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Keystone Small Co GR Fd S 4 – ‘N-30D’ for 5/31/97

As of:  Friday, 8/1/97   ·   For:  5/31/97   ·   Accession #:  950168-97-2079   ·   File #:  811-00101

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/01/97  Keystone Small Co GR Fd S 4       N-30D       5/31/97    1:51K                                    Donnelley Financial/FA

Annual or Semi-Annual Report Mailed to Shareholders   —   Rule 30d-1
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Document/Exhibit                   Description                      Pages   Size 

 1: N-30D       Evergreen Keystone Small Co. Growth AR N30-D          20     95K 


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PAGE 1 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) SEEKS LONG-TERM GROWTH OF CAPITAL BY INVESTING IN EMERGING GROWTH COMPANIES. Dear Shareholder: We are pleased to report to you on the activities of Keystone Small Company Growth Fund (S-4) for the twelve-month period that ended May 31, l997. Following this letter, we have included an interview with the Fund's manager J. Gary Craven, in which he discusses his portfolio strategy. PERFORMANCE For the twelve-month period, which ended May 31, l997, your Fund produced a total return of -8.61%, exclusive of any deferred sales charge. The Russell 2000 Index rose 6.97% and the Russell 2000 Growth Index produced a total return of -5.48% for the same period. Your Fund's results were disappointing. It is important to remember, though, that they occurred during a time when small-company stocks in general, and technology stocks in particular, lagged behind large-company stock indices. During this period, particularly the last six months, we continued to reposition the Fund for greater consistency by emphasizing the stocks of companies that we believe have the potential to produce sustainable above-average growth over time. ENVIRONMENT During the twelve months, concerns about the pace of economic growth, accelerating inflation and higher interest rates held back the performance of small-company stocks. From mid-l996 until late-April 1997, small-company stock prices fluctuated broadly. During market corrections, small-cap stock prices declined more than those of large-company stocks; and during market rallies, their returns rose less than their large-cap counterparts. Finally, in the last six weeks of the period, the small stock market began to rally as investors appeared to recognize the attractive relative values there. STRATEGY Over the twelve-months, we emphasized companies with market capitalizations of $1 billion and under. We cut back on the stocks of companies that we believed had reached optimal price levels, and we invested in a variety of high-quality companies that we believed were selling at attractive prices and that have the potential to generate strong earnings over several years. In selecting stocks for the portfolio, we focused on businesses that appear to have sustainable above-average growth prospects. We sought companies in all sectors of the market, and we emphasized firms that had distinguishing attributes, such as strong management, unique product lines, and low-cost goods and services. We diversified your Fund's investments among a number of economic sectors, including technology, health care and finance. OUTLOOK Over the next several months, we believe small-company stocks should generate stronger returns than they have in the recent past. We think economic growth should be moderate and inflation and interest rates should be relatively low. Historically, small-company stocks have tended to perform well in this type of environment. In addition, small company stocks are relatively inexpensive. Even after the small-cap stock rally of April and May, valuations on small-company stocks, in comparison to large-cap stocks, were at their most attractive levels in several years. We believe these favorable conditions should bode well for small-cap stocks. As a small-company investor, you should keep in mind that one of the characteristics of small-company stocks is their volatility. They tend to fluctuate in value over short periods of time. Historically, large gains in the small-cap sector -- CONTINUED--
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PAGE 2 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) have come during short time frames. Therefore, being invested in small-caps when they rally is crucial to being a successful small-cap investor. As we continue to restructure the portfolio, we believe that the companies in which we have invested are poised to achieve their highest profitability and fastest growth. In many areas, such as technology and health care, these companies are at a stage in their development when they are introducing products and services that have never existed. Generally, earnings growth in these types of companies is less dependent on the general level of economic activity and more on the success of their own particular product cycles. Thank you for your continued support of Keystone Small Company Growth Fund (S-4). If you have any questions or comments about your investment, we encourage you to write to us. Sincerely, /s/ Albert H. Elfner, III Albert H. Elfner, III CHAIRMAN KEYSTONE INVESTMENT MANAGEMENT COMPANY /s/ George S. Bissell George S. Bissell CHAIRMAN OF THE BOARD KEYSTONE FUNDS [Download Table] (Photo of Albert H. (Photo of George S. Elfner, III appears here) Bissell appears here) ALBERT H. ELFNER, III GEORGE S. BISSELL June 1997
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PAGE 3 A Discussion With Your Fund Manager (Photo of J. Gary Craven appears here) J. GARY CRAVEN IS SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER, SMALL COMPANY STOCKS AND PORTFOLIO MANAGER OF YOUR FUND. MR. CRAVEN IS A CHARTERED FINANCIAL ANALYST. PRIOR TO JOINING KEYSTONE IN NOVEMBER L996, HE WAS A PORTFOLIO MANAGER AT INVISTA CAPITAL MANAGEMENT, INC., A SUBSIDIARY OF THE PRINCIPAL FINANCIAL GROUP. AT INVISTA, HE MANAGED AN $860 MILLION SMALL COMPANY GROWTH PENSION ACCOUNT AND CO-MANAGED PRINCOR EMERGING GROWTH FUND AND PRINCOR GROWTH FUND, ALL OF WHICH HAD ATTRACTIVE PERFORMANCE RECORDS RELATIVE TO SMALL-CAP BENCHMARKS WHILE UNDER HIS MANAGEMENT. KEYSTONE'S SMALL COMPANY STOCK TEAM IS COMPOSED OF THREE PORTFOLIO MANAGERS AND SUPPORTED BY FIVE EQUITY ANALYSTS. TOGETHER, THEY SEARCH FOR STOCKS OF SMALL COMPANIES WITH SUSTAINABLE ABOVE- AVERAGE GROWTH RATES. Q WHAT WAS THE INVESTMENT ENVIRONMENT FOR SMALL-CAP STOCKS LIKE DURING THE TWELVE-MONTH PERIOD? A It was a volatile environment for small-cap stocks. Small caps generated very strong gains in l995, but midway through l996, the environment changed. Concerns about slower economic growth and rising interest rates made small-cap stocks less appealing to investors, and they shifted money to large-company stocks. Small company stocks were hit hardest during a market correction in the summer of l996 and, again, during the market downturn that occurred in March and April of l997. Toward the end of April, however, investors appeared to recognize that small-cap stock prices were at very attractive price levels and began to favor small-cap stocks. Small-cap stock prices rose and continued on an upward course through May 1997. Q WHAT WAS YOUR STRATEGY FOR MANAGING THE PORTFOLIO DURING THE PERIOD? A We invested in companies with market capitalizations of $1 billion and under. Our strategy was to reposition the portfolio to reduce volatility. We invested in high-quality companies that we believe have above average long-term growth prospects and that were relatively inexpensive. The companies we selected for the portfolio tended to have strong competitive positions in their market sectors and superior business models which have the potential to generate high returns on capital. These business models can include: low cost production, technological leadership, exceptional distribution systems and high-quality management teams. Q TECHNOLOGY STOCKS ACCOUNTED FOR THE LARGEST AREA OF INVESTMENT. WHAT WAS ATTRACTIVE ABOUT TECHNOLOGY STOCKS? A When we refer to technology stocks, we include a broad area that encompasses telecommunications, software and hardware businesses. During the period, we changed the composition of the technology portion of the portfolio. We sold stocks that we believed had reached optimal price levels. For example, we reduced two long-standing software holdings, McAfee Associates and BMC Software. We found opportunity in a number of other companies that were attractively priced and met our criteria for growth.
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PAGE 4 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) TOP 5 INDUSTRIES AS OF MAY 31, 1997 [Download Table] PERCENTAGE OF INDUSTRY NET ASSETS Information Services & Technology 19.4% Healthcare Products & Services 11.2% Finance & Insurance 9.8% Oil 8.7% Electronics 7.3% Q WHAT WERE SOME OF THE TECHNOLOGY COMPANIES YOU ADDED TO THE PORTFOLIO? A We believe there are several dominant hardware companies in the technology sector, including Microsoft, Intel and Cisco Systems. Because these are very large companies, your Fund does not invest in them. However, we can take advantage of their strength by investing in smaller firms that do business with these larger firms. We increased our exposure to companies that we believe should benefit from providing products and services to large, dominant technology companies. Two examples are Avid Technology and Rational Software. Avid Technology produces editing software for the television and movie industries. It is currently developing this high-end technical equipment for the corporate and consumer markets. Rational Software produces software that makes it easier to write computer programs. Q DID YOU MAKE ANY CHANGES IN THE FINANCE AREA? A We made a number of changes in the finance sector. We eliminated stocks that we believe had reached their target price levels. We also were concerned about the impact that increases in interest rates could have on some lenders. As a result, when the Federal Reserve Board raised rates in March, we repositioned our investments from sub-prime lenders to higher quality lenders. We sold automobile loan companies and mortgage lending businesses and increased our emphasis on quality, regional banks. Going forward, we are optimistic about the potential for financial stocks. We believe that the need for financial services and products will increase for the rest of the decade and that the finance sector of the market should be one of the strongest growth areas. Q SIX MONTHS AGO, OIL SERVICES STOCKS WERE AN AREA OF EMPHASIS FOR THE FUND. WERE THEY AS DOMINANT IN THE PORTFOLIO AT THE END OF THE PERIOD? A We trimmed the Fund's exposure to oil services stocks as they reached their price objectives. Even though energy and oil services stocks have produced strong returns for more than a year, the level of drilling activity is increasing. We have concentrated Fund holdings in companies we believe are well positioned to participate in this activity. We cut back on ENSCO International, which had been the Fund's largest holding. It is still among the portfolio's top ten holdings, but we reduced its position in the portfolio. Q HEALTH CARE STOCKS WERE AN IMPORTANT PART OF THE PORTFOLIO. HOW DID THESE STOCKS PERFORM? A In the health care area, prices on several companies declined because of concerns about changes in Medicare regulations. We believe investors overreacted to the possible changes in Medicare, and we invested in several health care companies. These included Lincare, American Home Patients, and Rotech. These are home health care businesses that specialize in respiration technology, that is, they provide oxygen to patients with Asthma, Emphysema and Chronic Bronchitis. We also increased the portfolio's exposure to biotechnology companies.
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PAGE 5 TOP 10 HOLDINGS AS OF MAY 31, 1997 [Download Table] PERCENTAGE OF COMPANY INDUSTRY NET ASSETS BMC Software, Inc. Information Services 3.0% & Technology Synopsis, Inc. Information Services 2.2.% & Technology Maxim Integrated Electronics 1.7% Products, Inc. Seacor Smit, Inc. Oil 1.7% Astoria Financial Corp Finance & Insurance 1.6% ENSCO International, Inc. Oil 1.6% Microchip Technology, Information Services 1.5% Inc. & Technology Health Management Healthcare Products & 1.5% Associates, Inc. Services USA Waste Services, Inc. Business Equipment 1.5% TCF Financial Corp Finance & Insurance 1.4% Q WHAT IS YOUR OUTLOOK? A We believe there are several factors that bode well for the future. Prices of small-company stocks are very attractive, relative to their large-cap counterparts. However, it is going to take earnings growth to drive small-cap prices higher over the long term. We believe that the development of new products and technologies should add the impetus that these stocks need to perform well over the long term. We are optimistic about economic growth. We believe that any increase in interest rates will be relatively small and will set the stage for moderate economic growth, relatively low inflation, and lower interest rates over the long term. We think this should be a positive backdrop for small companies. (Diamond appears here) THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND. IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO: EVERGREEN KEYSTONE INVESTMENT SERVICES, INC. ATTN. SHAREHOLDER COMMUNICATIONS 201 SOUTH COLLEGE STREET, SUITE 400, CHARLOTTE, N.C. 28288-1195
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PAGE 6 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) Your Fund's Performance (Charts appear here with the following information) Growth of an investment in Keystone Small Company Growth Fund 5/86 5/87 5/88 5/89 5/90 5/91 5/93 5/94 5/95 5/96 5/97 Dividend Reinvestment (Customer to supply plot points) Initial Investment A $10,000 investment in Keystone Small Company Growth Fund (S-4) made on May 31, 1987 with all distributions reinvested was worth $30,805 on May 31, 1997. Past performance is no guarantee of future results. Comparison of change in value of a $10,000 investment in Keystone Small Company Growth Fund (S-4), the Russell 2000 Index, the NASDAQ Composite Index and the Consumer Price Index. 5/31/87 5/88 5/89 5/90 5/91 5/92 5/93 5/94 5/95 5/96 5/97 Fund (Customer to supply plot points) CPI Russell 2000 NASDAQ Past performance is no guarantee of future results. The Russell 2000 index and NASDAQ Composite Index are unmanaged market indices. These indices do not include transaction costs associated with buying and selling securities nor any management fees. The Consumer Price Index, a measure of inflation, is through May 31, 1997. [Download Table] The "If you redeemed" returns reflect the deduction of the 3% contingent deferred sales charge (CDSC) for those investors who sold Fund shares after one calendar year. Investors who retained their fund investment earned the returns reported in the second column of the table. The investment return and principal value will fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. You may exchange your shares for another Keystone Classic fund by phone or in writing. The Fund reserves the right to change or terminate the exchange offer. [Download Table] TWELVE-MONTH PERFORMANCE AS OF MAY 31, 1997 Total Return* (8.61%) Net asset value 5/31/96 $10.35 5/31/97 $ 8.44 Dividends None Capital gain distributions $ 1.02 * BEFORE DEDUCTION OF CONTINGENT DEFERRED SALES CHARGES (CDSC). [CAPTION] [Download Table] HISTORICAL RECORD AS OF MAY 31, 1997 IF YOU IF YOU DID NOT REDEEMED REDEEM CUMULATIVE TOTAL RETURN 1-year (11.06%) (8.61%) 5-year 106.68% 106.68% 10-year 208.05% 208.05% AVERAGE ANNUAL TOTAL RETURN 1-year (11.06%) (8.61%) 5-year 15.63% 15.63% 10-year 11.91% 11.91%
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PAGE 7 SCHEDULE OF INVESTMENTS-- MAY 31, 1997 [CAPTION] [Download Table] SHARES VALUE COMMON STOCKS-- 97.2% AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 1.7% 359,500 Gentex Corp.................. $ 7,190,000 411,160 Tower Automotive Inc......... 16,292,215 23,482,215 BANKS-- 1.7% 93,100 * Community First Bankshares Inc........................ 3,217,769 233,160 * Hubco Inc.................... 6,076,732 390,080 * North Fork Bancorp, Inc...... 8,191,680 207,800 * Sovereign Bancorp Inc........ 2,740,362 61,646 * Westamerica Bancorp.......... 4,230,457 24,457,000 BUILDING, CONSTRUCTION & FURNISHINGS-- 3.4% 631,020 Champion Enterprises, Inc.... 11,594,993 235,419 Furniture Brands International, Inc......... 3,678,422 824,791 * Oakwood Homes Corp........... 19,588,786 125,000 Service Experts Inc.......... 3,546,875 194,160 Shaw Group Inc............... 3,373,530 299,420 Toll Brothers, Inc........... 5,464,415 47,247,021 BUSINESS EQUIPMENT & SERVICES-- 4.8% 235,660 Alternative Resources Corp....................... 4,344,981 25,000 American Management Systems Inc........................ 646,875 339,780 * Comdisco, Inc................ 12,529,388 325,121 * G&K Services................. 10,525,792 196,596 * Norrell Corporation Georgia.. 6,340,221 141,000 Renaissance Solutions, Inc........................ 5,164,125 584,616 USA Waste Services, Inc...... 21,192,330 217,945 Vincam Group Inc............. 6,701,809 67,445,521 CHEMICAL & AGRICULTURAL PRODUCTS-- 0.7% 291,240 * OM Group, Inc................ 9,174,060 COMMERCIAL SERVICES-- 0.3% 116,967 Budget Group Inc............. 3,260,455 23,800 Hertz Corp................... 815,150 4,075,605 COMMUNICATION SYSTEMS & SERVICES-- 0.5% 200,000 Data General Corp............ 4,275,000 200,000 Fore Systems................. 3,312,500 7,587,500 SHARES VALUE COMMON STOCKS (CONTINUED) CONSUMER PRODUCTS & SERVICES-- 3.0% 318,517 Action Performance Cos Inc... $ 7,664,315 69,880 Blyth Industries Inc......... 3,109,660 532,484 Devry Inc.................... 14,709,871 370,069 Equity Corporation International.............. 8,812,268 200,000 * Stanhome Inc................. 6,275,000 172,007 USA Detergents Inc........... 2,214,590 42,785,704 ELECTRONICS-- 7.3% 53,200 ADFlex Solutions, Inc........ 871,150 353,857 Altron Inc................... 5,882,873 626,640 Analog Devices, Inc.......... 16,762,620 3,500 Asyst Technologies Inc....... 1,337,906 300,560 * BMC Industries Inc........... 9,880,910 150,000 Credence Systems Corp........ 4,443,750 291,240 DII Group Inc................ 9,210,465 488,320 ESS Technology Inc........... 7,538,440 50,000 Flextronics International.... 1,171,875 200,000 Integrated Process Equipment Corp....................... 3,662,500 210,563 * Linear Technology Corp....... 10,541,310 433,889 Maxim Integrated Products Inc........................ 23,375,770 289,007 Sipex Corp................... 8,597,958 103,277,527 FINANCE & INSURANCE-- 9.8% 389,582 Amerin Corp.................. 9,057,781 561,462 * Astoria Financial Corp....... 23,090,125 248,255 The BISYS Group Inc. (a)..... 9,418,174 291,240 * BostonFed Bancorp Inc........ 4,405,005 28,188 * Capital Re Corp.............. 1,236,749 342,126 * CMAC Investment Corp......... 14,240,995 216,489 * Everen Capital Corp.......... 5,358,103 90,648 First Alliance Company....... 2,232,207 582,480 Firstplus Financial Group Inc........................ 14,780,430 361,023 * HCC Insurance Holdings Inc... 9,431,726 97,080 * Legg Mason, Inc.............. 4,477,815 266,970 * Long Islands Bancorp Inc..... 9,293,893 281,532 * Queens County Bancorp........ 11,648,386 465,980 * TCF Financial Corp........... 19,804,150 138,475,539
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PAGE 8 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) SCHEDULE OF INVESTMENTS-- MAY 31, 1997 [Download Table] SHARES VALUE COMMON STOCKS (CONTINUED) FOOD & BEVERAGE PRODUCTS-- 1.1% 351,527 * Applebee's International Inc........................ $ 8,678,323 382,500 * Flowers Industries Inc....... 6,741,562 15,419,885 HEALTHCARE PRODUCTS & SERVICES-- 11.2% 85,800 Agouron Pharmaceuticals Inc........................ 6,880,087 180,000 American Home Patient Inc.... 3,465,000 964,198 Amylin Pharmaceuticals Inc... 12,474,312 23,100 CRA Managed Care Inc......... 1,061,156 281,026 Cytotherapeutics............. 1,563,207 188,044 Cytyc Corp................... 4,595,325 292,502 Emeritus Corp................ 4,460,655 662,085 Gilead Sciences Inc.......... 17,834,915 727,226 Health Management Associates, Inc........................ 21,271,360 213,673 Heartport Inc................ 5,141,507 167,985 Idexx Laboratories, Inc...... 2,383,287 369,584 Lifecore Biomedical Inc...... 5,151,077 150,000 Lincare Holdings, Inc........ 5,840,625 582,480 Magainin Pharmaceutical...... 4,295,790 255,569 Neurogen Corp................ 4,823,865 192,510 Norland Medical Systems Inc........................ 1,672,431 329,684 Parexel International Corp....................... 10,776,546 145,620 Pediatrix Med Group.......... 5,788,395 142,320 Perclose Inc................. 3,273,360 512,582 Phymatrix Corp............... 7,336,330 120,000 Polymer Group Inc............ 1,740,000 140,000 Rotech Medical Corp.......... 2,388,750 339,780 Strategic Distribution Inc........................ 1,337,884 372,680 Thermo Cardiosystems Inc..... 10,015,775 235,711 Total Renal Care Holdings Inc........................ 8,485,596 63,102 Urologix Inc................. 1,064,846 24,076 Virus Research Institute Inc........................ 153,485 150,000 Weider Nutrition International Inc.......... 1,912,500 157,188,066 SHARES VALUE COMMON STOCKS (CONTINUED) INDUSTRIAL SPECIALTY PRODUCTS & SERVICES-- 2.3% 363,274 Brown & Sharpe Manufacturing Co. Cl. A.................. $ 5,176,655 354,050 GTS Duratek Inc.............. 3,075,809 180,500 * Roper Industries............. 8,867,062 47,500 * Trimas Corp.................. 1,347,813 438,037 United States Filter Corp.... 13,798,165 32,265,504 INFORMATION SERVICES & TECHNOLOGY-- 19.4% 130,000 ABR Information Services Inc........................ 4,168,125 15,000 Acxiom Corp.................. 247,500 280,800 Avid Technology Inc.......... 6,598,800 415,864 BDM International Inc........ 10,656,515 133,097 Bitstream Inc................ 382,654 217,000 Black Box Corp............... 7,649,250 788,095 BMC Software, Inc............ 42,606,386 420,380 Cambridge Technology Partners................... 12,847,864 80,182 Ciber Inc.................... 3,312,519 483,700 Clarify Inc.................. 5,834,631 485,400 Cognex Corp.................. 12,650,737 207,654 Dataworks Corp............... 3,932,448 485,400 Geoworks..................... 3,048,919 4,000 Inacom Corp.................. 129,250 227,184 INSO Corp.................... 6,346,953 48,540 Manugistics Group Inc........ 3,142,965 5,000 May & Speh Inc............... 55,937 205,290 McAfee Associates Inc........ 13,510,648 232,798 Mechanical Dynamics Inc...... 2,182,481 605,290 Microchip Technology Inc..... 21,601,287 237,054 * National Data Corp........... 10,400,744 291,240 Parametric Technology Corp... 13,087,597 236,681 Project Software & Development Inc............ 4,556,109 150,000 Pure Atria Corp.............. 2,390,625 174,200 Radisys Corp................. 6,380,075 350,000 Rational Software Corp....... 6,584,375 504,816 Safeguard Scientifics Inc.... 13,630,032 348,323 Security Dynamics............ 12,844,411 832,455 Synopsys Inc................. 31,008,949 100,000 Vantive Corp................. 2,687,500 233,497 Wind River Systems Inc....... 7,880,524 272,356,810
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PAGE 9 SCHEDULE OF INVESTMENTS-- MAY 31, 1997 [Download Table] SHARES VALUE COMMON STOCKS (CONTINUED) LEISURE & TOURISM-- 2.0% 43,000 Anchor Gaming................ $ 1,832,875 49,395 Casino America Inc........... 494 479,589 Colorado Gaming & Entertainment Company (c).. 2,158,150 291,240 * Louisiana Quinta Inns Inc.... 6,698,520 467,246 Promus Hotel Corp............ 16,879,262 27,569,301 MACHINERY-- DIVERSIFIED-- 0.5% 99,400 Omniquip International Inc... 1,994,213 215,324 Rental Service Corp.......... 4,683,297 6,677,510 METAL PRODUCTS & SERVICES-- 1.2% 452,490 Molten Metal Tech Inc........ 3,195,711 250,000 Oregon Metallurgical Corp.... 6,437,500 235,613 RMI Titanium Company......... 5,478,002 116,496 Special Metals Corp.......... 2,169,738 17,280,951 NATURAL GAS-- 1.2% 398,028 Nuevo Energy Company......... 17,363,972 OFFICE EQUIPMENT & SUPPLIES-- 2.0% 485,400 EMC Corp..................... 19,355,325 293,220 Komag Inc.................... 8,466,727 27,822,052 OIL-- 8.7% 191,240 BJ Services Company.......... 10,566,010 81,742 * Carbo Ceramics Inc........... 1,808,542 457,248 ENSCO International Inc...... 22,805,244 300,050 Falcon Drilling.............. 13,764,794 242,700 Forcenergy, Inc.............. 8,464,162 321,917 Global Industries, Inc....... 7,021,815 160,182 * KCS Energy Inc............... 6,667,576 316,039 Newpark Resources, Inc....... 16,592,047 448,999 Seacor Smit Inc.............. 23,235,698 24,950 Stone Energy Corp............ 698,600 83,586 * Saint Mary Land & Exploration Company.................... 2,653,856 325,218 Swift Energy Company......... 8,699,581 122,977,925 SHARES VALUE COMMON STOCKS (CONTINUED) PUBLISHING, BROADCASTING & ENTERTAINMENT-- 1.7% 371,040 Cox Radio Inc................ $ 8,302,020 388,320 Jacor Communications, Inc.... 13,421,310 75,800 Young Broadcasting Inc. Cl. A...................... 2,032,387 23,755,717 RETAILING & WHOLESALE-- 5.4% 390,055 Abercrombie & Fitch Company.. 6,777,205 882,480 Corporate Express Inc........ 12,244,410 181,877 Global Directmail Corp....... 4,319,579 141,240 Kohl's Corp.................. 7,609,305 187,680 Nautica Enterprises, Inc..... 4,422,210 485,400 Saks Holdings Inc............ 12,074,325 493,200 Sports Authority Inc......... 8,877,600 310,656 * Tiffany & Company New........ 14,406,672 236,293 West Marine Inc.............. 6,187,923 76,919,229 TELECOMMUNICATION SERVICES & EQUIPMENT-- 6.1% 77,800 ACC Corp..................... 1,993,625 427,288 Aspect Telecommunications Corp....................... 9,613,980 398,978 Billing Information Concepts Corp....................... 11,470,618 138,300 Boston Communications Group.. 1,339,781 346,768 Brooks Fiber Properties Inc........................ 8,907,603 435,000 McLeod USA Incorporated...... 10,222,500 326,286 Natural Microsystems Corp.... 8,014,400 300,000 Pairgain Technologies Inc.... 6,281,250 161,444 Proxim Inc................... 4,106,732 121,700 Spectrian.................... 2,692,612 829,053 Tel-Save Holdings Inc........ 12,746,690 582,480 Winstar Communications Inc... 8,227,530 85,617,321 TRANSPORTATION-- 0.3% 146,399 Coach USA Inc................ 3,842,974 TRANSPORTATION-- 0.9% 242,700 * ASA Holdings, Inc............ 6,310,200 77,320 Railtex Inc.................. 1,420,755 153,956 Swift Transportation Inc..... 4,965,082 12,696,037 TOTAL COMMON STOCKS (COST $1,056,771,773)......................... 1,367,760,946
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PAGE 10 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) SCHEDULE OF INVESTMENTS-- MAY 31, 1997 [Download Table] PAR VALUE VALUE SHORT-TERM INVESTMENTS-- 1.9% GOVERNMENT AGENCIES-- 0.7% 10,000,000 FHLB Discount Notes 5.50%, 6/2/97.................... $ 9,998,472 REPURCHASE AGREEMENTS-- 1.2% 16,205,000 Keystone Joint Repurchase Agreement (investments in repurchase agreements, in joint trading account, purchased 5/30/97, 5.5734%, maturing 6/2/97, maturity value $16,212,526)(b)... 16,205,000 TOTAL SHORT-TERM INVESTMENTS (COST $26,203,472)............................ 26,203,472 TOTAL INVESTMENTS (COST-- $1,082,975,245) 99.1% 1,393,964,418 OTHER ASSETS AND LIABILITIES-- NET 0.9 12,804,201 NET ASSETS 100.0% $1,406,768,619 * Income producing securities. FHLB-- Federal Home Loan Bank (a) At May 31, 1997, the Fund owned 248,255 shares of common stock of The BISYS Group, Inc. at a cost of $6,474,363. During the year ended May 31, 1997 the Fund earned no dividend income from this investment. These shares were purchased prior to Evergreen Keystone Distributors Inc., a wholly owned subsidiary of The BISYS Group, Inc. becoming the Fund's principal underwriter and BISYS Fund Services, Inc. becoming the Fund's sub-administrator. (b) The repurchase agreement is fully collateralized by U.S. Government and/or agency obligations based on market prices at May 31, 1997. (c) Investment in non-controlled affiliate holding over 5% of outstanding shares. At May 31, 1997, the Fund held 479,589 of Colorado Gaming & Entertainment Company with a value of $2,158,150 and acquisition cost of $2,766,251. The Fund has not earned any income from this investment. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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PAGE 11 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR) [Enlarge/Download Table] YEAR ENDED MAY 31, 1997(A) 1996 1995 1994 1993(A) 1992(A) 1991(A) 1990(A) 1989(A) NET ASSET VALUE BEGINNING OF YEAR $10.35 $8.62 $7.64 $7.95 $7.61 $7.17 $6.24 $5.66 $4.48 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.11) (0.13) (0.07) (0.12) (0.12) (0.08) (0.04) 0.00 0.02 Net realized and unrealized gain (loss) on investments (0.78) 2.87 1.68 0.63 1.82 0.98 1.17 0.63 1.20 Total from investment operations (0.89) 2.74 1.61 0.51 1.70 0.90 1.13 0.63 1.22 LESS DISTRIBUTIONS FROM Net investment income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.05) (0.01) Net realized gain on investments (1.02) (1.01) (0.63) (0.82) (1.36) (0.46) (0.20) 0.00 (0.03) Total distributions (1.02) (1.01) (0.63) (0.82) (1.36) (0.46) (0.20) (0.05) (0.04) NET ASSET VALUE END OF YEAR $8.44 $10.35 $8.62 $7.64 $7.95 $7.61 $7.17 $6.24 $5.66 TOTAL RETURN (B) (8.61%) 33.03% 23.58% 6.84% 28.76% 13.45% 19.42% 11.24% 27.45% RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Total expenses 1.75% 1.73% 1.78% 1.73% 2.04% 1.47% 1.48% 1.40% 1.27% Total expenses, excluding indirectly paid expenses 1.73% 1.72% N/A N/A N/A N/A N/A N/A N/A Net investment income (loss) (1.32%) (1.34%) (1.10%) (1.49%) (1.68%) (1.09%) (0.68%) 0.02% 0.47% PORTFOLIO TURNOVER RATE 48% 94% 38% 60% 78% 81% 73% 77% 57% AVERAGE COMMISSION RATE PAID $0.0551 $0.0563 N/A N/A N/A N/A N/A N/A N/A NET ASSETS END OF YEAR (THOUSANDS) $1,406,769 $2,005,803 $1,459,955 $1,005,595 $965,959 $702,442 $623,291 $537,912 $503,908 1988 NET ASSET VALUE BEGINNING OF YEAR $7.80 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.00 Net realized and unrealized gain (loss) on investments (1.64) Total from investment operations (1.64) LESS DISTRIBUTIONS FROM Net investment income 0.00 Net realized gain on investments (1.68) Total distributions (1.68) NET ASSET VALUE END OF YEAR $4.48 TOTAL RETURN (B) (22.39%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Total expenses 1.17% Total expenses, excluding indirectly paid expenses N/A Net investment income (loss) 0.03% PORTFOLIO TURNOVER RATE 80% AVERAGE COMMISSION RATE PAID N/A NET ASSETS END OF YEAR (THOUSANDS) $442,020 (a) Calculation based on average shares outstanding. (b) Excluding applicable sales charges. SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 12 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1997 [Download Table] ASSETS Investments at market value (identified cost, $1,082,975,245) $1,393,964,418 Cash 4,911 Foreign currency at market value (identified cost, $1,122,855) 1,110,711 Receivable for investments sold 18,176,302 Receivable for Fund shares sold 6,513,064 Interest and dividends receivable 225,195 Prepaid expenses 102,776 Other assets 103,431 Total assets 1,420,200,808 LIABILITIES Payable for investments purchased 8,028,277 Payable for Fund shares redeemed 3,920,705 Distribution fees payable 718,600 Accrued expenses and other liabilities 764,607 Total liabilities 13,432,189 NET ASSETS $1,406,768,619 NET ASSETS REPRESENTED BY Paid-in capital $ 983,582,840 Accumulated net investment loss (7,516) Accumulated net realized gains on investments 112,216,266 Net unrealized appreciation on investments and foreign currency 310,977,029 Total net assets $1,406,768,619 NET ASSET VALUE PER SHARE OF BENEFICIAL INTEREST OUTSTANDING Net assets of $1,406,768,619 / 166,737,931 shares outstanding $ 8.44 STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1997 [Download Table] INVESTMENT INCOME Dividends $ 2,562,283 Interest 4,364,898 Total income 6,927,181 EXPENSES Management fee $ 7,788,033 Distribution plan expenses 16,641,755 Transfer agent fees 3,702,109 Accounting expenses 17,039 Custodian fees 700,665 Professional fees 150,577 Trustees' fees and expenses 54,381 Miscellaneous expenses 244,220 Total expenses 29,298,779 Less: Expenses paid indirectly (231,796) Net expenses 29,066,983 Net investment loss (22,139,802) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments and foreign currency related transactions 117,982,561 Net change in unrealized appreciation on investments and foreign currency (279,047,661) Net realized and unrealized loss on investments and foreign currency (161,065,100) Net decrease in net assets resulting from operations $(183,204,902) SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 13 STATEMENTS OF CHANGES IN NET ASSETS [Enlarge/Download Table] YEAR ENDED MAY 31, 1997 1996 OPERATIONS: Net investment loss $ (22,139,802) $ (24,478,442) Net realized gain on investments 117,982,561 389,754,504 Net change in unrealized appreciation on investments and foreign currency (279,047,661) 127,581,090 Net increase (decrease) in net assets resulting from operations (183,204,902) 492,857,152 DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS ON INVESTMENTS (200,508,632) (173,760,139) CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 1,018,919,437 1,354,600,987 Payments for shares redeemed (1,402,606,782) (1,267,570,849) Net asset value of shares issued in reinvestment of distributions 168,366,921 139,720,568 Net increase (decrease) in net assets resulting from capital share transactions (215,320,424) 226,750,706 Total increase (decrease) in net assets (599,033,958) 545,847,719 NET ASSETS: Beginning of year 2,005,802,577 1,459,954,858 End of year [including accumulated net investment loss of $7,516 and $7,483, respectively] $ 1,406,768,619 $ 2,005,802,577 SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 14 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Keystone Small Company Growth Fund (S-4) (the "Fund") is a Pennsylvania common law trust for which Keystone Investment Management Company ("Keystone") is the investment advisor and manager. Keystone was formerly a wholly owned subsidiary of Keystone Investments, Inc ("KII") and is currently a subsidiary of First Union Corporation ("First Union"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund's investment objective is to seek long-term growth of capital through investments in emerging growth companies. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect amounts reported herein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Fund. A. VALUATION OF SECURITIES Investments are usually valued at the closing sales price, or, in the absence of sales and for over-the-counter securities, the mean of the bid and asked prices. Securities for which valuations are not available from an independent pricing service (including restricted securities) are valued at fair value as determined in good faith according to procedures established by the Board of Trustees. Short-term investments with remaining maturities of 60 days or less are carried at amortized cost, which approximates market value. Short-term securities with greater than 60 days to maturity are valued at market value. B. REPURCHASE AGREEMENTS Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with certain other Evergreen Keystone funds, may transfer uninvested cash balances into a joint trading account. These balances are invested in one or more repurchase agreements that are fully collateralized by U.S. Treasury and/or federal agency obligations. Securities pledged as collateral for repurchase agreements are held by the custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral daily and will require the seller to provide additional collateral in the event the market value of the securities pledged falls below the carrying value of the repurchase agreement. C. FOREIGN CURRENCY The books and records of the Fund are maintained in United States (U.S.) dollars. Foreign currency amounts are translated into U.S. dollars as follows: market value of investments, assets and liabilities at the daily rate of exchange; purchases and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gain (loss) resulting from changes in foreign currency exchange rates is a component of net unrealized appreciation (depreciation) on investments and foreign currency transactions. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions and the difference between the amounts of interest and dividends recorded on the books of the Fund and the amount actually received. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized gain (loss) on foreign currency transactions. D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward foreign currency exchange contracts ("forward contracts") to settle portfolio purchases and sales of securities denominated in a foreign currency and to hedge certain foreign currency
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PAGE 15 assets or liabilities. Forward contracts are recorded at the forward rate and are marked-to-market daily. Realized gains and losses arising from such transactions are included in net realized gain (loss) on investments and foreign currency related transactions. The Fund bears the risk of an unfavorable change in the foreign currency exchange rate underlying the forward contract and is subject to the credit risk that the other party will not fulfill their obligations under the contract. Forward contracts involve elements of market risk in excess of the amount reflected in the statement of assets and liabilities. E. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are accounted for no later than one business day after the trade date. Realized gains and losses are computed on the identified cost basis. Interest income is recorded on the accrual basis and includes amortization of discount and premium. Dividend income is recorded on the ex-dividend date. F. FEDERAL INCOME TAXES The Fund has qualified and intends to qualify in the future as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). Thus, the Fund is relieved of any federal income tax liability by distributing all of its net taxable investment income and net taxable capital gains, if any, to its shareholders. The Fund also intends to avoid excise tax liability by making the required distributions under the Code. Accordingly, no provision for federal income tax is required. G. DISTRIBUTIONS The Fund distributes net investment income and net capital gains, if any, at least annually. Distributions to shareholders are recorded at the close of business on the ex-dividend date. Income and capital gains distributions to shareholders are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to net operating losses generated by the Fund and the reclassification of certain gains related to the sale of passive foreign investment company securities. 2. CAPITAL SHARE TRANSACTIONS The Fund's Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest with a par value of $1.00. Transactions in shares of the Fund were as follows: [Download Table] YEAR ENDED MAY 31, 1997 1996 Shares sold 121,645,715 141,592,081 Shares redeemed (168,659,715) (131,599,635) Shares issued in reinvestment of distributions 19,925,079 14,560,340 Net increase (decrease) (27,088,921) 24,552,786 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of investment securities excluding short-term securities for the year ended May 31, 1997, were $766,944,947 and $1,214,970,663, respectively. On May 31, 1997, the cost of investments for federal income tax purposes was $1,085,389,073, gross unrealized appreciation of investments was $394,159,617 and gross unrealized depreciation of investments was $85,584,272, resulting in net unrealized appreciation of $308,575,345 for federal income income tax purposes. 4. DISTRIBUTION PLAN The Fund bears some of the costs of selling its shares under a Distribution Plan (the "Plan") adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays its principal underwriter amounts which are calculated daily and paid monthly. On December 11, 1996, the Fund entered into a principal underwriting agreement with Evergreen Keystone Distributors, Inc. (Formerly, Evergreen Fund Distributor, Inc.) ("EKD"), a wholly owned subsidiary of The BISYS Group, Inc. Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc. (Formerly Keystone Investment Distributors Company) ("EKIS"), a
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PAGE 16 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) wholly owned subsidiary of Keystone, served as the Fund's principal underwriter. Under the Plan, the Fund pays a distribution fee amount which may not exceed 1.00% of the Fund's average daily net assets. Of that amount, 0.75% is used to pay distribution expenses and 0.25% may be used to pay service fees. Contingent deferred sales charges paid by redeeming shareholders may be paid to EKD. The Plan may be terminated at any time by vote of the Independent Trustees or by vote of a majority of the outstanding voting shares of the Fund. However, after the termination of the Plan, and subject to the discretion of the Independent Trustees, payments to EKD and/or EKIS may continue as compensation for services which had been earned while the Plan was in effect. EKD intends, but is not obligated, to continue to pay distribution costs that exceed the current annual payments from the Fund. EKD intends to seek full payment of such distribution costs from the Fund at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. 5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS Under the terms of the investment advisory agreement dated December 11, 1996, Keystone serves as the investment adviser and manager to the Fund. As such, Keystone manages the Fund's investments, provides certain administrative services and supervises the Fund's daily business affairs. In return, Keystone is paid a management fee, computed daily and paid monthly, which is determined by applying percentage rates starting at 0.70% and declining as net assets increase to 0.35% per annum, to the average daily net asset value of the Fund. Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a wholly owned subsidiary of Keystone, served as investment manager to the Fund and provided investment management and administrative services. Under an investment advisory agreement between KMI and Keystone, Keystone served as investment adviser and provided investment advisory and management services to the Fund. In return for its services, Keystone received an annual fee equal to 85% of the management fee received by KMI. During the year ended May 31, 1997, the Fund paid or accrued $17,039 to Keystone for certain administrative and accounting services. Evergreen Keystone Service Company (formerly Keystone Investor Resource Center, Inc.), a wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend disbursing agent. Effective January 1, 1997, BISYS Fund Services, Inc. ("BISYS"), an affiliate of EKD, began serving as the Fund's sub-administrator. As sub-administrator, BISYS provides the officers of the Fund. For this service, BISYS was paid a fee by Keystone, which was not a Fund expense. Officers of the Fund and affiliated Trustees receive no compensation directly from the Fund. 6. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an expense offset arrangement with its custodian. For the year ended May 31, 1997, the Fund incurred total custody fees of $700,665 and received a credit of $231,796 pursuant to this expense offset arrangement, resulting in a net custody expense of $468,869. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets. 7. DISTRIBUTIONS TO SHAREHOLDERS A distribution of $0.70 per share was declared on July 2, 1997 from the taxable net long-term capital gains realized during the fiscal year ended May 31, 1997. This distribution was payable on July 8, 1997 to shareholders of record at the close of business on July 2, 1997. This distribution is not reflected in the financial statements
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PAGE 17 INDEPENDENT AUDITORS' REPORT THE TRUSTEES AND SHAREHOLDERS KEYSTONE SMALL COMPANY GROWTH FUND (S-4) We have audited the accompanying statement of assets and liabilities of Keystone Small Company Growth Fund (S-4), including the schedule of investments, as of May 31, 1997, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Keystone Small Company Growth Fund (S-4) as of May 31, 1997, the results of its operations for the year then ended, the changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the ten-year period then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts June 27, 1997
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PAGE 18 KEYSTONE SMALL COMPANY GROWTH FUND (S-4) ADDITIONAL INFORMATION (UNAUDITED) The Fund held a special meeting of shareholders on Monday, December 9, 1996. On October 18, 1996, the record date for the meeting, the Fund had 212,762,098 shares outstanding, of which 144,843,580 shares were represented at the meeting. The votes at the meeting were as follows: PROPOSAL 1: TO ELECT THE FOLLOWING PERSONS AS TRUSTEE OF THE FUND: [Download Table] NUMBER OF SHARES NOMINEES FOR TRUSTEE AFFIRMATIVE WITHHELD Lawrence B. Ashkin 141,046,717 3,796,863 Frederick Amling 141,122,165 3,721,415 Charles A Austin, III 141,183,433 3,660,148 Foster Bam 141,056,902 3,786,678 George S. Bissell 141,083,525 3,760,055 Edwin D. Campbell 141,090,815 3,752,765 Charles F. Chapin 141,112,237 3,731,343 K. Dun Gifford 141,185,185 3,658,395 James S. Howell 141,002,239 3,841,341 Leroy Keith, Jr. 141,180,151 3,663,429 F. Ray Keyser 141,079,535 3,764,045 Gerald M. McDonnell 141,117,661 3,725,919 Thomas L. McVerry 141,139,537 3,704,043 William Walt Pettit 141,105,380 3,738,200 David M. Richardson 141,188,804 3,654,776 Russell A Salton, III M.D. 141,132,530 3,711,050 Michael S. Scofield 141,121,690 3,721,890 Richard J. Shima 141,179,300 3,664,280 Andrew J. Simons 141,170,649 3,672,931 PROPOSAL 2: TO APPROVE AN INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN KEYSTONE INVESTMENT MANAGEMENT COMPANY AND THE FUND: [Download Table] Affirmative 137,959,295 Against 2,706,790 Abstain 4,177,495 FEDERAL TAX STATUS-- FISCAL 1997 DISTRIBUTIONS (UNAUDITED) During the fiscal year ended May 31, 1997, long-term capital gains distributions totalling $1.02 per share were paid in shares or cash. In January 1998, we will send to you complete information on the distributions paid during the calendar year 1997 to help you in completing your federal income tax return.
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KEYSTONE FAMILY OF FUNDS (Diamond appears here) Balanced Fund (K-1) Diversified Bond Fund (B-2) Growth and Income Fund (S-1) High Income Bond Fund (B-4) International Fund Inc. Liquid Trust Mid-Cap Growth Fund (S-3) Precious Metals Holdings, Inc. Quality Bond Fund (B-1) Small Company Growth Fund (S-4) Strategic Growth Fund (K-2) Tax Free Fund This report was prepared primarily for the information of the Fund's shareholders. It is authorized for distribution if preceded or accompanied by the Fund's current prospectus. The prospectus contains important information about the Fund including fees and expenses. Read it carefully before you invest or send money. For a free prospectus on other Evergreen Keystone funds, contact your financial adviser or call Evergreen Keystone. Evergreen Keystone (Tree appears here) FUNDS (SM) (Keystone symbol appears here) P.O. Box 2121 Boston, Massachusetts 02106-2121 (Recycle symbol appears here) S4-R 541255 7/97 KEYSTONE (Graphic appears here) SMALL COMPANY GROWTH FUND (S-4) Evergreen Keystone (Tree appears here) FUNDS (SM) (Keystone symbol appears here) ANNUAL REPORT MAY 31, 1997

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