<PAGE>
PAGE 1
KEYSTONE OMEGA FUND
SEEKS MAXIMUM CAPITAL GROWTH FROM COMMON STOCKS.
Dear Shareholder:
We are pleased to report on Keystone Omega Fund for the six-month period, which
ended June 30, 1997.
PERFORMANCE
For the periods which ended June 30, 1997 your Fund produced the following
investment results:
Class A Shares returned 7.96% for the six-month period and 16.40% for the
twelve-month period.
Class B Shares returned 7.51% for the six-month period and 15.38% for the
twelve-month period.
Class C Shares returned 7.55% for the six-month period and 15.42% for the
twelve-month period
Class Y Shares returned 5.48% since they began operation on January 13, 1997.
While the Fund lagged broad market averages for the six months and twelve
months, the portfolio has been in a state of repositioning, so it now emphasizes
large-company stocks that have been the market leaders. In fact, the Fund's
relative performance accelerated sharply during the last three months of the
period.
INVESTMENT ENVIRONMENT
Stocks made strong gains during the first three months of 1997, before
experiencing a sharp correction in late March and April. The correction was
largely triggered by concerns about inflation and a change in the Federal
Reserve Board's monetary policy. In what it termed a "pre-emptive strike"
against inflation, the Fed raised short-term interest rates 0.25% on March 25,
1997. While the March-April downturn in the market was short-lived, it erased
the gains stocks had generated earlier in 1997. In late April, however, a
succession of economic reports indicated that economic growth was moderating and
that inflation was not accelerating. This positive economic news caused interest
rates to decline and stocks to rally. Through June 30, 1997, stock prices
continued to rise steadily.
INVESTMENT STRATEGY
During the six-month period, as we searched for strong companies we emphasized
the stocks of large multinational companies with reasonable price/earnings
ratios, relative to the overall market. The stocks of these types of companies
have been market leaders for more than two years, and they tend to be of better
quality and more liquid than smaller company stocks. At the end of the six-month
period, approximately 70% of the portfolio's net assets were invested in such
companies, up from 40% a year ago. The large companies in which we invested had
several attractive characteristics. These included solid records of consistent
earnings growth, industry leadership and strong management. We sought companies
with these attributes in a variety of economic sectors, including finance,
healthcare, business services, foods, and oil services.
At nearly 16% of net assets on June 30, 1997, finance and bank stocks
accounted for the portfolio's largest industry allocation. In this area, we
maintained our focus on companies that we believe should continue to benefit
from industry consolidation, increased productivity through the use of
technology, and relatively low interest rates. The finance stocks in the
portfolio included American Express, Travelers Group and BankBoston.
The biggest change in the portfolio occurred in the healthcare area. The
Fund's allocation in healthcare rose from nearly 9% of net assets on December
31, 1996 to 17% on June 30, 1997. This increase was the result of market
appreciation as well the purchase of additional shares of companies we already
held in the portfolio. For example, the Fund's largest holding is Warner
Lambert. We invested in Warner Lambert about two years ago, because we believed
it
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE OMEGA FUND
had promising products in the pipeline. With the release of two new drugs-- a
cholesterol lowering medication and a diabetes drug-- Warner Lambert's market
share increased significantly. This enhanced the company's appeal, and we
purchased additional shares of stock for the portfolio.
We also found opportunities among medium-sized companies, which accounted for
30% of the portfolio's net assets at the end of the period. For the past two
years, medium-sized companies were out of favor with investors. As large-company
stocks became more expensive, however, investors began to show renewed interest
in mid-sized firms. Going forward, we will continue to invest a portion of the
Fund's assets in medium-sized companies. In selecting these types of companies
for the portfolio, we apply the same criteria that we use for choosing large
companies. Because earnings growth is key to rising stock prices, we seek
companies that we believe have the potential to produce consistent earnings over
time.
OUTLOOK
Despite the lofty levels of stock prices at the conclusion of the six-month
period, we believe the environment continues to be healthy for stocks in the
foreseeable future. Gross Domestic Product (GDP) continues to grow at a more
moderate rate than it had experienced earlier in 1997, and there are still
relatively few signs of inflationary pressure that could prompt the Federal
Reserve Board to push short-term interest rates up significantly.
Despite our cautious optimism, it is important to remember that the financial
markets move in cycles. To be sure, further market corrections, similar to that
of March and April, would not be unexpected. We currently are well into our
third year of strong, above-average returns from the stock markets. It seems
reasonable to expect that the markets cannot indefinitely sustain their recent
performance, and we recommend investors moderate their expectations about the
level of returns they are likely to enjoy.
With this outlook, we will continue to manage the Keystone Omega Fund with a
strategy that emphasizes high-quality stocks that have helped the fund deliver
consistent performance for so long.
PORTFOLIO MANAGEMENT
We would like to inform you that Maureen Cullinane, a Keystone Senior Vice
President with more than 18 years of investment experience remains portfolio
manger of Keystone Omega Fund.
In the annual report, which we sent you earlier this year, we had announced
that Warren Isabelle would become the Fund's portfolio manager. However, since
that time, Mr. Isabelle has left the firm. Ms. Cullinane, who has successfully
managed the Fund since 1989 will continue as portfolio manager. During her
tenure as Omega Fund portfolio manager, the Omega Fund has produced a strong
long-term performance record.
Ms. Cullinane will continue to manage the Fund in the style that has produced
such an excellent long-term record. We will provide an extensive report on the
management of Omega Fund in the fall.
<PAGE>
PAGE 3
Thank you for your support of Keystone Omega Fund. If you have any questions
about your Keystone investment, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III (Photo of Albert (Photo of George
Albert H. Elfner, III H. Elfner, III S. Bissell
CHAIRMAN appears here) appears here)
KEYSTONE INVESTMENT MANAGEMENT COMPANY
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
<TABLE>
<S> <C>
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
August 1997
<PAGE>
PAGE 4
KEYSTONE OMEGA FUND
TOP 10 STOCKS
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY INDUSTRY NET ASSETS
<S> <C> <C>
Warner Lambert Healthcare 4.7%
General Electric Electronics 3.4%
Motorola Inc. Telecommunications 2.7%
Greenpoint Financial Banks 2.6%
EI DuPont de Nemours Chemicals &
Agricultural
products 2.6%
Phillip Morris Food & Beverages 2.4%
Exxon Oil 2.3%
USA Waste Environmental
Services Services 2.2%
First American Corp. Banks 2.2%
Coca Cola Foods & Beverages 2.2%
</TABLE>
TOP FIVE INDUSTRIES
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY NET ASSETS
<S> <C>
Healthcare products & services 16.6%
Food & Beverage products 8.3%
Banks 8.3%
Electronics 8.0%
Finance & Insurance 7.5%
</TABLE>
(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 5
Your Fund's Performance
(Graph appears here with the following information)
Growth of an investment in
Keystone Omega Fund Class A
In Thousands
6/87 6/88 6/89 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97
Dividend Reinvestment (Customer to fill in plot points)
Initial Reinvestment
A $10,000 investment in Keystone Omega Fund made on June 30, 1987 with all
distributions reinvested was worth $35,124 on June 30, 1997. Past performance
is no guarantee of future results. The performance of each class may vary based
on the differences in loads and fees paid by shareholders investing in the
different classes.
Class A share performance is reported at the current maximum front-end sales
charge of 4.75%.
Class B and C shares were introduced on August 2, 1993. Shares purchased after
January 1, 1997 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years after the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period and
reflects the deduction of a 5% CDSC.
[CAPTION]
<TABLE>
<CAPTION>
SIX-MONTH PERFORMANCE AS OF JUNE 30, 1997
<S> <C> <C> <C> <C>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
Total returns* 7.96 % 7.51 % 7.55 % 5.48 %
Net Asset
Value 12/31/96 $19.52 $18.83 $18.86 $19.98 **
Net Asset
Value 6/30/97 $20.17 $19.34 $19.37 $20.16
Capital Gain
Distributions $ 0.85 $ 0.85 $ 0.85 $ 0.85
</TABLE>
* BEFORE DEDUCTION OF FRONT-END OR CONTINGENT DEFERRED SALES CHARGE (CDSC).
CLASS Y TOTAL RETURN CALCULATED FOR PERIOD FROM JANUARY 13, 1997 (DATE OF
INITIAL PUBLIC OFFERING) TO JUNE 30, 1997.
** INITIAL NET ASSET VALUE OF CLASS Y ON JANUARY 13, 1997.
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL RECORD AS OF JUNE 30, 1997
<S> <C> <C> <C> <C>
CUMULATIVE TOTAL
RETURNS CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
1-year w/o sales
charge 16.40 % 15.38 % 15.42 % --
1-year 10.87 % 10.38 % 14.42 % --
5-year 95.46 % -- -- --
10-year 251.24 % -- -- --
Life of Class -- 60.90 % 64.15 % 5.48 %
AVERAGE ANNUAL
RETURNS
1-year w/o sales
charge 16.40 % 15.38 % 15.42 % --
1-year 10.87 % 10.38 % 14.42 % --
5-year 14.34 % -- -- --
10-year 13.39 % -- -- --
Life of Class -- 12.92 % 13.50 % --
</TABLE>
Class C shares are subject to a 1% contingent deferred sales charge for 12
months after the month purchased. Performance reflects the return you would have
received after holding shares for one year or more and redeeming after the end
of that period.
Class Y shares were introduced on January 13, 1997. Class Y Shares are
available, without a front-end sales charge or contingent deferred sales charge,
only to investment advisory clients of First Union or its affiliates and certain
institutional clients.
<PAGE>
PAGE 6
KEYSTONE OMEGA FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
[CAPTION]
<TABLE>
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
COMMON STOCKS-- 95.1%
<C> <C> <S> <C>
BANKS-- 8.3%
34,700 BankBoston Corp............... $ 2,500,569
150,000 First American Corp........... 5,770,313
56,000 Firstplus Financial Group,
Inc......................... 1,904,000
105,000 Greenpoint Financial Corp..... 6,989,062
100,000 TCF Financial Corp............ 4,937,500
22,101,444
BUILDING, CONSTRUCTION & FURNISHINGS-- 3.4%
196,300 * Furniture Brands
International, Inc.......... 3,803,313
170,000 Sherwin-Williams Company...... 5,248,750
9,052,063
BUSINESS EQUIPMENT & SERVICES-- 3.2%
50,000 Hewlett-Packard Co............ 2,800,000
37,200 Stewart Enterprises, Inc...... 1,557,750
123,800 Thermo Electron Corp.......... 4,209,200
8,566,950
CAPITAL GOODS-- 2.9%
50,000 Case Corp..................... 3,443,750
40,000 Caterpillar, Inc.............. 4,295,000
7,738,750
CHEMICAL & AGRICULTURAL PRODUCTS-- 4.0%
110,000 Du Pont E. I. De Nemours &
Co.......................... 6,916,250
85,000 Monsanto Co................... 3,660,312
10,576,562
DIVERSIFIED COMPANIES-- 1.6%
60,000 * Tyco Interational Ltd......... 4,173,750
ELECTRONICS-- 8.0%
151,666 * Analog Devices, Inc........... 4,028,628
140,000 General Electric Co........... 9,152,500
23,500 Intel Corp.................... 3,327,453
55,000 Texas Instruments, Inc........ 4,623,438
21,132,019
ENVIRONMENTAL SERVICES-- 3.1%
94,000 United States Filter Corp..... 2,561,500
150,000 * USA Waste Services, Inc....... 5,793,750
8,355,250
<CAPTION>
SHARES VALUE
<C> <C> <S> <C>
<CAPTION>
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
FINANCE & INSURANCE-- 7.5%
65,000 American Express Co........... $ 4,842,500
35,000 American International Group,
Inc......................... 5,228,125
45,000 Student Loan Marketing
Association................. 5,715,000
63,333 Travelers Group, Inc.......... 3,993,937
19,779,562
FOOD & BEVERAGE PRODUCTS-- 8.3%
85,000 Coca Cola Co. (The)........... 5,737,500
268,200 Flowers Industries, Inc....... 4,509,113
145,000 Pepsico, Inc.................. 5,446,562
145,000 Philip Morris Companies,
Inc......................... 6,434,375
22,127,550
HEALTHCARE PRODUCTS & SERVICES-- 16.6%
60,000 American Home Products Corp... 4,590,000
22,500 * Boston Scientific Corp........ 1,382,344
59,250 Cardinal Health, Inc.......... 3,392,063
162,600 Gilead Sciences, Inc.......... 4,501,987
200,000 * HEALTHSOUTH Corp.............. 4,987,500
50,000 Lilly (Eli) & Co.............. 5,465,625
21,900 Pfizer, Inc................... 2,617,050
50,000 SmithKline Beecham PLC, ADR... 4,581,250
100,000 Warner-Lambert Co............. 12,425,000
43,942,819
INFORMATION SERVICES & TECHNOLOGY-- 1.6%
34,000 * Microsoft Corp................ 4,299,938
LEISURE & TOURISM-- 1.0%
45,000 HFS, Inc...................... 2,610,000
NATURAL GAS-- 3.5%
80,000 Barrett Resources Corp........ 2,395,000
100,000 * Nuevo Energy Corp............. 4,100,000
97,100 * United Meridian Corp.......... 2,913,000
9,408,000
OFFICE EQUIPMENT & SUPPLIES-- 5.2%
140,000 * E M C Corp.................... 5,460,000
60,000 International Business
Machines Corp............... 5,411,250
70,000 * Parametric Technology Corp.... 2,977,187
13,848,437
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
COMMON STOCKS-- CONTINUED
<C> <C> <S> <C>
OIL-- 5.4%
30,000 Amoco Corp.................... $ 2,608,125
97,500 Exxon Corp.................... 5,996,250
74,200 Pennzoil Co................... 5,694,850
14,299,225
OIL FIELD SERVICES-- 5.9%
60,000 * BJ Services Co................ 3,217,500
44,100 Diamond Offshore Drilling,
Inc......................... 3,445,312
90,000 * ENSCO International, Inc...... 4,747,500
72,800 * Falcon Drilling............... 4,195,100
15,605,412
RETAILING & WHOLESALE-- 1.4%
70,000 * CDW Computer Centers, Inc..... 3,714,375
TELECOMMUNICATION SERVICES & EQUIPMENT--
4.2%
60,000 * Cisco Systems, Inc............ 4,029,375
95,000 Motorola, Inc................. 7,220,000
11,249,375
TOTAL COMMON STOCKS
(IDENTIFIED COST, $197,604,810)................ 252,581,481
<CAPTION>
PAR
VALUE VALUE
<C> <C> <S> <C>
<CAPTION>
REPURCHASE AGREEMENT-- 3.0%
<C> <C> <S> <C>
$ 7,884,000 Keystone Joint Repurchase Agreement,
(investment in repurchase
agreement, in joint
trading account, purchased
6/30/97, 6.039%, maturing
7/1/97, maturity value
$7,885,323) (a)............. $ 7,884,000
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL INVESTMENTS--
(IDENTIFIED COST, $205,488,810) 98.1% 260,465,481
OTHER ASSETS AND
LIABILITIES-- NET 1.9 5,034,590
NET ASSETS 100.0% $265,500,071
</TABLE>
* Non-income producing securities.
(a) The repurchase agreement is fully collateralized by U.S. Government and/or
agency obligations based on market prices at June 30, 1997.
ADR-- American Depository Receipts.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 8
KEYSTONE OMEGA FUND
FINANCIAL HIGHLIGHTS-- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED DECEMBER 31,
(UNAUDITED)(B) 1996 1995 1994 1993 1992(B) 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF
PERIOD $19.52 $19.56 $15.54 $17.11 $15.84 $17.68 $13.37 $16.03 $13.66
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.01) (0.06) 0.00 0.04 (0.07) 0.00 (0.04) 0.11 0.17
Net realized and unrealized gain
(loss) on investments 1.51 2.15 5.58 (1.00) 3.07 0.39 6.92 (0.39) 4.30
Total from investment operations 1.50 2.09 5.58 (0.96) 3.00 0.39 6.88 (0.28) 4.47
LESS DISTRIBUTIONS FROM
Net investment income 0.00 0.00 0.00 0.00 0.00 0.00 (0.02) (0.25) (0.20)
In excess of net investment
income 0.00 0.00 0.00 0.00 0.00 0.00 (0.05) (0.04) 0.00
Net realized gain on investments (0.85) (2.13) (1.56) (0.61) (1.73) (2.23) (2.50) (2.09) (1.90)
Total distributions (0.85) (2.13) (1.56) (0.61) (1.73) (2.23) (2.57) (2.38) (2.10)
NET ASSET VALUE END OF PERIOD $20.17 $19.52 $19.56 $15.54 $17.11 $15.84 $17.68 $13.37 $16.03
TOTAL RETURN(A) 7.96% 11.31% 36.94% (5.66%) 19.33% 4.00% 54.49% (2.38%) 33.05%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.31%(d) 1.33% 1.38% 1.41% 1.51% 1.52% 1.57% 1.73% 1.84%
Total expenses, excluding
indirectly paid expenses 1.29%(d) 1.32% 1.37% N/A N/A N/A N/A N/A N/A
Net investment income (loss) (0.13%)(d) (0.29%) 0.00% 0.27% (0.48%) (0.01%) (0.31%) 0.70% 1.03%
PORTFOLIO TURNOVER RATE 53% 173% 159% 137% 162% 176% 115% 108% 77%
AVERAGE COMMISSION RATE PAID $0.0580 $0.0621 N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF PERIOD
(THOUSANDS) $148,871 $154,825 $135,079 $99,569 $90,404 $73,144 $58,671 $38,531 $39,682
<CAPTION>
1988
<S> <C>
NET ASSET VALUE BEGINNING OF
PERIOD $12.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.30(c)
Net realized and unrealized gain
(loss) on investments 1.40
Total from investment operations 1.70
LESS DISTRIBUTIONS FROM
Net investment income (0.12)
In excess of net investment
income 0.00
Net realized gain on investments 0.00
Total distributions (0.12)
NET ASSET VALUE END OF PERIOD $13.66
TOTAL RETURN(A) 14.05%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 1.78%
Total expenses, excluding
indirectly paid expenses N/A
Net investment income (loss) 2.22%
PORTFOLIO TURNOVER RATE 84%
AVERAGE COMMISSION RATE PAID N/A
NET ASSETS END OF PERIOD
(THOUSANDS) $33,951
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculated based on average shares outstanding.
(c) Includes $0.17 per share relating to a special non-recurring distribution
from Inco Limited.
(d) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 9
FINANCIAL HIGHLIGHTS-- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED DECEMBER 31,
(UNAUDITED)(B) 1996 1995 1994 1993(C)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $18.83 $19.10 $15.34 $17.06 $17.29
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.09) (0.17) (0.09) (0.06) (0.05)
Net realized and unrealized gain (loss) on investments 1.45 2.03 5.41 (1.05) 1.55
Total from investment operations 1.36 1.86 5.32 (1.11) 1.50
LESS DISTRIBUTIONS FROM
Net realized gain from investments (0.85) (2.13) (1.56) (0.61) (1.73)
Total distributions (0.85) (2.13) (1.56) (0.61) (1.73)
NET ASSET VALUE END OF PERIOD $19.34 $18.83 $19.10 $15.34 $17.06
TOTAL RETURN(A) 7.51% 10.31% 35.70% (6.57%) 9.02%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.16%(d) 2.20% 2.29% 2.30% 2.57%(d)
Total expenses, excluding indirectly paid expenses 2.14%(d) 2.18% 2.27% N/A N/A
Net investment loss (0.97%)(d) (1.15%) (0.94%) (0.58%) (1.73%)(d)
PORTFOLIO TURNOVER RATE 53% 173% 159% 137% 162%
AVERAGE COMMISSION RATE PAID $0.0580 $0.0621 N/A N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS) $101,460 $89,921 $71,636 $32,266 $7,423
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculated based on average shares outstanding.
(c) For the period from August 2, 1993 (Date of Initial Public Offering) to
December 31, 1993.
(d) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 10
KEYSTONE OMEGA FUND
FINANCIAL HIGHLIGHTS-- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED DECEMBER 31,
(UNAUDITED)(B) 1996 1995 1994 1993(C)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $18.86 $19.13 $15.37 $17.09 $17.29
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.09) (0.18) (0.13) (0.07) (0.06)
Net realized and unrealized gain (loss) on investments 1.45 2.04 5.45 (1.04) 1.59
Total from investment operations 1.36 1.86 5.32 (1.11) 1.53
LESS DISTRIBUTIONS FROM
Net realized gain from investments (0.85) (2.13) (1.56) (0.61) (1.73)
Total distributions (0.85) (2.13) (1.56) (0.61) (1.73)
NET ASSET VALUE END OF YEAR $19.37 $18.86 $19.13 $15.37 $17.09
TOTAL RETURN(A) 7.55% 10.29% 35.62% (6.56%) 9.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.17%(d) 2.21% 2.30% 2.30% 2.48%(d)
Total expenses, excluding indirectly paid expenses 2.15%(d) 2.20% 2.29% N/A N/A
Net investment loss (0.98%)(d) (1.17%) (0.91%) (0.63%) (1.64%)(d)
PORTFOLIO TURNOVER RATE 53% 173% 159% 137% 162%
AVERAGE COMMISSION RATE PAID $ 0.0580 $0.0621 N/A N/A N/A
NET ASSETS END OF PERIOD (THOUSANDS) $ 15,169 $17,628 $13,963 $9,900 $3,620
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculated based on average shares outstanding.
(c) For the period from August 2, 1993 (Date of Initial Public Offering) to
December 31, 1993.
(d) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS-- CLASS Y SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 13, 1997
(DATE OF INITIAL OFFERING)
TO JUNE 30, 1997
(UNAUDITED)
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD $19.98
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.00
Net realized and unrealized gain on investments 1.03
Total from investment operations 1.03
LESS DISTRIBUTIONS FROM
Net realized gain on investments (0.85)
Total distributions (0.85)
NET ASSET VALUE END OF PERIOD $20.16
TOTAL RETURN 5.48%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 0.00%(a)
Total expenses, excluding indirectly paid expenses 0.00%(a)
Net investment income 0.00%(a)
PORTFOLIO TURNOVER RATE 53%
AVERAGE COMMISSION RATE PAID $0.0580
NET ASSETS END OF PERIOD $21
</TABLE>
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
KEYSTONE OMEGA FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at value
(identified cost, $205,488,810) $260,465,481
Cash 301
Receivable for investments sold 5,787,863
Receivable for Fund shares sold 289,374
Dividends and interest receivable 131,303
Prepaid expenses 65,264
Other assets 82,374
Total assets 266,821,960
LIABILITIES
Payable for investments purchased 511,798
Payable for Fund shares redeemed 736,167
Distribution fees payable 45,215
Due to related parties 6,000
Accrued expenses and other liabilities 22,709
Total liabilities 1,321,889
NET ASSETS $265,500,071
NET ASSETS REPRESENTED BY
Paid-in-capital $208,897,261
Accumulated net investment loss (627,658)
Accumulated net realized gain on investments 2,253,797
Net unrealized appreciation on investments 54,976,671
Total net assets $265,500,071
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
CLASS A SHARES
Net assets of $148,871,373 4 7,380,550
shares outstanding $ 20.17
Offering price per share ($20.17 4 0.9525)
(based on sales charge of 4.75% of the
offering price at June 30, 1997) $ 21.18
CLASS B SHARES
Net assets of $101,459,722 4 5,246,743
shares outstanding $ 19.34
CLASS C SHARES
Net assets of $15,168,955 4 782,999 shares
outstanding $ 19.37
CLASS Y SHARES
Net assets of $21 4 1 share outstanding $ 20.16
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign
withholding taxes of $3,642) $ 1,021,738
Interest 478,030
Total income 1,499,768
EXPENSES
Management fee $954,155
Distribution Plan expenses 649,980
Transfer agent fee 345,391
Accounting expense 13,123
Custodian fees 66,096
Trustees' fees and expenses 7,618
Miscellaneous expenses 112,513
Total expenses 2,148,876
Less: Expenses paid indirectly (21,450)
Net expenses 2,127,426
Net investment loss (627,658)
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments 2,536,082
Net change in unrealized
appreciation on investments 17,022,368
Net realized and unrealized gain
on investments 19,558,450
Net increase in net assets
resulting from operations $18,930,792
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PAGE 13
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
OPERATIONS
Net investment loss $ (627,658) $ (1,563,271)
Net realized gain on investments 2,536,082 35,051,903
Net change in unrealized appreciation on investments 17,022,368 (8,092,996)
Net increase in net assets resulting from operations 18,930,792 25,395,636
DISTRIBUTIONS TO SHAREHOLDERS FROM
NET REALIZED GAIN ON INVESTMENTS:
Class A Shares (6,111,942) (15,011,932)
Class B Shares (4,388,061) (9,027,710)
Class C Shares (657,416) (1,879,136)
Class Y Shares (1) 0
Total distributions to shareholders (11,157,420) (25,918,778)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A Shares 12,556,352 33,571,953
Class B Shares 21,579,395 28,806,348
Class C Shares 1,877,435 6,288,512
Class Y Shares 20 0
Payments for shares redeemed:
Class A Shares (28,558,907) (44,999,521)
Class B Shares (17,066,220) (19,500,081)
Class C Shares (5,365,178) (4,608,982)
Class Y Shares 0 0
Net asset value of shares issued in reinvestment of distributions:
Class A Shares 5,545,839 13,822,516
Class B Shares 4,149,157 8,494,665
Class C Shares 635,076 1,743,341
Class Y Shares 1 0
Shares issued in acquisition of Hartwell Growth Fund:
Class A Shares 0 16,929,242
Class B Shares 0 1,206,044
Class C Shares 0 464,444
Net increase (decrease) in net assets resulting from capital share transactions (4,647,030) 42,218,481
Total increase in net assets 3,126,342 41,695,339
NET ASSETS:
Beginning of period 262,373,729 220,678,390
End of period, including net investment loss of $627,658 and $0, respectively $ 265,500,071 $ 262,373,729
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PAGE 14
KEYSTONE OMEGA FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 is currently 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'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 Fund offers Class A, Class B, Class C and Class Y shares. Class A shares
are currently offered at a public offering price, which includes a maximum sales
charge of 4.75% payable at the time of purchase. Class B shares are sold subject
to a contingent deferred sales charge that is payable upon redemption and
decreases depending on how long the shares have been held. Class B shares
purchased on or after January 1, 1997 that have been outstanding for seven years
will automatically convert to Class A shares. Class B shares purchased prior to
January 1, 1997 retain their existing conversion rights. Class C shares are sold
subject to a contingent deferred sales charge payable on shares redeemed within
one year of purchase. Class Y shares are available, without a front-end sales
charge or contingent deferred sales charge, only to investment advisory clients
of First Union and its affiliates and certain institutional clients. Class Y
shares were initially offered to the public on January 13, 1997.
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
The Fund values securities traded on a national securities exchange or included
on the NASDAQ National Market System ("NMS") at the last reported sales price on
the exchange where primarily traded. The Fund values securities traded on an
exchange or NMS for which there has been no sale and other securities traded in
the over-the-counter market at the mean between the last reported bid and asked
price. Securities for which valuations are not available from an independent
pricing service, including restricted securities, are valued at fair value as
determined in good faith according to procedures established by the Board of
Trustees. Short-term investments with remaining maturities of 60 days or less
are valued at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with certain other funds managed by Keystone, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized by
U.S. 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. 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. Dividend income is recorded on the ex-dividend date.
<PAGE>
PAGE 15
Interest income is recorded on the accrual basis and includes amortization of
discounts and premiums.
D. 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.
E. 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 for tax purposes.
F. CLASS ALLOCATIONS
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 without par value. Transactions in shares of the Fund were
as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
CLASS A
Shares sold 652,496 1,759,793
Shares redeemed (1,497,048) (2,381,626)
Shares issued in
Acquisition of
Hartwell Growth Fund -- 910,037
Shares issued in
reinvestment of
distributions 292,502 736,752
Net increase
(decrease) (552,050) 1,024,956
CLASS B
Shares sold 1,151,467 1,552,928
Shares redeemed (907,946) (1,062,059)
Shares issued in
Acquisition of
Hartwell Growth Fund -- 66,754
Shares issued in
reinvestment of
distributions 227,976 466,572
Net increase 471,497 1,024,195
CLASS C
Shares sold 100,953 336,661
Shares redeemed (287,344) (253,439)
Shares issued in
Acquisition of
Hartwell Growth Fund -- 25,665
Shares issued in
reinvestment of
distributions 34,837 95,593
Net increase
(decrease) (151,554) 204,480
</TABLE>
<PAGE>
PAGE 16
KEYSTONE OMEGA FUND
During the period from January 13, 1997 to June 30, 1997, one Class Y share was
sold.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the six months ended
June 30, 1997 were $126,294,487 and $139,232,697, respectively.
4. DISTRIBUTION PLANS
The Fund has entered into a principal underwriting agreement with Evergreen
Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The BISYS Group
Inc.
The Fund has adopted Distribution Plans for each class of shares, except Class
Y, as allowed by Rule 12b-1 of the 1940 Act. Distribution plans permit the fund
to reimburse its principal underwriter for costs related to selling shares of
the fund and for various other services. These costs, which consist primarily of
commissions and service fees to broker-dealers who sell shares of the fund, are
paid by shareholders through expenses called "Distribution Plan expenses". Each
class, except Class Y, currently pays a service fee equal to 0.25% of the
average daily net asset of the Class. Class B and Class C also presently pay
distribution fees equal to 0.75% of the average daily net assets of the Class.
Distribution Plan expenses are calculated daily and paid monthly.
With respect to Class B and Class C shares, the principal underwriter may
incur distribution costs greater than the allowable annual amounts the Fund is
permitted to pay. The Fund may reimburse the principal underwriter for such
excess amounts in later years with annual interest at the prime rate plus 1.00%.
During the six months ended June 30, 1997, amounts paid to EKD and/or its
predecessor pursuant to the Fund's Class A, Class B and Class C Distribution
Plans were $100,891, $468,692 and $80,397, respectively.
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 EKD
and/or its predecessor may continue as compensation for services which had been
provided 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.
EKD and/or its predecessor has advised the Fund that it has retained front-end
sales charges resulting from the sales of Class A shares of the Fund during the
six months ended June 30, 1997 of $18,507.
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. As such, Keystone manages the
Fund's investments, provides certain administrative services and supervises the
Funds daily business affairs. In return, Keystone is paid a management fee,
computed daily and paid monthly. 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.
During the six months ended June 30, 1997, the Fund paid or accrued $13,123 to
Keystone for certain accounting services. Evergreen Keystone Service Company, 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
<PAGE>
PAGE 17
Fund's sub-administrator. As sub-administrator, BISYS provides the officers of
the Fund. For this service, BISYS is paid a fee by Keystone, which is not a Fund
expense.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
7. 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 investment, 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>
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<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
(Diamond appears here)
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Global Resources & Development 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
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
(Evergreen tree appears here) FUNDS(SM) (Keystone logo appears here)
P.O. Box 2121
Boston, Massachusetts 02106-2121
OFI-R Rev01 7/97 (Recycle logo appears here)
KEYSTONE
(Photo of mountain climber appears here)
OMEGA
FUND
Evergreen Keystone
(Evergreen tree appears here) FUNDS(SM) (Keystone logo appears here)
SEMI-ANNUAL REPORT
JUNE 30, 1997
