outperformance. Over the long term, if we're doing our job right, the
results should be attractive.
<PAGE>
PAGE 5
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Your Fund's Performance
Growth of an investment in
Keystone Omega Fund Class A
In Thousands
Initial Reinvested
Investment Distributions
12/86 9,425 9,425
8,561 10,313
12/88 9,681 11,762
11,361 15,649
12/90 9,476 15,276
12,530 23,600
12/92 11,226 24,545
12,126 29,290
12/94 11,013 27,632
13,863 37,840
12/96 13,834 42,117
Total Value: $42,117
A $10,000 investment in Keystone Omega Fund Class A made on December 31, 1986
with all distributions reinvested was worth $42,117 on December 31, 1996.
Past performance is no guarantee of future results.
Twelve-Month Performance as of December 31, 1996
=============================================================================
Class A Class B Class C
Total returns* 11.31% 10.31% 10.29%
Net asset value 12/31/95 $19.56 $19.10 $19.13
12/31/96 $19.52 $18.83 $18.86
Capital gains $ 2.13 $ 2.13 $ 2.13
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1996
==============================================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 11.31% 10.31% 10.29%
1-year 6.02% 5.38% 10.29%
5-year 69.99% -- --
10-year 321.17% -- --
Life of Class -- 49.46% 52.63%
Average annual returns
1-year w/o sales charge 11.31% 10.31% 10.29%
1-year 6.02% 6.02% 10.29%
5-year 11.19% -- --
10-year 15.46% -- --
Life of Class -- 12.49% 13.19%
Class A shares are reported at the current maximum front-end sales charge of
4.75%.
Class B shares were initially offered on August 2, 1993. Shares purchased
after June 1, 1995 are subject to a contingent deferred sales charge (CDSC)
that declines from 5% to 1% over six years from the month purchased.
Performance assumes that shares were redeemed after the end of a one-year
holding period and reflects the deduction of a 4% CDSC.
Class C shares were initially offered on August 2, 1993. Performance
reflects the return you would have received for holding shares for one year
and redeeming after the end of the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange shares for another Keystone fund by phone or in writing.
Your may also exchange funds through Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 6
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Keystone Omega Fund
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone Omega Fund,
the Standard & Poor's 500 Index and the Consumer Price Index.
In Thousands December 31, 1986 through December 31, 1996
Fund Average
Annual Total Return
---------------------------
1 Year 5 Year 10 Year
Class A 6.02% 11.19% 15.46%
Class B 5.38% -- 12.49%*
Class C 10.29% -- 13.19%*
Standard & Poor's Consumer
500 Index Price Index
Class A (S&P 500) (CPI)
12/86 9,525 10,000 10,000
10,313 10,514 10,441
12/88 11,762 12,250 10,903
15,649 16,070 11,409
12/90 15,276 15,540 12,105
23,600 20,283 12,476
12/92 24,545 21,834 12,836
29,290 24,035 13,190
12/94 27,632 24,353 13,542
37,840 33,505 13,886
12/96 42,117 41,195 14,348
Past performance is no guarantee of future results. The performance of Class
B or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the
different classes. *Class B and Class C shares were introduced August 2,
1993; performance is for life of Class. The Consumer Price Index is through
November 30, 1996.
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Omega Fund Class A
The Fund seeks maximum capital growth from common stocks. The return is
quoted after deducting sales charges (if applicable), fund expenses and
transaction costs and assumes reinvestment of all distributions.
2. Standard & Poor's 500 Index (S&P 500)
The S&P 500 is a broad-based unmanaged index of common stock prices. It is
comprised of stocks of the largest U.S. companies. These stocks are selected
and compiled by Standard & Poor's Corporation according to criteria that may
be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
<PAGE>
PAGE 7
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Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 8
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Keystone Omega Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 9
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SCHEDULE OF INVESTMENTS--December 31, 1996
Number Market
of Shares Value
========================================= ========== ============
COMMON STOCKS (93.7%)
AEROSPACE (1.0%)
The Boeing Co. 25,000 $ 2,659,375
- ----------------------------------------- --------- ------------
AMUSEMENTS (2.0%)
HFS Inc. (a) 90,000 5,377,500
- ----------------------------------------- --------- ------------
AUTOMOTIVE (1.1%)
Gentex Corp. (a) 150,000 3,018,750
- ----------------------------------------- --------- ------------
BUILDING MATERIALS & CONSTRUCTION (2.8%)
Sherwin-Williams Co. 45,000 2,520,000
Toll Brothers, Inc. (a) 110,700 2,158,650
U.S. Homes Corp. (a) 100,000 2,600,000
- ----------------------------------------- --------- ------------
7,278,650
- ----------------------------------------- --------- ------------
BUSINESS SERVICES (7.2%)
Memtec Ltd. 123,300 4,014,956
Thermo Electron Corp. (a) 140,000 5,775,000
USA Waste Services, Inc. (a) 200,000 6,375,000
US Filter Corp. (a) 82,600 2,622,550
- ----------------------------------------- --------- ------------
18,787,506
- ----------------------------------------- --------- ------------
CAPITAL GOODS (5.6%)
Case Corp. 50,000 2,725,000
Caterpillar, Inc. 40,000 3,010,000
General Electric Co. 90,000 8,898,750
- ----------------------------------------- --------- ------------
14,633,750
- ----------------------------------------- --------- ------------
CHEMICALS (1.6%)
Du Pont E.I. De Nemours & Co. 45,000 4,246,875
- ----------------------------------------- --------- ------------
CONSUMER GOODS (2.3%)
CUC International, Inc. (a) 150,000 3,562,500
Furniture Brands International, Inc.
(a) 176,300 2,468,200
- ----------------------------------------- --------- ------------
6,030,700
- ----------------------------------------- --------- ------------
DIVERSIFIED COMPANIES (2.1%)
Alco Standard Corp. 105,000 5,420,625
- ----------------------------------------- --------- ------------
DRUGS (6.8%)
American Home Products Corp. 40,000 2,345,000
Gilead Sciences, Inc. (a) 200,600 5,002,463
Johnson & Johnson 65,000 3,233,750
Neurex Corp. (a) 80,000 $ 1,365,000
SmithKline Beecham PLC, ADR 50,000 3,400,000
Warner-Lambert Co. 34,500 2,587,500
- ----------------------------------------- --------- ------------
17,933,713
- ----------------------------------------- --------- ------------
ELECTRONICS PRODUCTS (4.2%)
Altron, Inc. (a) 81,900 1,730,137
Analog Devices, Inc. (a) 140,000 4,742,500
Intel Corp. 35,000 4,582,813
- ----------------------------------------- --------- ------------
11,055,450
- ----------------------------------------- --------- ------------
FINANCE (12.1%)
BISYS Group, Inc. (The) (a) 75,600 2,801,925
Bank of Boston Corp. 87,200 5,602,600
Federal Home Loan Mortgage Corp. 60,000 6,607,500
Greenpoint Financial Corp. 52,500 2,480,625
Jayhawk Acceptance Corp. (a) 90,000 1,023,750
Student Loan Marketing Association 45,000 4,190,625
TCF Financial Corp. 120,000 5,220,000
Travelers Group, Inc. 83,333 3,781,235
- ----------------------------------------- --------- ------------
31,708,260
- ----------------------------------------- --------- ------------
FOODS (5.6%)
Coca-Cola Co. 115,000 6,051,875
Flowers Industries, Inc. 178,800 3,844,200
Hudson Foods, Inc. 160,000 3,040,000
Richfood Holdings, Inc. 69,800 1,692,650
- ----------------------------------------- --------- ------------
14,628,725
- ----------------------------------------- --------- ------------
HEALTH CARE (2.6%)
Cardinal Health, Inc. 119,250 6,946,312
- ----------------------------------------- --------- ------------
INSURANCE (1.4%)
American International Group, Inc. 35,000 3,788,750
- ----------------------------------------- --------- ------------
NATURAL GAS (5.7%)
Noble Affiliates, Inc. 100,000 4,787,500
Nuevo Energy Corp. (a) 110,000 5,720,000
United Meridian Corp. (a) 85,000 4,398,750
- ----------------------------------------- --------- ------------
14,906,250
- ----------------------------------------- --------- ------------
See Notes to Financial Statements.
<PAGE>
PAGE 10
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Keystone Omega Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Number Market
of Shares Value
========================================= ========= ============
OFFICE & BUSINESS EQUIPMENT (5.3%)
Flextronics International (a) 41,900 $ 1,173,200
Compaq Computer Corp. (a) 30,000 2,227,500
EMC Corp. Mass (a) 125,000 4,140,625
Parametric Technology Corp. (a) 70,000 3,600,625
Synopsys, Inc. (a) 60,000 2,760,000
- ----------------------------------------- --------- ------------
13,901,950
- ----------------------------------------- --------- ------------
OIL (3.9%)
Exxon Corp. 30,000 2,940,000
Occidental Petroleum Corp. 41,300 965,387
Tejas Gas Corp. (a) 42,500 2,024,063
Unocal Corp. 105,000 4,265,625
- ----------------------------------------- --------- ------------
10,195,075
- ----------------------------------------- --------- ------------
OIL SERVICES (6.9%)
BJ Services Co. (a) 60,000 3,060,000
Diamond Offshore Drilling, Inc. (a) 50,000 2,850,000
ENSCO International, Inc. (a) 137,100 6,649,350
Tidewater, Inc. 124,200 5,620,050
- ----------------------------------------- --------- ------------
18,179,400
- ----------------------------------------- --------- ------------
RETAIL (5.0%)
Abercrombie & Fitch Co., Class A (a) 160,300 2,644,950
CDW Computer Centers, Inc. (a) 70,000 4,151,875
Corporate Express, Inc. (a) 95,400 2,808,338
Loehmanns, Inc. (a) 100,000 2,300,000
PETsMART, Inc. (a) 55,000 1,203,125
- ----------------------------------------- --------- ------------
13,108,288
- ----------------------------------------- --------- ------------
SOFTWARE SERVICES (3.2%)
Epic Design Technology, Inc. (a) 100,000 2,500,000
Microsoft Corp. (a) 71,000 5,870,812
- ----------------------------------------- --------- ------------
8,370,812
- ----------------------------------------- --------- ------------
TELECOMMUNICATIONS (5.3%)
Cascade Communications Corp. (a) 35,000 1,933,750
Cisco Systems, Inc. (a) 28,000 1,783,250
Smartalk Teleservices, Inc. (a) 161,800 2,811,275
3Com Corp. (a) 40,000 2,932,500
U.S. Robotics Corp. (a) 60,000 4,323,750
- ----------------------------------------- --------- ------------
13,784,525
- ----------------------------------------- --------- ------------
TOTAL COMMON STOCKS
(Cost--$208,006,938) $245,961,241
====================================================== ============
Maturity
Value
========================================== ========= ============
SHORT-TERM INVESTMENTS (5.7%)
REPURCHASE AGREEMENTS (5.7%)
Investments in repurchase agreements in
a joint trading account, purchased
12/31/96, 6.717%, maturing 01/02/97
(Cost--$14,855,000)(b) $14,860,543 14,855,000
========================================== =========== ============
TOTAL INVESTMENTS
(Cost--$222,861,938)(c) 260,816,241
- ------------------------------------------ ----------- ------------
OTHER ASSETS AND LIABILITIES (0.6%) 1,557,488
- ------------------------------------------------------ ------------
NET ASSETS (100.0%) $262,373,729
====================================================== ============
(a) Non-income producing security.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at December 31, 1996.
(c) The cost of investments for federal income tax purposes is $222,538,131.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at December 31, 1996 are as follows:
Gross unrealized appreciation $42,078,355
Gross unrealized depreciation (4,370,245)
-------------
Net unrealized appreciation $37,708,110
=============
Legend of Portfolio Abbreviations:
ADR--American Depository Receipt
<PAGE>
PAGE 11
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FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992(b) 1991 1990
========================== ======== ======== ======= ======= ======= ======= =========
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value beginning
of year $ 19.56 $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37 $ 16.03
- -------------------------- -------- -------- ------- ------- ------- ------- ---------
Income from investment
operations
Net investment income
(loss) (0.06) 0.00 0.04 (0.07) 0.00 (0.04) 0.11
Net realized and
unrealized gain (loss)
on investment
transactions 2.15 5.58 (1.00) 3.07 0.39 6.92 (0.39)
- -------------------------- -------- -------- ------- ------- ------- ------- ---------
Total from investment
operations 2.09 5.58 (0.96) 3.00 0.39 6.88 (0.28)
- -------------------------- -------- -------- ------- ------- ------- ------- ---------
Less distributions from
Net investment income 0.00 0.00 0.00 0.00 0.00 (0.02) (0.25)
In excess of net
investment income 0.00 0.00 0.00 0.00 0.00 (0.05) (0.04)
Net realized gain on
investment transactions (2.13) (1.56) (0.61) (1.73) (2.23) (2.50) (2.09)
- -------------------------- -------- -------- ------- ------- ------- ------- ---------
Total distributions (2.13) (1.56) (0.61) (1.73) (2.23) (2.57) (2.38)
- -------------------------- -------- -------- ------- ------- ------- ------- ---------
Net asset value end of
year $ 19.52 $ 19.56 $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37
========================== ======== ======== ======= ======= ======= ======= =========
Total return(a) 11.31% 36.94% (5.66%) 19.33% 4.00% 54.49% (2.38%)
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.33%(c) 1.38%(c) 1.41% 1.51% 1.52% 1.57% 1.73%
Net investment income
(loss) (0.29%) 0.00% 0.27% (0.48%) (0.01%) (0.31%) 0.70%
Portfolio turnover rate 173% 159% 137% 162% 176% 115% 108%
Average commission rate
paid $ 0.0621 N/A N/A N/A N/A N/A N/A
- -------------------------- -------- -------- ------- ------- ------- ------- ---------
Net assets end of year
(thousands) $154,825 $135,079 $99,569 $90,404 $73,144 $58,671 $38,531
========================== ======== ======== ======= ======= ======= ======= =========
</TABLE>
Year Ended December 31,
--------------------------------
1989 1988 1987
- -------------------------- -------- -------- ---------
Net asset value beginning
of year $ 13.66 12.08 13.44
- -------------------------- -------- -------- ---------
Income from investment
operations
Net investment income
(loss) 0.17 0.30(d) 0.02
Net realized and
unrealized gain (loss)
on investment
transactions 4.30 1.40 1.11
- -------------------------- -------- -------- ---------
Total from investment
operations 4.47 1.70 1.13
- -------------------------- -------- -------- ---------
Less distributions from
Net investment income (0.20) (0.12) (0.24)
In excess of net
investment income 0.00 0.00 0.00
Net realized gain on
investment transactions (1.90) 0.00 (2.25)
- -------------------------- -------- -------- ---------
Total distributions (2.10) (0.12) (2.49)
- -------------------------- -------- -------- ---------
Net asset value end of
year $ 16.03 $ 13.66 $ 12.08
========================== ======== ======== =========
Total return(a) 33.05% 14.05% 8.27%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.84% 1.78% 1.99%
Net investment income
(loss) 1.03% 2.22% 0.13%
Portfolio turnover rate 77% 84% 106%
Average commission rate
paid N/A N/A N/A
- -------------------------- -------- -------- ---------
Net assets end of year
(thousands) $39,682 $33,951 $30,246
========================== ======== ======== =========
(a) Excluding applicable sales charges.
(b) Calculated on average shares outstanding
(c) The ratio of total expenses to average net assets includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio
would have been 1.32% and 1.37% for the years ended December 31, 1996 and
1995, respectively.
(d) Includes $0.17 per share relating to a special non-recurring distribution
from Inco Limited.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------
Keystone Omega Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
August 2, 1993
(Date of Initial
Year Ended December 31, Public Offering) to
1996 1995 1994 December 31, 1993
============================================= ======== ======== ======= ========================
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 19.10 $ 15.34 $ 17.06 $17.29
--------------------------------------------- -------- -------- ------- ---------------------
Income from investment operations
Net investment loss (0.17) (0.09) (0.06) (0.05)
Net realized and unrealized gain (loss) on
investment transactions 2.03 5.41 (1.05) 1.55
--------------------------------------------- -------- -------- ------- ---------------------
Total from investment operations 1.86 5.32 (1.11) 1.50
--------------------------------------------- -------- -------- ------- ---------------------
Less distributions from
Net realized gain on investment transactions (2.13) (1.56) (0.61) (1.73)
--------------------------------------------- -------- -------- ------- ---------------------
Total distributions (2.13) (1.56) (0.61) (1.73)
--------------------------------------------- -------- -------- ------- ---------------------
Net asset value end of year $ 18.83 $ 19.10 $ 15.34 $17.06
============================================= ======== ======== ======= =====================
Total return (b) 10.31% 35.70% (6.57%) 9.02%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.20%(c) 2.29%(c) 2.30% 2.57%(a)
Net investment loss (1.15%) (0.94%) (0.58%) (1.73%)(a)
Portfolio turnover rate 173% 159% 137% 162%
Average commission rate paid $0.0621 N/A N/A N/A
--------------------------------------------- -------- -------- ------- ---------------------
Net assets end of year (thousands) $89,921 $71,636 $32,266 $7,423
============================================= ======== ======== ======= =====================
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The ratio of total expenses to average net assets includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio
would have been 2.18% and 2.27% for the years ended December 31, 1996 and
1995, respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
August 2, 1993
(Date of Initial
Year Ended December 31, Public Offering) to
1996 1995 1994 December 31, 1993
============================================= ======== ======== ======= ========================
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 19.13 $ 15.37 $17.09 $17.29
--------------------------------------------- -------- -------- ------- ---------------------
Income from investment operations
Net investment loss (0.18) (0.13) (0.07) (0.06)
Net realized and unrealized gain (loss) on
investment transactions 2.04 5.45 (1.04) 1.59
--------------------------------------------- -------- -------- ------- ---------------------
Total from investment operations 1.86 5.32 (1.11) 1.53
--------------------------------------------- -------- -------- ------- ---------------------
Less distributions from
Net realized gain on investment transactions (2.13) (1.56) (0.61) (1.73)
--------------------------------------------- -------- -------- ------- ---------------------
Total distributions (2.13) (1.56) (0.61) (1.73)
--------------------------------------------- -------- -------- ------- ---------------------
Net asset value end of year $ 18.86 $ 19.13 $15.37 $17.09
============================================= ======== ======== ======= =====================
Total return (b) 10.29% 35.62% (6.56%) 9.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.21%(c) 2.30%(c) 2.30% 2.48%(a)
Net investment loss (1.17%) (0.91%) (0.63%) (1.64%)(a)
Portfolio turnover rate 173% 159% 137% 162%
Average commission rate paid $0.0621 N/A N/A N/A
--------------------------------------------- -------- -------- ------- ---------------------
Net assets end of year (thousands) $17,628 $13,963 $9,900 $3,620
============================================= ======== ======== ======= =====================
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The ratio of total expenses to average net assets includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio
would have been 2.20% and 2.29% for the years ended December 31, 1996 and
1995, respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------
Keystone Omega Fund
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
=====================================================================
Asset:
Investments at market value
(identified cost--$222,861,938) $260,816,241
Cash 852
Receivable for:
Fund shares sold 331,050
Investments sold 1,474,567
Dividends and interest 89,005
Prepaid expenses and other assets 5,609
-------------------------------------------------- --------------
Total assets 262,717,324
-------------------------------------------------- --------------
Liabilities
Payable for:
Fund shares redeemed 307,260
Other liabilities 36,335
-------------------------------------------------- --------------
Total liabilities 343,595
-------------------------------------------------- --------------
Net assets $262,373,729
================================================== ==============
Net assets represented by
Paid-in-capital 213,544,291
Accumulated net realized gain on investment
transactions 10,875,135
Net unrealized appreciation on investments 37,954,303
-------------------------------------------------- --------------
Total net assets $262,373,729
-------------------------------------------------- --------------
Net Asset Value and redemption price per share
Class A Shares
Net assets of $154,824,722 / 7,932,600 shares
outstanding $ 19.52
Offering price per share ($19.52 / 0.9425)
(based on sales charge of 5.75% of the offering
price at December 31, 1996) $ 20.71
Class B Shares
Net assets of $89,921,484 / 4,775,246 shares
outstanding $ 18.83
Class C Shares
Net assets of $17,627,523 / 934,553 shares
outstanding $ 18.86
================================================== ==============
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
======================================================================
Investment income
Dividends (net of foreign withholding
taxes of $11,152) $ 1,898,416
Interest 614,911
- ---------------------------------------- ---------- -------------
Total income 2,513,327
- ---------------------------------------- ---------- -------------
Expenses (Notes 4 and 5)
Management fee $1,831,142
Shareholder services 691,038
Accounting, auditing, and legal 72,898
Custodian fees 151,914
Printing 34,344
Trustees' fees and expenses 8,074
Distribution Plan expenses 1,170,321
Registration fees 85,770
Miscellaneous expenses 66,125
- ---------------------------------------- ---------- -------------
Total expenses 4,111,626
Less: Expenses paid indirectly (Note
6) (35,028)
- ---------------------------------------- ---------- -------------
Net expenses 4,076,598
- ---------------------------------------- ---------- -------------
Net investment loss (1,563,271)
- ---------------------------------------- ---------- -------------
Net realized and unrealized gain
on investment transactions
Net realized gain on investment
transactions 35,051,903
- ---------------------------------------- ---------- -------------
Net change in unrealized appreciation
or depreciation on investment
transactions (Note 7) (8,092,996)
- ---------------------------------------- ---------- -------------
Net realized and unrealized gain on
investment transactions 26,958,907
- ---------------------------------------- ---------- -------------
Net increase in net assets resulting
from operations $25,395,636
======================================== ========== =============
See Notes to Financial Statements.
<PAGE>
PAGE 15
- --------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995
===========================================================================================================
<S> <C> <C>
Operations
Net investment loss $ (1,563,271) $ (548,862)
Net realized gain on investment transactions 35,051,903 24,020,841
Net change in unrealized appreciation or depreciation on investment
transactions (8,092,996) 30,134,778
- ------------------------------------------------------------------------ ------------ --------------
Net increase in net assets resulting from operations 25,395,636 53,606,757
- ------------------------------------------------------------------------ ------------ --------------
Distributions to shareholders from
Net realized gain on investment transactions:
Class A Shares (15,011,932) (9,531,332)
Class B Shares (9,027,710) (4,676,811)
Class C Shares (1,879,136) (973,850)
- ------------------------------------------------------------------------ ------------ --------------
Total distributions to shareholders (25,918,778) (15,181,993)
- ------------------------------------------------------------------------ ------------ --------------
Capital share transactions (Note 2)
Proceeds from shares issued in acquisition of Hartwell Growth Fund: (Note 7)
Class A Shares 16,929,242 --
Class B Shares 1,206,044 --
Class C Shares 464,444 --
Proceeds from shares sold:
Class A Shares 33,571,953 21,425,010
Class B Shares 28,806,348 33,563,718
Class C Shares 6,288,512 4,723,834
Payments for shares redeemed:
Class A Shares (44,999,521) (20,370,219)
Class B Shares (19,500,081) (8,682,058)
Class C Shares (4,608,982) (4,086,346)
Net asset value of shares issued in reinvestment of distributions:
Class A Shares 13,822,516 8,685,153
Class B Shares 8,494,665 4,332,038
Class C Shares 1,743,341 927,300
- ------------------------------------------------------------------------ ------------ --------------
Net increase in net assets resulting from capital share transactions 42,218,481 40,518,430
- ------------------------------------------------------------------------ ------------ --------------
Total increase in net assets 41,695,339 78,943,194
- ------------------------------------------------------------------------ ------------ --------------
Net assets:
Beginning of year 220,678,390 141,735,196
- ------------------------------------------------------------------------ ------------ --------------
End of year $262,373,729 $220,678,390
======================================================================== ============ ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 16
- --------------------
Keystone Omega Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Omega Fund (the "Fund") is a Massachusetts business trust for which
Keystone Investment Management Company ("Keystone") is the Investment Adviser
and Manager. Keystone was formerly a wholly-owned subsidiary of Keystone
Investments, Inc. ("KII") and on December 11, 1996 became a wholly-owned
subsidiary of First Union Keystone, Inc. First Union Keystone, Inc. is a
wholly-owned subsidiary of First Union National Bank of North Carolina which
in turn is a wholly-owned 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 investment company. The
Fund offers several classes of shares. The Fund's investment objective is to
achieve maximum capital growth by investing in a varied portfolio consisting
of common stocks and securities convertible into common stocks.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
Investments are usually valued at the closing sales price, or in the absence
of sales and for over-the-counter securities, the mean of the bid and asked
prices.
Securities for which valuations are not available from an independent
pricing service (including restricted securities) are valued at fair value as
determined in good faith according to procedures established by the Board of
Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. government 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
<PAGE>
PAGE 17
- --------------------
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. 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 amortization of discounts and premiums. Dividend income is recorded
on the ex-dividend date.
E. 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 taxes is required.
F. 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
differing treatment of net operating losses and short-term capital gains for
tax purposes.
G. Class Allocations
As of December 31, 1996, Class A shares were offered at a public offering
price which included a maximum sales charge of 4.75% payable at the time of
purchase. Class B shares were sold subject to a contingent deferred sales
charge that was payable upon redemption and decreased depending on how long
the shares had been held. Class B shares purchased on or after June 1, 1995
have been outstanding for eight years will automatically converted to Class A
shares. Class B shares purchased prior to June 1, 1995 have been outstanding
for seven years will automatically converted to Class A shares. Class C
shares were sold subject to a contingent deferred sales charge payable on
shares redeemed within one year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the
relative net assets of each class. Currently, class specific expenses are
limited to expenses incurred under the Distribution Plans for each class.
(2.) Capital Share Transactions
The trust agreement authorizes the issuance of an unlimited number of shares
of beneficial interest with-
<PAGE>
PAGE 18
- --------------------
Keystone Omega Fund
out par value. Transactions in shares of the Fund were as follows:
Class A Shares
----------------------------
Year ended December 31,
----------------------------
1996 1995
================================ =========== =============
Shares sold 1,759,793 1,178,460
Shares redeemed (2,381,626) (1,161,391)
Shares issued in acquisition of
Hartwell Growth Fund (Note 7) 910,037 --
Shares issued in reinvestment of
distributions 736,752 482,356
-------------------------------- ----------- -------------
Net increase 1,024,956 499,425
================================ =========== =============
Class B Shares
----------------------------
Year ended December 31,
----------------------------
1996 1995
================================ =========== =============
Shares sold 1,552,928 1,902,255
Shares redeemed (1,062,059) (499,966)
Shares issued in acquisition of
Hartwell Growth Fund (Note 7) 66,754 --
Shares issued in reinvestment of
distributions 466,572 245,291
-------------------------------- ----------- -------------
Net increase 1,024,195 1,647,580
================================ =========== =============
Class C Shares
----------------------------
Year ended December 31,
----------------------------
1996 1995
================================ =========== =============
Shares sold 336,661 273,387
Shares redeemed (253,439) (240,110)
Shares issued in acquisition of
Hartwell Growth Fund (Note 7) 25,665 --
Shares issued in reinvestment of
distributions 95,593 52,465
-------------------------------- ----------- -------------
Net increase 204,480 85,742
================================ =========== =============
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the year ended
December 31, 1996 were $400,230,776 and $403,223,255, respectively.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted for its Class A, B and C shares pursuant to Rule 12b-1 under
the 1940 Act. Under the Distribution Plans, the Fund pays its principal
underwriter amounts which are calculated and paid monthly.
<PAGE>
PAGE 19
- --------------------
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter. On
December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. At
that time, EKD replaced EKIS as the Fund's principal underwriter.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A
shares, to pay expenses related to the distribution of Class A shares. During
the year ended December 31, 1996, the Fund paid $186,596 to EKIS under the
Class A Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays
a distribution fee which may not exceed 1.00% annually of the average daily
net assets of Class B and Class C shares, respectively. Of that amount, 0.75%
is used to pay distribution expenses and 0.25% is used to pay service fees.
During the year ended December 31, 1996, under the Class B Distribution
Plans, the Fund paid or accrued $495,535 for Class B shares purchased on or
after June 1, 1995 and $319,442 for Class B shares purchased prior to June 1,
1995. The Fund paid $168,748 under the Class C Distribution Plan.
Each of the Distribution Plans 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 respective class. However, after the termination of any
Distribution Plan, and subject to the discretion of the Independent Trustees,
payments to EKIS and/or EKD may continue as compensation for services which
had been earned while the Distribution 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 Class B or Class C
shares would be within permitted limits.
At December 31, 1996 total unpaid distribution costs were $2,194,528 for
Class B shares purchased prior to June 1, 1995 and $2,322,188 for Class B
shares purchased on or after June 1, 1995. Unpaid distribution costs for
Class C were $1,155,669 at December 31, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD or its predecessor.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone
serves as the Investment Adviser and Manager to the Fund. Keystone provides
the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed and paid daily. The management
fee is determined by applying percentage rates starting at 0.75% and
declining as net assets increase to 0.50% 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
the 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 December 31, 1996, the Fund paid or accrued $30,154 to
Keystone for certain
<PAGE>
PAGE 20
- --------------------
Keystone Omega Fund
accounting services. The Fund paid or accrued $691,038 to Evergreen Keystone
Service Company (formerly, Keystone Investor Resource Center, Inc.), a
wholly-owned subsidiary of Keystone, for services rendered as the Fund's
transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund. Currently the Independent Trustees of the Fund
receive no compensation for their services.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended December 31, 1996, the Fund incurred total custody fees of
$151,914 and received a credit of $35,028 pursuant to this expense offset
arrangement, resulting in a net custody expense of $116,886. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
(7.) Fund Reorganization
On April 25, 1996, the Fund acquired the net assets of Keystone Hartwell
Growth Fund in exchange for Class A, B, and C shares of the Fund pursuant to
a plan of reorganization approved by the shareholders of Keystone Hartwell
Growth Fund on April 25, 1996. The acquisition was accomplished by a tax-free
exchange of 1,002,456 shares of the Fund for the net assets of Keystone
Hartwell Growth Fund. The net assets of Keystone Hartwell Growth Fund on that
date, including $7,665,038 of unrealized appreciation on investments, were
combined with the assets of the Fund. The aggregate net assets of the Fund
and Keystone Hartwell Growth Fund immediately before the acquisition were
$236,927,458 and $18,599,730, respectively. The net assets of the Fund
immediately after the acquisition was $255,527,188.
<PAGE>
PAGE 21
- --------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Omega Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Omega Fund, including the schedule of investments, as of December
31, 1996, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
eight-year period ended December 31, 1996 for Class A shares and for each of
the years in the three-year period ended December 31, 1996 and the period
from August 2, 1993 (Date of Initial Public Offering) to December 31, 1993
for Class B and Class C shares. 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. The financial highlights for Class
A shares for each of the years in the two-year period ended December 31, 1988
were audited by other auditors whose report, dated February 3, 1989,
expressed an unqualified opinion thereon.
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 December 31, 1996, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Omega Fund as of December 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the years
in the two-year period then ended, and the financial highlights for each of
the years or periods subsequent to 1988 specified in the first paragraph
above in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 31, 1997
<PAGE>
PAGE 22
- --------------------
Keystone Omega Fund
FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in
shares or cash, are as follows:
Short-term Long-term
Gains Gains Totals
============== ========== ========= ======
Class A shares $1.01 $1.12 $2.13
- -------------- ------- ------- -------
Class B shares $1.01 $1.12 $2.13
- -------------- ------- ------- -------
Class C shares $1.01 $1.12 $2.13
- -------------- ------- ------- -------
In January 1997 complete information on calendar year 1996 distributions was
forwarded to you to assist in completing your 1996 federal income tax return.
<PAGE>
PAGE 23
- --------------------
ADDITIONAL INFORMATION
(Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed below
at a special meeting of shareholders held Monday, December 9, 1996. In
addition, below each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withhold
========================== ============= =============
Frederick Amling 8,862,277.946 220,153.643
Laurence B. Ashkin 8,862,508.298 219,923.291
Charles Austin III 8,864,785.536 217,646.053
Foster Bam 8,862,764.805 219,666.784
George S. Bissell 8,863,156.994 219,274.595
Edwin D. Campbell 8,864,055.095 218,376.494
Charles F. Chapin 8,867,568.628 214,862.961
K. Dun Gifford 8,865,211.790 217,219.799
James S. Howell 8,866,746.661 215,684.928
Leroy Keith, Jr. 8,868,698.163 213,733.426
F. Ray Keyser, Jr. 8,866,421.840 216,009.749
Gerald McDonell 8,864,073.507 218,358.082
Thomas L. McVerry 8,867,523.583 214,908.006
William Walt Pettit 8,866,618.771 215,812.818
David M. Richardson 8,865,026.891 217,404.698
Russell A. Salton, III MD 8,864,774.128 217,657.461
Michael S. Scofield 8,863,086.847 219,344.742
Richard J. Shima 8,867,146.120 215,285.469
Andrew J. Simons 8,863,932.999 218,498.590
2. To approve an Investment Advisory and Management Agreement between
Keystone Investment Management Company and the Fund, subject to completion
of the Merger, substantially as described in the Proxy Statement.
Affirmative 8,638,837.978
Against 172,025.692
Abstain 271,567.919
------------- ---------------
TOTAL 9,082,431.589
------------- ---------------
<PAGE>
[wrap cover]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Balanced Fund II
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources & Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
World Bond 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.
[GRAPHIC] Evergreen Keystone Logo
P.O. Box 2121
Boston, Massachusetts 02106-2121
OFI-R-2/97
25M [recycle symbol]
KEYSTONE
[GRAPHIC]Mountain climber
OMEGA
FUND
[GRAPHIC] Evergreen Keystone Logo
ANNUAL REPORT
DECEMBER 31, 1996
