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Keystone Small Co GR Fd S 4 · N-30D · For 9/30/97

Filed On 11/25/97   ·   Accession Number 950168-97-3508   ·   SEC File 811-00101

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

11/25/97  Keystone Small Co GR Fd S 4       N-30D       9/30/97    1:57K                                    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       Keystone Small Co. Growth Fund 62904                  20    114K 


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PAGE 1 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) Dear Shareholders: We have pleasant news to share with you in this report. (Photo of The U.S. stock market delivered exceptionally strong William M. performance during the 12 months that ended on September 30, Ennis appears 1997. Investors in Keystone Small Company Growth Fund (S-4) here.) certainly had the opportunity to participate in this pleasant experience, particularly at the end of the period when the markets began recognizing the values in small company stocks. Riding a friendly, rising tide of moderate growth and modest inflation, the stock market rose higher and higher, with the steady ascent interrupted just briefly for pauses in the late winter and late summer of 1997. MARKET LEADERSHIP The 12 months from October 1, 1996 through September 30, 1997 were especially rewarding WILLIAM M. ENNIS for the biggest of the largest capitalization companies. Stocks of the largest companies, particularly those with strong positions in the global markets, tended to be the market leaders. Funds, such as Keystone Small Company Growth Fund (S-4), lagged funds that emphasized these large cap companies during most of the year. However, in the final three months of the period, small and mid-size company stocks began to show new strength. It is important to keep these returns in perspective. MARKET CYCLES History has shown that the markets move in cycles, and one year's performance does not often indicate the following year's performance. History also has taught us, however, that over longer periods of time, the winning investment strategies are those that have consistent disciplines and that remain faithful to those disciplines, even during periodic market slumps. At Evergreen Funds, we encourage you to remain focused on your long-term goals and to remain disciplined in your personal investment strategies. No one can confidently say whether next year's market or the following year's market will be as rewarding as last year's market. We can say, however, that the most likely winners in the long run are those who consistently follow long-term investment strategies. UPCOMING DEVELOPMENTS In the next few weeks and months, you will begin to see some changes which we believe will enhance the investment experience of shareholders of Keystone Funds and Evergreen Funds. You are scheduled to receive a proxy statement explaining a number of proposed changes. Among these are proposals that would give shareholders of Keystone Funds exchange privileges with a wide range of investment choices in the Evergreen Funds family and that would introduce multiple classes for many traditional Keystone Funds. This latter proposal may bring lower expenses for many long-term fund shareholders. As part of these changes, all Keystone Funds would become part of the Evergreen Fund family and be renamed as Evergreen Funds early in 1998. -- CONTINUED--
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PAGE 2 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) We have made these proposals after very serious consideration. We encourage you to consider them carefully when you receive the proxy. If you should have any questions about these or other issues affecting your investments, please consult your financial adviser or call Evergreen Funds at 1-800-343-2898. Sincerely, /s/ William M. Ennis William M. Ennis MANAGING DIRECTOR November, 1997
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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 1996, HE WAS A PORTFOLIO MANAGER AT INVISTA CAPITAL MANAGEMENT, INC., A SUBSIDIARY OF THE PRINCIPAL FINANCIAL GROUP. AT INVISTA, HE MANAGED AN $860 MILLION SMALL-COMPANY GROWTH PENSION ACCOUNT AND CO-MANAGED PRINCOR EMERGING GROWTH FUND AND PRINCOR GROWTH FUND, ALL OF WHICH HAD ATTRACTIVE PERFORMANCE RECORDS RELATIVE TO SMALL-CAP BENCHMARKS WHILE UNDER HIS MANAGEMENT. KEYSTONE'S SMALL COMPANY STOCK TEAM IS COMPOSED OF THREE PORTFOLIO MANAGERS AND SUPPORTED BY FIVE EQUITY ANALYSTS. TOGETHER, THEY SEARCH FOR STOCKS OF SMALL COMPANIES WITH SUSTAINABLE ABOVE-AVERAGE GROWTH RATES. Q HOW DID THE FUND PERFORM DURING THE PERIOD? A For the four-month period that ended September 30, 1997, your Fund produced a total return of 21.43%, exclusive of any deferred sales charge. The Russell 2000 Index rose 19.81%, and the Russell 2000 Growth Index produced a total return of 20.88% for the same period. For the twelve-month period that ended September 30, 1997, your Fund produced a total return of 18.48%, and the Russell 2000 Growth Index produced a total return of 23.26%. Your Fund's impressive return reflects a general upward trend in small-company stock prices. After lagging large-company stocks for more than two years, small-company stocks took the lead, as their compelling relative valuations fueled investor demand. WHAT WAS THE ECONOMIC ENVIRONMENT LIKE DURING THE PERIOD? A The economic environment was ideal for small-company stocks. Economic growth was strong, inflation remained under control, and interest rates were relatively low. Against this back drop, small-company stocks generated strong returns. In fact, for the third calendar quarter of 1997, small-company stocks were market leaders. Q HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT? A We sought companies with market capitalizations of $1 billion and under with improving prospects. We invested in a variety of businesses in several economic sectors, including, technology, healthcare, finance, and energy. At the end of the period, your Fund's portfolio was composed of 198 stocks in 25 industries. Q AT 37.8% ON SEPTEMBER 30, 1997, TECHNOLOGY STOCKS CONTINUED TO ACCOUNT FOR THE LARGEST PORTION OF PORTFOLIO ASSETS. DID YOU MAKE CHANGES IN THIS AREA? A The Fund's technology holdings included telecommunications, information services and electronics companies. We built up the Fund's exposure to companies that are benefitting from the production of the next generation of semiconductor equipment. For example, we added Asyst Technologies, a company that creates "clean room" environments for the production of semiconductors and Credence Systems, a business that tests semiconductor designs.
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PAGE 4 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) TOP FIVE INDUSTRIES AS OF SEPTEMBER 30, 1997 [Download Table] PERCENTAGE OF INDUSTRY NET ASSETS ------------------------------------------------------------- Information Services & Technology 19.2% ------------------------------------------------------------- Electronic Technology 9.8% ------------------------------------------------------------- Telecommunication Services & Equipment 8.8% ------------------------------------------------------------- Health Technology & Services 7.7% ------------------------------------------------------------- Banks 7.6% ------------------------------------------------------------- Q THE FINANCE INDUSTRY IS AMONG THE TOP FIVE INDUSTRIES REPRESENTED IN THE PORTFOLIO. WHY WERE FINANCE STOCKS ATTRACTIVE? A In the finance area, we focused on regional banks, insurance companies and brokerages. In general, these types of companies are benefitting from lower interest rates. Regional banks are reaping the rewards of cost reduction and growth from consolidation. We also increased the number of insurance companies in the portfolio. Insurance companies are at the beginning of a restructuring and consolidation cycle. We believe that such activity should lead to increased earnings growth, and ultimately, higher stock prices. Q WHERE ELSE DID YOU FIND OPPORTUNITY? A Energy-related companies were strong contributors to your Fund's performance. They accounted for 8.6% of the portfolio's net assets. These types of companies supply oil fields with the drilling rigs and other equipment needed to explore and produce gas and oil. Energy services companies are benefitting from a strong growth trend in gas and oil exploration that has been triggered by dwindling reserves and increased worldwide energy demand. Q WHAT IS YOUR OUTLOOK? A As we look toward 1998, we find ourselves in one of the most positive investment environments in memory, with moderate economic growth, stable-to- falling interest rates, and low inflation. Relative to other TOP 10 HOLDINGS AS OF SEPTEMBER 30, 1997 [Download Table] PERCENTAGE OF COMPANY INDUSTRY NET ASSETS -------------------------------------------------------------------- Synopsys, Inc. Information Services & Technology 2.3% -------------------------------------------------------------------- Maxim Integrated Products Electronic Technology 1.9% -------------------------------------------------------------------- BMC Software, Inc. Information Services & Technology 1.8% -------------------------------------------------------------------- Astoria Financial Corp. Banks 1.8% -------------------------------------------------------------------- TCF Financial Corporation Banks 1.8% -------------------------------------------------------------------- Firstplus Financial Group, Inc. Finance & Insurance 1.6% -------------------------------------------------------------------- Newpark Resources, Inc. Oil Field Services 1.6% -------------------------------------------------------------------- USA Waste Services, Inc. Industry Specialty Products & Services 1.5% -------------------------------------------------------------------- Roper Industries Industry Specialty Products & Services 1.4% -------------------------------------------------------------------- Oakwood Homes Corp. Building, Construction & Furnishings 1.4% -------------------------------------------------------------------- investments, we believe that small-company stocks are among the most compelling investments available. Nevertheless, a word of caution is in order. While your Fund made superior gains over the past several months, it would be unrealistic to expect that such high returns will continue without interruption. Over the long term, there will be upswings and downturns, as there have always been with small-company investments. That is why, we encourage you to take a long-term perspective when reviewing your Fund's performance. Over time, we believe small-company stocks have the potential to provide strong returns to long-term investors. (Diamond appears here.) THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND. IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO: EVERGREEN INVESTMENT SERVICES, INC. ATTN: SHAREHOLDER COMMUNICATIONS 201 SOUTH COLLEGE STREET, SUITE 600 CHARLOTTE, N.C. 28288-0969 Funds that invest in stocks of small companies, also called small-cap stocks, involve certain risks and, therefore, may not be appropriate for all investors. Although they may offer the potential for greater long-term returns, they also may experience greater price volatility due to their limited focus on a particular industry, market, product, or service, or because they invest in smaller, less established companies.
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PAGE 5 --------------------------------------------------------- Growth of an Investment (Chart appears here with the following plot points.) [Download Table] HISTORICAL PERFORMANCE AS OF SEPTEMBER 30, 1997 -------------------------------------------------------------- CUMULATIVE TOTAL RETURN 1 year w/o sales charge 18.48% 1 year w/sales charge* 15.48% 5 years 154.62% 10 years 269.06% AVERAGE ANNUAL TOTAL RETURN 1 year w/o sales charge 18.48% 1 year w/sales charge* 15.48% 5 years 20.55% 10 years 13.95% * THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 3.0%
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PAGE 6 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997 [Download Table] SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- 99.6% AUTOMOTIVE EQUIPMENT & MANUFACTURING-- 0.7% 256,860 Tower Automotive, Inc........ $ 11,558,700 -------------- BANKS-- 7.6% 561,462 * Astoria Financial Corp....... 28,231,011 291,240 * Bostonfed Bancorp, Inc....... 6,134,243 244,160 * Hubco, Inc................... 7,698,670 266,970 * Long Island Bancorp, Inc..... 12,555,933 390,080 * North Fork Bancorp., Inc..... 11,312,320 171,532 * Queens County Bancorp, Inc... 8,882,141 600,000 * Sovereign Bancorp, Inc....... 10,462,500 465,980 * TCF Financial Corp........... 27,230,706 61,646 * Westamerica Bancorp.......... 5,378,614 -------------- 117,886,138 -------------- BUILDING, CONSTRUCTION & FURNISHINGS-- 3.9% 581,020 Champion Enterprises, Inc.... 11,112,007 150,000 Essex International, Inc..... 5,775,000 235,419 Furniture Brands International, Inc......... 4,443,534 150,000 General Cable Corp........... 5,325,000 774,791 * Oakwood Homes Corp........... 21,984,695 194,160 Shaw Group, Inc.............. 4,259,385 299,420 Toll Brothers, Inc........... 6,961,515 -------------- 59,861,136 -------------- BUSINESS EQUIPMENT & SERVICES-- 5.0% 248,255 BISYS Group, Inc. (The) (a).. 7,967,434 509,670 * Comdisco, Inc................ 16,596,129 512,484 Devry, Inc................... 15,310,459 370,069 Equity Corp. International... 8,627,234 175,121 * G & K Services............... 6,118,290 354,050 GTS Duratek, Inc............. 5,200,109 196,596 * Norrell Corp................. 6,757,988 165,324 Rental Service Corp.......... 3,709,457 217,945 Vincam Group, Inc............ 6,293,162 -------------- 76,580,262 -------------- CHEMICAL & AGRICULTURAL PRODUCTS-- 0.7% 266,240 * OM Group, Inc................ 10,632,960 -------------- SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED COMMUNICATION SYSTEMS & SERVICES-- 1.4% 200,000 * Belden Inc................... $ 7,537,500 200,000 Cable Design Technologies Corp....................... 7,612,500 300,000 Xylan Corp................... 6,628,125 -------------- 21,778,125 -------------- CONSUMER PRODUCTS & SERVICES-- 1.6% 248,517 Action Performance Cos., Inc........................ 7,206,993 116,967 Budget Group, Inc............ 3,859,911 380,000 Coleman Co., Inc............. 6,127,500 200,000 Peapod, Inc.................. 2,500,000 129,000 * Russ Berrie & Co., Inc....... 3,773,250 150,000 * Weider Nutrition International, Inc......... 1,743,750 -------------- 25,211,404 -------------- ELECTRONIC TECHNOLOGY-- 9.8% 100,900 ADFlex Solutions, Inc........ 2,459,438 626,640 Analog Devices, Inc.......... 20,992,440 261,100 Asyst Technologies, Inc...... 11,594,472 250,560 * BMC Industries, Inc.......... 7,970,940 66,100 Brooks Automation, Inc....... 2,536,587 100,000 Credence Systems Corp........ 4,887,500 200,000 Cymer Inc.................... 5,468,750 382,480 DII Group, Inc............... 12,538,172 137,700 Electroglas, Inc............. 4,673,194 75,000 Kulicke & Soffa Industries Inc........................ 3,471,094 210,563 * Linear Technology Corp....... 14,535,427 240,000 Mattson Technology, Inc...... 3,510,000 418,889 Maxim Integrated Products, Inc.............. 29,858,932 300,000 Radisys Corp................. 15,112,500 378,014 Sipex Corp................... 12,072,822 -------------- 151,682,268 --------------
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PAGE 7 --------------------------------------------------------- SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997 [Download Table] SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED FINANCE & INSURANCE-- 6.1% 59,000 * Allied Group, Inc............ $ 2,997,937 24,000 American Capital Strategies Ltd............. 475,500 389,582 Amerin Corp.................. 11,163,959 15,900 * ARM Financial Inc............ 378,619 232,126 * CMAC Investment Corp......... 12,447,757 100,000 Delphi Financial Group, Inc........................ 4,293,750 216,489 * Everen Capital Corp.......... 8,794,866 131,548 First Alliance Corp.......... 4,119,097 452,480 Firstplus Financial Group, Inc........................ 25,395,440 78,800 * Frontier Insurance Group, Inc........................ 2,994,400 186,023 * HCC Insurance Holdings Inc... 4,941,236 50,900 * Horace Mann Educators Corp... 2,856,762 129,440 * Legg Mason, Inc.............. 6,827,960 58,200 * Penn-America Group, Inc...... 1,191,281 100,000 * Vesta Insurance Group, Inc................. 5,700,000 -------------- 94,578,564 -------------- FOOD & BEVERAGE PRODUCTS-- 1.2% 211,527 * Applebee's International, Inc........................ 5,274,955 382,500 * Flowers Industries Inc....... 7,793,437 15,100 Landry's Seafood Restaurants Inc............ 444,506 55,000 Morningstar Group, Inc....... 2,365,000 122,400 * Worthington Foods, Inc....... 2,807,550 -------------- 18,685,448 -------------- HEALTH TECHNOLOGY & SERVICES-- 7.7% 180,400 Cyberonics, Inc.............. 2,903,313 411,044 Cytyc Corp................... 10,250,410 292,502 Emeritus Corp................ 4,387,530 300,000 Graham Field Health Products, Inc.............. 4,875,000 577,226 Health Management Associates, Inc........................ 18,254,772 213,673 Heartport, Inc............... 5,208,279 327,985 Idexx Laboratories, Inc...... 5,503,998 369,584 Lifecore Biomedical, Inc..... 6,652,512 88,000 Megabios Corp................ 1,485,000 292,510 Norland Medical Systems, Inc........................ 2,650,872 252,684 Parexel International Corp....................... 9,886,261 165,620 Pediatrix Medical Group...... 7,307,982 142,320 Perclose, Inc................ 3,148,830 336,582 Phymatrix Corp............... 5,027,694 194,500 Spine-Tech, Inc.............. 7,330,219 SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED HEALTH TECHNOLOGY & SERVICES-- CONTINUED 372,680 Thermo Cardiosystems, Inc.... $ 10,295,285 235,711 Total Renal Care Holdings, Inc.............. 11,785,550 60,000 Vivus........................ 2,229,375 -------------- 119,182,882 -------------- INDUSTRIAL SPECIALTY PRODUCTS & SERVICES-- 4.2% 363,274 Brown & Sharpe Manufacturing Co. Cl. A.... 5,153,950 100,000 * Kaydon Corp.................. 6,000,000 660,000 * Roper Industries............. 22,275,000 122,280 Strategic Distribution, Inc........................ 676,361 188,737 United States Filter Corp.... 8,127,487 584,616 USA Waste Services, Inc...... 23,311,563 -------------- 65,544,361 -------------- INFORMATION SERVICES & TECHNOLOGY-- 19.2% 150,000 American Management Systems Inc........................ 2,859,375 148,100 Aspen Technology, Inc........ 5,211,269 230,800 Avid Technology, Inc......... 7,457,725 438,095 BMC Software, Inc............ 28,352,961 320,380 Cambridge Technology Partners................... 11,443,573 150,000 Cognos, Inc.................. 3,557,813 360,000 Computer Products, Inc....... 10,788,750 101,250 Comverse Technology Inc...... 5,347,266 500,000 Data General Corp............ 13,312,500 165,000 Dataworks Corp............... 3,052,500 226,300 Discreet Logic, Inc.......... 6,011,094 28,200 Documentum, Inc.............. 934,125 40,000 EMC Corp..................... 2,335,000 371,000 Geoworks..................... 6,098,312 75,000 HTE, Inc..................... 1,134,375 178,600 JDA Software Group, Inc...... 6,507,737 353,380 Manugistics Group, Inc....... 12,589,162 400,000 Mapics, Inc.................. 5,150,000 28,700 Maximus, Inc................. 830,506 155,290 McAfee Associates, Inc....... 8,220,664 63,898 Mechanical Dynamics, Inc..... 501,200 205,290 Microchip Technology, Inc.... 9,302,203 237,054 * National Data Corp........... 9,719,214
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PAGE 8 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997 [Download Table] SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED INFORMATION SERVICES & TECHNOLOGY-- CONTINUED 291,240 Parametric Technology Corp... $ 12,841,864 336,681 Project Software and Development, Inc........... 7,764,706 200,000 PSW Technologies Inc......... 2,600,000 64,600 QAD, Inc..................... 1,191,063 889,000 Rational Software Corp....... 14,196,219 504,816 Safeguard Scientifics, Inc........................ 14,765,868 348,323 Security Dynamics Technology Inc............. 12,887,951 832,455 Synopsys, Inc................ 35,353,323 400,000 System Software Associates Inc........................ 5,875,000 35,000 Transition Systems, Inc...... 717,500 1,000,000 Unisys Corp.................. 15,312,500 100,000 Vantive Corp................. 2,406,250 233,497 Wind River Systems Inc....... 9,631,751 -------------- 296,261,319 -------------- LEISURE & TOURISM-- 1.9% 49,395 Casino America, Inc. Warrant.................... 494 176,000 * CKE Restaurants Inc.......... 7,392,000 479,589 Colorado Gaming and Entertainment Co. (c)...... 2,757,637 17,500 Pegasus Systems, Inc......... 317,734 167,246 Promus Hotel Corp............ 7,494,712 230,000 Regal Cinemas, Inc........... 6,166,875 347,000 Sodak Gaming, Inc............ 4,890,531 -------------- 29,019,983 -------------- MACHINERY-- DIVERSIFIED-- 0.1% 99,400 Omniquip International, Inc........................ 1,857,538 -------------- METAL PRODUCTS & SERVICES-- 2.1% 321,917 Global Industries, Inc....... 12,856,560 250,000 Oregon Metallurgical Corp....................... 6,257,813 116,496 Special Metals Corp.......... 2,198,862 200,000 Steel Dynamics Inc........... 4,718,750 200,000 * Trimas Corp.................. 6,100,000 -------------- 32,131,985 -------------- OFFICE EQUIPMENT & SUPPLIES-- 0.5% 227,900 Cognex Corp.................. 7,520,700 -------------- OIL-- EXPLORATION & PRODUCTION-- 3.6% 242,700 Forcenergy, Inc.............. 9,419,794 320,364 * KCS Energy Inc............... 9,450,738 138,000 Newfield Exploration Co...... 3,872,625 398,028 Nuevo Energy Co.............. 19,055,590 SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED OIL-- EXPLORATION & PRODUCTION-- CONTINUED 83,586 * St. Mary Land and Exploration Co............. $ 3,756,146 24,950 Stone Energy Corp............ 838,944 325,218 Swift Energy Co.............. 9,167,082 -------------- 55,560,919 -------------- OIL FIELD SERVICES-- 5.0% 191,240 BJ Services Co., Inc......... 14,199,570 56,742 * Carbo Ceramics, Inc.......... 1,879,579 400,000 ENSCO International, Inc..... 15,775,000 400,100 Falcon Drilling.............. 14,128,531 632,078 Newpark Resources, Inc....... 24,848,566 108,999 Seacor Smit, Inc............. 6,757,938 -------------- 77,589,184 -------------- PHARMACEUTICALS-- 3.1% 200,000 Agouron Pharmaceuticals, Inc........................ 9,612,500 964,198 Amylin Pharmaceuticals, Inc........................ 8,165,552 100,000 Dura Pharmaceuticals, Inc.... 4,381,250 250,000 Guilford Pharmaceuticals, Inc........................ 7,328,125 50,000 Incyte Pharmaceuticals, Inc........................ 4,198,438 582,480 Magainin Pharmaceutical...... 6,607,507 255,569 Neurogen Corp................ 6,868,417 -------------- 47,161,789 -------------- PUBLISHING, BROADCASTING & ENTERTAINMENT-- 1.1% 33,300 * Central Newspapers, Inc...... 2,472,525 93,000 Hearst Argyle Television, Inc........................ 2,807,437 259,000 Jacor Communications, Inc.... 11,436,469 -------------- 16,716,431 -------------- RETAILING & WHOLESALE-- 3.2% 203,000 Central Garden & Pet Co...... 6,204,187 882,480 Corporate Express, Inc....... 18,587,235 138,000 Cutter & Buck, Inc........... 2,829,000 300,000 Gadzooks, Inc................ 6,318,750 168,000 Michaels Stores, Inc......... 5,139,750 87,500 Stage Stores Inc............. 3,762,500 184,600 * Stanhome, Inc................ 5,457,238 35,000 Tefron Ltd................... 700,000 -------------- 48,998,660 --------------
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PAGE 9 --------------------------------------------------------- SCHEDULE OF INVESTMENTS-- SEPTEMBER 30, 1997 [Download Table] SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED TELECOMMUNICATION SERVICES & EQUIPMENT-- 8.8% 305,500 ACC Corp..................... $ 9,966,938 342,288 Aspect Telecommunications Corp....................... 7,936,803 25,000 Associated Group, Inc. (The) Cl. A...................... 1,765,625 128,000 Associated Group, Inc. (The) Cl. B...................... 8,944,000 388,978 Billing Info Concepts Corp... 13,565,608 138,300 Boston Communications Group.. 2,031,281 75,000 Boston Technology, Inc....... 2,540,625 246,768 Brooks Fiber Properties Inc........................ 11,513,270 501,000 McLeod-USA, Inc.............. 19,742,531 329,686 Natural Microsystems Corp.... 12,486,857 300,000 Ortel Corp................... 6,656,250 300,000 Pairgain Technologies, Inc... 8,540,625 170,000 Smartalk Teleservices, Inc........................ 4,186,250 56,700 Spectrian Corp............... 3,625,256 150,000 United States Cellular Corp....................... 5,531,250 89,000 Univision Communications, Inc. Cl. A................. 4,828,250 550,000 Westell Technologies......... 12,185,937 -------------- 136,047,356 -------------- SHARES VALUE ---------------------------------------------------------------- COMMON STOCKS-- CONTINUED TRANSPORTATION-- 1.1% 242,700 * ASA Holdings, Inc............ $ 6,803,184 146,399 Coach USA, Inc............... 4,401,120 100,000 Fritz Cos., Inc.............. 1,478,125 153,956 Swift Transportation, Inc.... 4,907,348 -------------- 17,589,777 -------------- TOTAL COMMON STOCKS (COST $1,044,099,031)...... 1,539,637,889 -------------- SHORT-TERM INVESTMENTS-- 0.7% REPURCHASE AGREEMENTS-- 0.7% 11,360,000 Keystone Joint Repurchase Agreement (investments in repurchase agreements, in joint trading account, purchased 9/30/97, 6.15%, maturing 10/1/97, maturity value $11,361,941) (b)..... 11,360,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $11,360,000)......... 11,360,000 -------------- [Download Table] TOTAL INVESTMENTS-- (COST $1,055,459,031)................. 100.3% 1,550,997,889 OTHER ASSETS AND LIABILITIES-- NET..................... (0.3) (5,252,371) ------ -------------- NET ASSETS.............................. 100.0% $1,545,745,518 ------ -------------- * Income producing securities. (a) At September 30, 1997, the Fund owned 248,255 shares of common stock of The BISYS Group, Inc. at a cost of $6,474,363. During the four months ended September 30, 1997 the Fund earned no dividend income from this investment. These shares were purchased prior to Evergreen Keystone Distributor, Inc., a wholly owned subsidiary of The BISYS Group, Inc., becoming the Fund's principal underwriter and BISYS Fund Services, Inc. becoming the Fund's sub-administrator. (b) The repurchase agreement is fully collateralized by U.S. Government and/or agency obligations based on market prices at September 30, 1997. (c) Investment in a non-controlled affiliate. The Fund owns over 5% of outstanding shares. At September 30, 1997, the Fund held 479,589 shares of Colorado Gaming and Entertainment Company with a value of $2,757,637 and acquisition cost of $2,766,251. The Fund has not earned any income from this investment. SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 10 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) [Enlarge/Download Table] FOUR-MONTH PERIOD ENDED YEAR ENDED MAY 31, SEPTEMBER 30, --------------------------------------------------------- 1997(A)(D) 1997(A) 1996 1995 1994 1993(A) ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE BEGINNING OF PERIOD $8.44 $10.35 $8.62 $7.64 $7.95 $7.61 ------------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.04) (0.11) (0.13) (0.07) (0.12) (0.12) Net realized and unrealized gain (loss) on investments and foreign currency related transactions 1.74 (0.78) 2.87 1.68 0.63 1.82 ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.70 (0.89) 2.74 1.61 0.51 1.70 ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM Net investment income 0 0 0 0 0 0 Net realized gain on investments and foreign currency related transactions (0.70) (1.02) (1.01) (0.63) (0.82) (1.36) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (0.70) (1.02) (1.01) (0.63) (0.82) (1.36) ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE END OF PERIOD $9.44 $8.44 $10.35 $8.62 $7.64 $7.95 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (B) 21.43% (8.61%) 33.03% 23.58% 6.84% 28.76% RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Total expenses 1.77%(c) 1.75% 1.73% 1.78% 1.73% 2.04% Total expenses, excluding indirectly paid expenses 1.77%(c) 1.73% 1.72% N/A N/A N/A Net investment income (loss) (1.43%)(c) (1.32%) (1.34%) (1.10%) (1.49%) (1.68%) PORTFOLIO TURNOVER RATE 28% 48% 94% 38% 60% 78% AVERAGE COMMISSION RATE PAID PER SHARE $0.0525 $0.0551 $0.0563 N/A N/A N/A ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS END OF PERIOD (MILLIONS) $ 1,546 $ 1,407 $ 2,006 $1,460 $1,006 $ 966 ------------------------------------------------------------------------------------------------------------------------------------ [Enlarge/Download Table] YEAR ENDED MAY 31, -------------------------------------------------------------- 1992(A) 1991(A) 1990(A) 1989(A) 1988 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE BEGINNING OF PERIOD $7.17 $6.24 $5.66 $4.48 $7.80 --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.08) (0.04) 0 0.02 0 Net realized and unrealized gain (loss) on investments and foreign currency related transactions 0.98 1.17 0.63 1.20 (1.64) --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.90 1.13 0.63 1.22 (1.64) --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM Net investment income 0 0 (0.05) (0.01) 0 Net realized gain on investments and foreign currency related transactions (0.46) (0.20) 0 (0.03) (1.68) --------------------------------------------------------------------------------------------------------------------------------- Total distributions (0.46) (0.20) (0.05) (0.04) (1.68) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE END OF PERIOD $7.61 $7.17 $6.24 $5.66 $4.48 --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (B) 13.45% 19.42% 11.24% 27.45% (22.39%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Total expenses 1.47% 1.48% 1.40% 1.27% 1.17% Total expenses, excluding indirectly paid expenses N/A N/A N/A N/A N/A Net investment income (loss) (1.09%) (0.68%) 0.02% 0.47% 0.03% PORTFOLIO TURNOVER RATE 81% 73% 77% 57% 80% AVERAGE COMMISSION RATE PAID PER SHARE N/A N/A N/A N/A N/A --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS END OF PERIOD (MILLIONS) $ 702 $ 623 $ 538 $ 504 $ 442 --------------------------------------------------------------------------------------------------------------------------------- (a) Calculation based on average shares outstanding. (b) Excluding applicable sales charges. (c) Annualized (d) Effective September 30, 1997, the Fund changed its fiscal year end from May 31 to September 30. SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 11 --------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997 [Download Table] ------------------------------------------------------------ ASSETS Investments, at value (identified cost, $1,055,459,031) $1,550,997,889 Foreign currency, at value (identified cost, $2,962) 2,886 Cash 950,787 Receivable for investments sold 16,246,483 Receivable for Fund shares sold 4,709,494 Receivable for interest and dividends 103,774 Prepaid expenses 94,377 Other assets 56,466 ------------------------------------------------------------ Total assets 1,573,162,156 ------------------------------------------------------------ LIABILITIES Payable for investments purchased 19,428,049 Payable for Fund shares redeemed 6,380,739 Distribution Plan expenses payable 800,832 Management fee payable 603,983 Due to affiliates 10,000 Accrued expenses and other liabilities 193,035 ------------------------------------------------------------ Total liabilities 27,416,638 ------------------------------------------------------------ NET ASSETS $1,545,745,518 ------------------------------------------------------------ NET ASSETS REPRESENTED BY Paid-in capital $ 946,410,059 Accumulated net investment loss (16,648) Accumulated net realized gains on investments and foreign currency related transactions 103,813,325 Net unrealized appreciation on investments and foreign currency related transactions 495,538,782 ------------------------------------------------------------ Total net assets $1,545,745,518 ------------------------------------------------------------ NET ASSET VALUE PER SHARE OF BENEFICIAL INTEREST OUTSTANDING Net assets of $1,545,745,518 (divided by) 163,756,330 shares outstanding $ 9.44 ------------------------------------------------------------ STATEMENTS OF OPERATIONS [Download Table] FOUR-MONTH PERIOD ENDED YEAR ENDED SEPTEMBER 30, 1997* MAY 31, 1997 ------------------------------------------------------------ INVESTMENT INCOME Dividends $ 978,024 $ 2,562,283 Interest 678,271 4,364,898 ------------------------------------------------------------ Total income 1,656,295 6,927,181 ------------------------------------------------------------ EXPENSES Management fee $ 2,387,425 $ 7,788,033 Distribution Plan expenses 4,928,079 16,641,755 Transfer agent fees 942,732 3,702,109 Administrative expenses 165,513 17,039 Custodian fees 92,345 700,665 Professional fees 16,509 150,577 Trustees' fees and expenses 63,443 54,381 Miscellaneous expenses 128,797 244,220 ------------------------------------------------------------ Total expenses 8,724,843 29,298,779 Less: Expenses paid indirectly (3,184) (231,796 ) ------------------------------------------------------------ Net expenses 8,721,659 29,066,983 ------------------------------------------------------------ Net investment loss (7,065,364) (22,139,802 ) ------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments and foreign currency related transactions 110,149,243 117,982,561 Net change in unrealized appreciation on investments and foreign currency related transactions 184,561,753 (279,047,661 ) ------------------------------------------------------------ Net realized and unrealized gain (loss) on investments and foreign currency related transactions 294,710,996 (161,065,100 ) ------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $ 287,645,632 $(183,204,902) ------------------------------------------------------------ * EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31 TO SEPTEMBER 30. SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 12 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) STATEMENTS OF CHANGES IN NET ASSETS [Enlarge/Download Table] FOUR-MONTH YEAR ENDED MAY 31, PERIOD ENDED ---------------------------------- SEPTEMBER 30, 1997* 1997 1996 ------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (7,065,364) $ (22,139,802) $ (24,478,442) Net realized gain on investments and foreign currency related transactions 110,149,243 117,982,561 389,754,504 Net change in unrealized appreciation on investments and foreign currency related transactions 184,561,753 (279,047,661) 127,581,090 ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 287,645,632 (183,204,902) 492,857,152 ------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS (114,171,454) (200,508,632) (173,760,139) ------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 243,488,031 1,018,919,437 1,354,600,987 Payments for shares redeemed (369,839,740) (1,402,606,782) (1,267,570,849) Net asset value of shares issued in reinvestment of distributions 91,854,430 168,366,921 139,720,568 ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from capital share transactions (34,497,279) (215,320,424) 226,750,706 ------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 138,976,899 (599,033,958) 545,847,719 NET ASSETS: Beginning of period 1,406,768,619 2,005,802,577 1,459,954,858 ------------------------------------------------------------------------------------------------------------------------- End of period, including accumulated net investment loss of $16,648, $7,516 and $7,483, respectively $ 1,545,745,518 $ 1,406,768,619 $ 2,005,802,577 ------------------------------------------------------------------------------------------------------------------------- * EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31 TO SEPTEMBER 30. SEE NOTES TO FINANCIAL STATEMENTS.
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PAGE 13 --------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Keystone Small Company Growth Fund (S-4), (the "Fund") is a Pennsylvania trust for which Keystone Investment Management Company ("Keystone") is the investment adviser and manager. Keystone is a subsidiary of First Union Corporation ("First Union"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund's investment objective is long-term growth of capital through investments in emerging growth companies. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect amounts reported herein. Actual results could differ from these estimates. A. VALUATION OF SECURITIES The Fund values securities traded on a national securities exchange or included on the NASDAQ National Market System ("NMS") at the last reported sales price on the exchange where primarily traded. The Fund values securities traded on an exchange or NMS for which there has been no sale and other securities traded in the over-the-counter market at the mean between the last reported bid and asked price. Securities for which valuations are not available from an independent pricing service, including restricted securities, are valued at fair value as determined in good faith according to procedures established by the Board of Trustees. Short-term investments with remaining maturities of 60 days or less are carried at an amortized cost, which approximate market value. B. REPURCHASE AGREEMENTS Securities pledged as collateral for repurchase agreements are held by the custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral daily and will require the seller to provide additional collateral in the event the market value of the securities pledged falls below the carrying value of the repurchase agreement including accrued interest. The Fund will only enter into repurchase agreements with banks and other financial institutions which are deemed by the investment advisor to be creditworthy pursuant to guidelines established by the Board of Trustees. Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with certain other funds managed by Keystone, may transfer uninvested cash balances into a joint trading account. These balances are invested in one or more repurchase agreements that are fully collateralized by U.S. government and/or Federal Agency obligations. C. FOREIGN CURRENCY The books and records of the Fund are maintained in United States ("U.S.") dollars. Foreign currency amounts are translated into U.S. dollars as follows: market value of investments, assets and liabilities at the daily rate of exchange; purchases and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gain (loss) resulting from changes in foreign currency exchange rates is a component of net unrealized appreciation (depreciation) on investments and foreign currency transactions. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions and gains and losses resulting from the difference between the amounts of interest and dividends recorded on the books of the Fund and the amount actually received. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized
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PAGE 14 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) gain (loss) on investments and foreign currency related transactions. D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward foreign currency exchange contracts ("forward contracts") to settle portfolio purchases and sales of securities denominated in a foreign currency and to hedge certain foreign currency assets or liabilities. Forward contracts are recorded at the forward rate and are marked-to-market daily. Realized gains and losses arising from such transactions are included in net realized gain (loss) on investments and foreign currency related transactions. The Fund bears the risk of an unfavorable change in the foreign currency exchange rate underlying the forward contract and is subject to the credit risk that the other party will not fulfill their obligations under the contract. Forward contracts involve elements of market risk in excess of the amount reflected in the statement of assets and liabilities. E. SECURITY TRANSACTIONS AND INVESTMENT INCOME Securities transactions are accounted for no later than one business day after the trade date. Realized gains and losses are computed on the identified cost basis. Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. Dividend income is recorded on the ex-dividend date. F. FEDERAL TAXES The Fund has qualified and intends to qualify in the future as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). Thus, the Fund is relieved of any federal income tax liability by distributing all of its net investment company taxable income and net capital gains, if any, to its shareholders. The Fund also intends to avoid any excise tax liability by making the required distributions under the Code. Accordingly, no provision for federal taxes is required. To the extent that realized capital gains can be offset by capital loss carryforwards, it is the Fund's policy not to distribute such gains. G. DISTRIBUTIONS The Fund distributes net investment income quarterly and net capital gains, if any, at least annually. Distributions to shareholders are recorded at the close of business on the ex-dividend date. Income and capital gains distributions to shareholders are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. The significant differences between financial statement amounts available for distribution and distributions made in accordance with income tax regulations are primarily due to differing treatment for net realized gains and losses from foreign currency related transactions and net operating losses. 2. CAPITAL SHARE TRANSACTIONS The Fund's Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest with a par value of $1.00. Transactions in shares of the Fund were as follows: [Download Table] FOUR-MONTH PERIOD ENDED YEAR ENDED MAY 31, SEPTEMBER 30, --------------------------- 1997* 1997 1996 ------------------------------------------------------------- Shares sold 27,990,885 121,645,715 141,592,081 Shares redeemed (42,215,378) (168,659,715) (131,599,635) Shares issued in reinvestment of distributions 11,242,892 19,925,079 14,560,340 ------------------------------------------------------------- Net increase (decrease) (2,981,601) (27,088,921) 24,552,786 ------------------------------------------------------------- * EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31 TO SEPTEMBER 30.
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PAGE 15 --------------------------------------------------------- 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of investment securities (excluding short-term securities) for the four-month period ended September 30, 1997 and year ended May 31, 1997 were as follows: [Download Table] FOUR-MONTH PERIOD ENDED YEAR ENDED SEPTEMBER 30, 1997* MAY 31 1997 ---------------------------------------------------------- Purchases $ 403,741,271 $ 766,944,947 Sales 526,578,104 1,214,970,663 * EFFECTIVE SEPTEMBER 30, 1997, THE FUND CHANGED ITS FISCAL YEAR END FROM MAY 31 TO SEPTEMBER 30. On September 30, 1997, the cost of investments for federal income tax purposes was $1,056,265,261, gross unrealized appreciation of investments was $519,501,950 and gross unrealized depreciation of investments was $24,769,322 resulting in net unrealized appreciation of $494,732,628 for federal income tax purposes. 4. DISTRIBUTION PLAN Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The BISYS Group Inc. ("BISYS") has served as principal underwriter to the Fund. Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of Keystone, served as the Fund's principal underwriter. The Fund has adopted a Distribution Plan (the "Plan") as allowed by Rule 12b-1 of the 1940 Act. The Plan permits the Fund to reimburse its principal underwriter for costs related to selling shares of the Fund and for various other services. These costs, which consist primarily of commissions and services fees to broker-dealers who sell shares of the fund, are paid by shareholders through expenses called "Distribution Plan expenses". The Fund pays a service fee equal to 0.25% of its average daily net assets and a distribution fee equal to 0.75% of its average daily net assets. Distribution Plan expenses are calculated daily and paid monthly. With respect to the Fund's shares, the principal underwriter may incur distribution costs greater than the allowable annual amounts the Fund is permitted to pay. The Fund may reimburse the principal underwriter for such excess amounts in later years with annual interest at the prime rate plus 1.00%. The Plan may be terminated at any time by vote of the Independent Trustees or by vote of a majority of the outstanding voting shares of the Fund. However, after the termination of the Plan, and subject to the discretion of the Independent Trustees, payments to EKD and/or EKIS may continue as compensation for services which had been earned while the Plan was in effect. EKD intends, but is not obligated, to continue to pay distribution costs that exceed the current annual payments from the Fund. EKD intends to seek full payment of such distribution costs from the Fund at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. Contingent deferred sales charges paid by redeeming shareholders may be paid to EKD or its predecessor. 5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS Under the terms of the investment advisory agreement dated December 11, 1996, Keystone serves as the investment adviser and manager to the Fund. In return for providing investment advisory and management services to the Fund, Keystone is paid a management fee, computed daily and paid monthly, which is determined by applying percentage rates starting at 0.70% and declining as net assets increase to 0.35% per annum, to the average daily net asset value of the Fund. During the four-month period ended September 30, 1997 and year ended May 31, 1997, the Fund paid or accrued $165,513 and $17,039, respectively, to Keystone for certain administrative services. Additionally, Evergreen Keystone Services Company ("EKSC"), a wholly-owned subsidiary of Keystone, serves as the Fund's transfer and dividend disbursing agent. BISYS Fund Services, Inc. ("BISYS"), an affiliate of EKD, serves as the Fund's sub-administrator. As sub-
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PAGE 16 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) administrator, BISYS provides the officers of the Fund. For this service, BISYS is paid a fee by Keystone, which is not a Fund expense. Officers of the Fund and affiliated Trustees receive no compensation directly from the Fund. 6. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an expense offset arrangement with its custodian. The assets deposited with the custodian under this expense offset arrangement could have been invested in income-producing assets 7. YEAR END CHANGE The Fund changed its fiscal year end from May 31 to September 30, effective September 30, 1997.
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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 September 30, 1997, and the related statements of operations for the four-month period then ended and the year ended May 31, 1997, the statements of changes in net assets for the four-month period ended September 30, 1997 and for each of the years in the two-year period ended May 31, 1997 and financial highlights for the four-month period ended September 30, 1997 and for each of the years in the ten-year period ended May 31, 1997. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Keystone Small Company Growth Fund (S-4) as of September 30, 1997, the results of its operations for the four-month period then ended and the year ended May 31, 1997, its changes in net assets for the four-month period ended September 30, 1997 and for each of the years in the two-year period ended May 31, 1997 and its financial highlights for the four-month period ended September 30, 1997 and for each of the years in the ten-year period ended May 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts October 31, 1997
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PAGE 18 --------------------------------------------------------- KEYSTONE SMALL COMPANY GROWTH FUND (S-4) FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS (UNAUDITED) During the four month period ended September 30, 1997, the Fund paid distributions of $114,171,454. These distributions were paid entirely from long-term capital gains. The above figures may differ from those previously reported and those cited elsewhere in this report due to differences in the calculation of income and capital gains for accounting (book) purposes and internal revenue service (tax) purposes. In January 1998, we will send you complete information on the distributions paid during calendar year 1997 to help you in completing your federal tax return.
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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. 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. [Download Table] ----------------------------------- NOT FDIC MAY LOSE VALUE INSURED NO BANK GUARANTEE ------------------------------------- EVERGREEN KEYSTONE DISTRIBUTOR, INC. Evergreen KeystoneSM is a Service Mark of Evergreen Keystone Investment Services, Inc. Copyright 1997. (Recycle logo appears here.) S4-R 541255 REV01 11/97 KEYSTONE (Photo Exists in Film ONLY. Will See on Dylux) SMALL COMPANY GROWTH FUND (S-4) (Evergreen tree appears here.) Evergreen Funds(SM) SINCE 1932 ANNUAL REPORT SEPTEMBER 30, 1997

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This N-30D Filing   Date First   Last      Other Filings
10/1/961
12/11/9615497
5/31/97111724F-2NT, N-30D, NSAR-B
For The Period Ended9/30/9712024F-2NT, NSAR-B
10/31/9717
Filed On / Filed As Of11/25/97
 
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