Page 1
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
Seeks capital growth from a broad spectrum of domestic and foreign securities.
Dear Shareholder:
We would like to take this opportunity to report on the performance of
Keystone Strategic Growth Fund (K-2) for the twelve-month period which ended
October 31, 1995.
Performance
Your Fund produced satisfactory results, especially during the second half of
the twelve-month period. For the six-month period which ended October 31,
1995, your Fund returned 15.51%, surpassing the 14.46% return of the Standard
& Poor's 500 Index (S&P 500). For the twelve-month period, your Fund returned
15.05% and the S&P 500 returned 26.44%.
The investment climate for stocks improved dramatically during the
twelve-month period. Moderate economic growth, declining interest rates and
low inflation created an attractive environment for growth stocks in 1995.
Sustained by continued strong earnings and an improved international position
for many U.S. companies, the stock market rallied strongly in 1995.
At the start of your Fund's fiscal period in November 1994, stock prices
were fluctuating broadly in reaction to an uncertain economic environment. At
that time, we were pursuing a generally cautious investment strategy that was
aimed at minimizing the effects of a possible market correction. As it turned
out, we may have been too cautious: economic growth slowed, interest rates
declined, fears of inflation disappeared and the U.S. stock market rallied.
During the second half of the twelve-month period, small company stocks
rallied, led by technology issues. Your Fund's holdings of small- and mid-cap
stocks in the technology, finance and drug sectors were major contributors to
your Fund's strong performance between April 30 and October 31, 1995. While
we were disappointed by your Fund's twelve-month return, we were encouraged
by its impressive rebound during the second half of the period.
Discipline, diversification and flexibility
We pursue a disciplined approach in managing your Fund. As we evaluate
companies for the portfolio, each must meet our requirements for accelerating
earnings, attractive valuations and low debt levels. We look for these
companies in all sectors of the market regardless of size. The ideal company
will typically be a leader in its field with a strong management team. This
approach often leads to investments in many different areas: small-, mid- and
large-cap stocks, as well as stocks of established foreign companies. We
think this diversification helps to smooth out potential price fluctuations
while providing participation in companies that we believe have attractive
characteristics.
Keystone Strategic Growth Fund (K-2) maintains a flexible approach to this
discipline by making investments in what we think are the most promising
companies both by industry, size and geographic location. We believe this
flexibility has been responsible for the Fund's attractive long term
performance.
(continued on next page)
<PAGE>
Page 2
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
Our outlook
We are encouraged by the market's strong showing in 1995, and expect that the
positive environment for growth stocks should continue in 1996. We anticipate
moderate economic growth, low inflation and stable-to-declining interest
rates. Combined with our expectations for continued positive earnings, this
environment should favor growth stocks. However, we believe that returns in
1996 may be less than those experienced in 1995. And, we think investors
should not be surprised to see a short-term pull back in stock prices in the
months ahead. If a normal correction occurs, we would view it as an
opportunity to invest in stocks at lower prices. In other words, we continue
to believe that the current environment remains healthy for stocks. Your
Fund's disciplined investment strategy and flexible design should continue to
provide excellent long-term growth opportunities.
Thank you for your continued support of Keystone Strategic Growth Fund
(K-2). If you have any questions about your Keystone investment, we encourage
you to write to us.
[photo of Albert H. Elfner, III] [photo of George S. Bissell]
Albert H. Elfner III George S. Bissell
Sincerely,
[signature of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
December 1995
<PAGE>
Page 3
A Discussion With
Your Fund Manager
Maureen E. Cullinane is senior portfolio manager of your Fund and leads
Keystone's growth stock team. A Chartered Financial Analyst, Ms. Cullinane
has over 20 years of investment experience. She received BA and MA degrees
from Emmanuel College with post-graduate study at the Universite de Paris.
She holds an MBA from Boston University. Together with Margery C. Parker,
portfolio manager of Keystone Mid-Cap Growth Fund (S-3), the team focuses on
selecting companies with growing earnings.
Q What was the environment like during the twelve month period?
A The economic and market environment improved remarkably during the period.
The end of 1994 was marked by strong economic growth and rising interest
rates, which was unsettling for stocks. In the first quarter of l995, the
environment had improved significantly. Economic growth moderated to a
slower, sustainable pace; interest rates declined; and corporate earnings
continued to exceed investor expectations. This was excellent news for growth
stocks.
Q How did the Fund perform?
A We were disappointed by the Fund's weak performance during the first half
of the fiscal year from October 31, 1994 to April 30, 1995. But, we were
pleased with its strong results during the second half (April 30 to October
31, 1995). At the beginning of 1995, when economic growth moderated and
interest rates declined, we emphasized several areas including cyclical
companies, small- and mid-cap stocks, foreign stocks and cash--areas that
performed poorly as large blue chip stocks rallied.
As the rally continued in 1995, it broadened to include small- and mid-cap
stocks, which contributed to the Fund's strong returns during the second half
of the twelve-month period. In addition, we eliminated our foreign holdings
in Japan and reduced the Fund's cash position to more fully participate in
the U.S. stock rally. We think this strategy proved effective, resulting in a
15.51% return for the second half of the period, exceeding the 14.46% return
of the S&P 500 for the same six-month period.
Q How do you select stocks for the portfolio?
A We pursue a disciplined approach to selecting stocks. We seek companies
with attractive prospects that meet our requirements for earnings growth,
management, market position and solid financial conditions. These may be
small, medium or large companies in the U.S., or established foreign
companies. These selections must also be a good fit with Keystone's economic
and market policy.
[begin text in box]
Fund Profile
Objective: Seeks capital growth from a broad spectrum of domestic and foreign
securities.
Number of stocks: 65
Commencement of investment operations: September 11, 1935
Net assets: $492 million
Newspaper Symbol: StrGrK2
[end text in box]
<PAGE>
Page 4
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
[begin text in box]
Your Fund Invests In . . .
(bullet) Dynamic companies with accelerating earnings growth rates
(bullet) Companies with strong management teams, leading market positions and
solid balance sheets
(bullet) Stocks of any size in any industry: small-, mid-, and large-cap
(bullet) U.S. stocks and stocks of established foreign companies.
[end text in box]
Q What types of companies did you invest in during the period?
A We continued to focus on two kinds of companies: those involved in
productivity enhancement and stable growth companies. By productivity
enhancement, we mean companies that are providing products and services to
improve efficiency. Many of these companies can be found in the technology
sector--an area that has been a strong theme for the Fund for several years.
Technology stocks were an important contributor to the Fund's strong
performance during the second half of the twelve-month period. On October 31,
l995, these stocks accounted for nearly 30% of the Fund's net assets.
We believe that the growth of technology companies is a long-term trend that
should benefit investors for many years. To compete in a global economy, U.S.
companies must offer better products or services at lower costs. We think
that technology, whether electronic components, computerized manufacturing
systems or software, will continue to enhance productivity and lower costs
for many companies. This should benefit both the companies themselves, and
the businesses which use their products and services to stay competitive.
Q What are some of the Fund's technology holdings?
A In the software area, we invested in Parametric Technology, a company that
produces CAD/CAM software which can speed up the design process for a wide
range of products. Another software holding, Adobe Software, produces a
program called Acrobat, which makes it possible to view many different types
of documents or spread sheets on virtually any computer operating system.
Q Stable growth companies comprised another portfolio theme. What are these
kinds of companies?
A Stable growth companies--also known as noncyclicals--tend to be less
affected by swings in the economic cycle. These companies tend to grow
regardless of the state of the economy. Stable growth companies were a
consistent theme in the portfolio throughout the twelve-month period. Example
holdings include Gillette, a manufacturer of razor blades and personal care
products, and HFS, formerly Hospitality Franchise Services, a franchiser of
hotel chains that has added real estate to its businesses through its
acquisition of Century 21. CUC International is another company in the stable
growth category. CUC produces books containing discount coupons for dining
and entertainment at restaurants, theaters, and museums. The company also
offers a service called Shoppers Advantage, in which subscribers can purchase
more than 250,000 consumer products via telephone or the Internet.
Q The Fund's weighting in financial stocks rose from about 2% to 14% of net
assets. Why?
A During the second half of the period, we built up the Fund's position in
financial services stocks such as banks, and brokerage and insurance
companies. l995 was a particularly advantageous time for financial services
companies. These companies enjoyed the rewards
[begin text in box]
Portfolio Themes . . .
(bullet) Productivity enhancement--companies that are lowering costs and
improving efficiency
(bullet) Stable growth--companies that typically grow regardless of economic
conditions
[end text in box]
<PAGE>
Page 5
[PIE CHART]
Diversification by Market Capitalization
as of October 31, 1995
Small-cap stocks (U.S.) (17%)
Mid-cap stocks (U.S.) (45%)
Large-cap (2) (38%)
(as a percentage of portfolio assets)
of declining interest rates, and bank stocks benefited from the trend towards
consolidation in the industry.
Q What changes did you make in the health care area?
A We shifted our emphasis away from health care management companies and
concentrated on drug and medical device firms. The drug portion of the
portfolio rose from 3.8% of net assets to more than 10%. Among the Fund's new
additions were Merck and SmithKline Beecham. Merck has been a consistent
growth stock, and the company has developed a new drug called Fosamax, which
will be prescribed for the treatment of osteoporosis. SmithKline Beecham
plans to introduce approximately 50 new drugs in the next three years. We
believe SmithKline has the potential to increase its earnings by 13% to 15%
per year over the next few years.
Q Did you make any changes to the Fund's foreign stock holdings?
A Overall, the performance of the foreign markets paled in comparison to the
strong performance of the U.S. markets in 1995. We maintained limited
investments abroad (6% of net assets at the end of the period) and evaluated
opportunities on a stock-by-stock basis given the weak economic and market
environments in Europe and Japan. We eliminated our holdings of Japanese
securities and carefully monitored our other foreign holdings.
Q What stocks did you eliminate from the portfolio?
A We took profits in oil stocks. While they had been relatively strong
performers early in l994, they generated only modest returns in l995. We
believed that the price of oil would remain relatively stable in the
foreseeable future and that oil company earnings would probably lag those of
companies in more growth oriented sectors.
Q What is your outlook?
A Our outlook remains cautiously optimistic. We believe moderate economic
growth, low inflation, and relatively strong corporate earnings should create
an attractive environment for the growth stocks in which your Fund is
invested. While we think stock prices may rise over the next six to twelve
months, we do not expect stocks to duplicate the very strong gains they
generated in l995. We believe your Fund's flexible investment approach and
its emphasis on companies that have the potential to generate consistent
earnings should provide it with the potential to produce above-average
returns over the long term.
Top 5 Industries
as of October 31, 1995
Percentage of
Industry net assets
- -------------------------------------------------------------------------------
Finance 14.4
- -------------------------------------------------------------------------------
Drugs 10.2
- -------------------------------------------------------------------------------
Software services 10.1
- -------------------------------------------------------------------------------
Telecommunications 8.8
- -------------------------------------------------------------------------------
Electronics products 5.9
- -------------------------------------------------------------------------------
[FOOTNOTE]
(2) Includes 6% of net assets invested in foreign stocks.
<PAGE>
Page 6
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
Your Fund's Performance
[MOUNTAIN CHART]
Growth of an investment in Keystone Strategic Growth Fund (K-2)
Initial Investment Reinvested Distributions
10/85 10000 10000
12222 13138
10/87 10107 13158
8742 14175
10/89 10268 17256
8728 15522
10/91 10950 21541
10174 22915
10/93 12048 28637
10094 29654
10/95 10776 34117 Total Value: $34,117
A $10,000 investment in Keystone Strategic Growth Fund (K-2) made on October
31, 1985 with all distributions reinvested was worth $34,117 on October 31,
1995. Past performance is no guarantee of future results.
Top 10 Holdings
as of October 31, 1995
Percentage of
Stock Industry net assets
- ----------------------------------------------------------------------
Warner Lambert Drugs 3.8
- ----------------------------------------------------------------------
Parametric Technology Software services 3.2
- ----------------------------------------------------------------------
SmithKline Beecham Drugs 3.2
- ----------------------------------------------------------------------
Thermo Electron Business services 2.8
- ----------------------------------------------------------------------
Microsoft Software services 2.6
- ----------------------------------------------------------------------
CUC International Consumer goods 2.5
- ----------------------------------------------------------------------
Potash Corp. of Saskatchewan (Canada) Chemicals 2.5
- ----------------------------------------------------------------------
Cisco Systems Telecommunications 2.4
- ----------------------------------------------------------------------
Bank of Boston Finance 2.3
- ----------------------------------------------------------------------
Bankamerica Finance 2.1
- ----------------------------------------------------------------------
Twelve-Month Performance as of October 31, 1995
Total return* 15.05%
Net asset value 10/31/94 $ 7.54
10/31/95 $ 8.05
Dividends None
Capital gains $ 0.60
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of October 31, 1995
If you If you did
Cumulative total return redeemed not redeem
1-year 12.05% 15.05%
5-year 119.79% 119.79%
10-year 241.17% 241.17%
Average annual total return
1-year 12.05% 15.05%
5-year 17.06% 17.06%
10-year 13.06% 13.06%
The "if you redeemed" returns reflect the deduction of the 3% CDSC for those
investors who bought and 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 fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
Page 7
Growth of an Investment
[LINE CHART]
Comparison of change in value of a $10,000 investment in Keystone Strategic
Growth Fund (K-2), the Standard & Poor's 500 Index and the Consumer Price
Index.
Fund Average
Annual Total Return
1 Year 5 Year 10 Year
12.05% 17.06% 13.06%
S&P 500
$41,751
Fund
$34,117
CPI
$14,140
Past performance is no guarantee of future results. The one-year return
reflects the deduction of the Fund's 3% contingent deferred sales charge for
shares held for at least one year.
[END OF LINE CHART]
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of three lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate
a hypothetical investment in:
1. Keystone Strategic Growth Fund (K-2)
The Fund seeks capital growth from a broad spectrum of domestic and foreign
securities. The return is quoted after deducting sales charges (if
applicable), fund expenses and transaction costs and assumes reinvestment of
all distributions.
2. Standard & Poor's 500 Index (S&P 500)
The S&P 500 is a broad-based unmanaged index of common stock prices. It is
comprised of stocks of the largest U.S. companies. These stocks are selected
and compiled by Standard & Poor's Corporation according to criteria that may
be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S.. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
<PAGE>
Page 8
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund
may be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
Page 9
SCHEDULE OF INVESTMENTS--October 31, 1995
Market
Shares Value
----------------------------------------------------------------------------
COMMON STOCKS (96.1%)
[bullet] BRAZIL
Telecommunications (0.8%)
Telecomunicacoes Brasileiras S/A 100,000 $ 4,000,000
----------------------------------------------------------------------------
[bullet] GERMANY
Finance (0.8%)
Deutsche Bank AG (d) 89,000 4,025,739
----------------------------------------------------------------------------
[bullet] HONG KONG
Telecommunications (0.7%)
Hong Kong Telecommunications Limited 2,000,000 3,492,117
----------------------------------------------------------------------------
[bullet] NETHERLANDS
Advertising & Publishing (1.0%)
Wolters Kluwer N.V. (d) 56,719 5,162,155
----------------------------------------------------------------------------
[bullet] SWEDEN
Pharmaceutical (1.2%)
Pharmacia AB 165,000 5,739,692
----------------------------------------------------------------------------
[bullet] TAIWAN
Advertising & Publishing (0.6%)
Taiwan Semiconductor (c), (d) 486,000 1,512,728
United Microelectronics Corp., Ltd. (c), (d) 576,000 1,408,678
----------------------------------------------------------------------------
2,921,406
----------------------------------------------------------------------------
Finance (0.1%)
Chronicle 2001 Mutual Fund (d) 1,653,374 628,585
----------------------------------------------------------------------------
[bullet] TOTAL TAIWAN 3,549,991
----------------------------------------------------------------------------
[bullet] UNITED KINGDOM
Advertising & Publishing (0.7%)
International Cabletel, Inc. (c), (d) 133,333 3,566,658
----------------------------------------------------------------------------
[bullet] UNITED STATES
Advertising & Publishing (1.8%)
Infinity Broadcasting, Corp.,
Class A (d) 280,000 9,100,000
----------------------------------------------------------------------------
Aerospace (1.5%)
Boeing Co. 110,000 7,218,750
----------------------------------------------------------------------------
Amusement (1.9%)
HFS, Inc. (d) 150,000 9,187,500
----------------------------------------------------------------------------
Automotive (2.6%)
Lear Seating Corp. (d) 250,000 $ 6,937,500
Volvo AB, Class B, ADR 265,000 5,995,625
----------------------------------------------------------------------------
12,933,125
----------------------------------------------------------------------------
Capital Goods (5.0%)
AGCO Corporation 7,450,875
166,500
Caterpillar, Inc. 7,857,500
140,000
General Electric Co. 145,000 9,171,250
----------------------------------------------------------------------------
24,479,625
----------------------------------------------------------------------------
Chemicals (2.5%)
Potash Corp. of Saskatchewan, Inc. 175,000 12,184,375
----------------------------------------------------------------------------
Consumer Goods (4.5%)
CUC International, Inc. (b), (d) 12,381,900
357,600
Gillette Co. 200,000 9,675,000
----------------------------------------------------------------------------
22,056,900
----------------------------------------------------------------------------
Drugs (10.2%)
Amgen, Inc. (d) 75,000 3,604,688
Medaphis Corp. 88,600 2,813,050
Merck & Company, Inc. 115,000 6,612,500
Pharmacia AB, ADR 85,000 2,964,375
SmithKline Beecham plc, ADR 300,000 15,562,500
Warner Lambert Company 220,000 18,727,500
----------------------------------------------------------------------------
50,284,613
----------------------------------------------------------------------------
Electronics Products (5.9%)
Analog Devices, Inc. (d) 175,000 6,321,875
KLA Instruments Corporation (d) 161,800 6,957,400
Maxim Integrated Products, Inc. (d) 55,200 4,122,750
Microchip Technology, Inc. (d) 130,000 5,151,250
Solectron Corporation (d) 160,000 6,440,000
----------------------------------------------------------------------------
28,993,275
----------------------------------------------------------------------------
Finance (14.4%)
Allmerica Financial Corporation (d) 133,100 3,344,138
Bankamerica Corporation 180,000 10,350,000
Bank of Boston Corporation 250,000 11,125,000
Fleet Financial Group, Inc. 195,000 7,556,250
Golden West Financial Corporation 132,500 6,641,562
Greenpoint Financial Corporation 281,900 7,646,537
MBIA, Inc. 145,900 10,158,288
Merrill Lynch & Co., Inc. 97,500 5,411,250
Norwest Corporation 282,400 8,330,800
----------------------------------------------------------------------------
70,563,825
----------------------------------------------------------------------------
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
Page 10
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
Market
Shares Value
- ----------------------------------------------------------------------------
United States -- (cont'd)
Foods (3.1%)
Pioneer Hi-Bred International, Inc. 155,700 $ 7,726,612
Sara Lee Corporation 250,000 7,343,750
----------------------------------------------------------------------------
15,070,362
----------------------------------------------------------------------------
Health Care Services (3.4%)
Boston Scientific Corp. 230,000 9,688,750
Pacificare Health Systems, Inc. (d) 94,300 6,872,113
----------------------------------------------------------------------------
16,560,863
----------------------------------------------------------------------------
Natural Gas (2.6%)
Anadarko Petroleum Corporation 190,000 8,241,250
Louisiana Land & Exploration Company 130,000 4,598,750
----------------------------------------------------------------------------
12,840,000
----------------------------------------------------------------------------
Office Products (1.3%)
EMC Corp. (d) 422,300 6,545,650
----------------------------------------------------------------------------
Oil Services (2.6%)
ENSCO International, Inc. (d) 375,000 6,328,125
Schlumberger, Ltd. 100,437 6,252,203
----------------------------------------------------------------------------
12,580,328
----------------------------------------------------------------------------
Restaurants (1.0%)
Apple South, Inc. 250,000 5,187,500
----------------------------------------------------------------------------
Retail (2.5%)
Barnes & Noble, Inc. (d) 200,000 7,300,000
General Nutrition, Inc. (d) 200,000 4,950,000
----------------------------------------------------------------------------
12,250,000
----------------------------------------------------------------------------
Services (4.5%)
Molten Metal Technology, Inc. (d) 82,500 $ 3,196,875
Thermo Electron Corporation (d) 300,000 13,800,000
U. S. Filter Corp. (d) 222,000 5,161,500
----------------------------------------------------------------------------
22,158,375
----------------------------------------------------------------------------
Software Services (10.1%)
Adobe Systems, Inc. 80,000 4,570,000
America Online, Inc. (d) 125,000 10,007,813
BMC Software, Inc. (d) 175,000 6,256,250
Microsoft Corp. (d) 130,000 13,008,125
Parametric Technology
Corporation (d) 238,700 15,948,144
----------------------------------------------------------------------------
49,790,332
----------------------------------------------------------------------------
Telecommunications (8.8%)
Cabletron Systems, Inc. (d) 100,000 7,862,500
Cisco Systems, Inc. (d) 150,000 11,634,375
Motorola, Inc. 110,000 7,218,750
Netmanage, Inc. (d) 400,000 8,175,000
Winstar Communications, Inc. (d) 490,000 8,146,250
----------------------------------------------------------------------------
43,036,875
----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$389,581,779) 472,558,625
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Interest Maturity Maturity Market
Rate Date Value Value
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.6%)
Repurchase Agreement (2.6%) (b)
Goldman Sachs Group LP (collateralized by $12,975,195
FNMA, 6.394%, due 10/01/32 (Cost $12,846,000) 5.90% 11/01/95 $12,848,105 12,846,000
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$12,846,000) 12,846,000
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $402,427,779)(a) 485,404,625
- ---------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY HOLDINGS (Cost $303,840) (0.1%) (c) 294,164
OTHER ASSETS AND LIABILITIES--NET (1.2%) 5,911,029
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $491,609,818
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Schedule of Investments.
<PAGE>
Page 11
SCHEDULE OF INVESTMENTS--October 31, 1995
NOTES TO SCHEDULE OF INVESTMENTS:
(a) The cost of investments for federal income tax purposes is identical.
Gross unrealized appreciation and depreciation on investments, based
identified tax cost, at October 31, 1995 are as follows:
Gross unrealized appreciation $86,129,747
Gross unrealized depreciation (3,162,577)
--------------
$82,967,170
--------------
(b) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at October 31, 1995.
(c) Investments denominated in the local currency and/or foreign currency
holdings of certain foreign countries are considered illiquid due to current
foreign exchange restrictions of these foreign markets.
(d) Non-income-producing security.
See Notes to Financial Statements.
<PAGE>
Page 12
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
Net asset value
beginning of year $ 7.54 $ 9.00 $ 7.60 $ 8.18 $ 6.52
----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02) 0.00 (0.06) (0.01) 0.08
Net gains (losses) on investments and foreign
currency related transactions 1.13 0.23 1.89 0.42 2.24
Net commissions paid on fund share sales (a) 0 0 0 0 0
----------------------------------------------------------------------------------------------------------
Total from investment operations 1.11 0.23 1.83 0.41 2.32
----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0 0 0 (0.01) (0.16)
In excess of net investment income 0 0 (0.03) (0.05) 0
Net realized gains on investments and foreign
currency related transactions (0.60) (1.66) (0.40) (0.93) (0.50)
In excess of net realized gains on investments
and foreign currency related transactions 0 (0.03) 0 0 0
----------------------------------------------------------------------------------------------------------
Total distributions (0.60) (1.69) (0.43) (0.99) (0.66)
----------------------------------------------------------------------------------------------------------
Net asset value end of year $ 8.05 $ 7.54 $ 9.00 $ 7.60 $ 8.18
----------------------------------------------------------------------------------------------------------
Total return (b) 15.05% 3.55% 24.97% 6.38% 38.77%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (c) 2.01% 1.73% 1.83% 1.58% 1.52%
Net investment income (loss) (0.25%) (0.17%) (0.57%) (0.15%) 0.99%
Portfolio turnover rate 140% 68% 65% 62% 86%
----------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $491,610 $416,684 $403,693 $321,794 $339,359
----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of year $ 7.67 $ 6.53 $ 7.55 $ 9.13 $ 7.47
----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.08 0.16 0.18 0.02 0.14
Net gains (losses) on investments and foreign
currency related transactions (0.80) 1.21 0.19 0.04 2.15
Net commissions paid on fund share sales (a) 0 0 0 0 (0.08)
----------------------------------------------------------------------------------------------------------
Total from investment operations (0.72) 1.37 0.37 0.06 2.21
----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.18) (0.18) (0.14) (0.13) (0.11)
In excess of net investment income 0 0 0 0 0
Net realized gains on investments and foreign
currency related transactions (0.25) (0.05) (1.25) (1.51) (0.44)
In excess of net realized gains on investments
and foreign currency related transactions 0 0 0 0 0
----------------------------------------------------------------------------------------------------------
Total distributions (0.43) (0.23) (1.39) (1.64) (0.55)
----------------------------------------------------------------------------------------------------------
Net asset value end of year $ 6.52 $ 7.67 $ 6.53 $ 7.55 $ 9.13
----------------------------------------------------------------------------------------------------------
Total return (b) (10.05%) 21.74% 7.73% 0.15% 31.38%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (c) 1.65% 1.59% 1.69% 2.12% 0.98%
Net investment income (loss) 1.64% 2.06% 2.14% 0.23% 1.63%
Portfolio turnover rate 30% 40% 89% 104% 104%
----------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $234,060 $329,994 $328,205 $298,748 $303,994
----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges. On June 11,
1987, the Securities and Exchange Commission adopted a Rule which
required for financial statements for periods ended on or after June 30,
1987, that net commissions paid under Rule 12b-1 Distribution Plans be
treated as operating expenses rather than as capital charges.
Accordingly, beginning with fiscal year ended October 31, 1987, the
Fund's financial statements reflect 12b-1 Distribution Plan expenses
(i.e., shareholder service fees plus commissions paid net of deferred
sales charges received by the Fund) as a component of the net investment
income section of the financial highlights.
(b) Excluding contingent deferred sales charge (CDSC).
(c) The annualized expense ratio for the year ended October 31, 1995 includes
indirectly paid expenses. Excluding indirectly paid expenses, the
annualized expense ratio would have been 2.00%.
See Notes to Financial Statements.
<PAGE>
Page 13
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments at market value (Note 1):
Long-term investments (identified cost
$402,427,779) $485,404,625
Foreign currency holdings (identified cost--
$303,840) 294,164
-----------------------------------------------------------------------------
Total investments and foreign currency
holdings (identified cost $402,731,619) 485,698,789
-----------------------------------------------------------------------------
Cash 322
Receivable for:
Investments sold 10,173,539
Fund shares sold 591,233
Dividends and Interest 170,580
Refundable foreign tax withheld 111,375
Prepaid expenses 36,616
-----------------------------------------------------------------------------
Total assets 496,782,454
-----------------------------------------------------------------------------
Liabilities:
Payable for:
Investments purchased 4,835,273
Fund shares redeemed 203,395
Other accrued expenses 133,968
-----------------------------------------------------------------------------
Total liabilities 5,172,636
-----------------------------------------------------------------------------
Net assets $491,609,818
-----------------------------------------------------------------------------
Net assets represented by (Notes 1 and 3):
Paid-in capital $382,083,937
Undistributed net investment income (Note 1) 478,981
Accumulated net realized gains (losses) on
investment and foreign currency related
transactions 26,065,648
Net unrealized appreciation (depreciation) on
investments, foreign currency holdings and
other assets and liabilities 82,981,252
-----------------------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($8.05 a share on
61,095,706 shares outstanding) (Note 2) $491,609,818
-----------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended October 31, 1995
- ------------------------------------------------------------------------------
Investment income (Note 1):
Dividends (Net of foreign withholding
taxes of $103,171) $ 5,532,697
Interest 2,420,655
-----------------------------------------------------------------------------
Total income 7,953,352
-----------------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $ 2,779,544
Transfer agent fees 1,296,268
Accounting, auditing and legal 64,639
Custodian fees 312,724
Printing 32,342
Trustees' fees and expenses 36,448
Distribution Plan expenses 4,580,713
Registration fees 39,106
Miscellaneous expenses 29,443
-----------------------------------------------------------------------------
Total expenses 9,171,227
Less: Expenses paid indirectly (Note 4) (64,847)
-----------------------------------------------------------------------------
Net expenses 9,106,380
-----------------------------------------------------------------------------
Net investment loss (1,153,028)
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions (Notes 1 and 3):
Net realized gain (loss) on:
Investments 60,648,086
Foreign currency related transactions (193,244)
-----------------------------------------------------------------------------
Net realized gain on investments and foreign
currency related transactions (Notes 1 and 3) 60,454,842
-----------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments and foreign currency holdings 8,411,692
Foreign currency related transactions 575,497
-----------------------------------------------------------------------------
Net change in unrealized appreciation or
depreciation 8,987,189
-----------------------------------------------------------------------------
Net gain (loss) on investments and foreign
currency related transactions 69,442,031
-----------------------------------------------------------------------------
Net increase in net assets resulting
from operations $68,289,003
-----------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
Page 14
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended October 31,
1995 1994
<S> <C> <C>
- -------------------------------------------------------------------------------------------
Operations:
Net investment loss (Note 1) $ (1,153,028) $ (649,697)
Net realized gain on investments and foreign
currency related transactions (Notes 1 and 3) 60,454,842 43,691,185
Net change in unrealized appreciation or
depreciation 8,987,189 (29,782,781)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 68,289,003 13,258,707
- -------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1):
Net realized gain on investments and foreign
currency related transactions (34,582,438) (76,453,390)
In excess of net realized gain on investments and
foreign currency related transactions 0 (1,460,646)
- -------------------------------------------------------------------------------------------
Total distributions to shareholders (34,582,438) (77,914,036)
- -------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold 101,411,115 80,583,329
Payments for shares redeemed (91,086,308) (72,254,270)
Net asset value of shares issued in reinvestment of
dividends and distributions 30,894,379 69,316,863
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from
capital share transactions 41,219,186 77,645,922
- -------------------------------------------------------------------------------------------
Total increase in net assets 74,925,751 12,990,593
- -------------------------------------------------------------------------------------------
Net assets:
Beginning of year 416,684,067 403,693,474
- -------------------------------------------------------------------------------------------
End of year [including undistributed investment
income as follows: October, 1995--$478,981 and
October, 1994--$571,945] $491,609,818 $416,684,067
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 15
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Strategic Growth Fund (K-2) (formerly Keystone Custodian Fund,
Series K-2), (the "Fund") is a common law trust for which Keystone
Management, Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is
the Investment Adviser. The Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of current and former members
of management of Keystone and its affiliates. Keystone Investor Resource
Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's
transfer agent.
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.
A. Investments are usually valued at the closing sales price or, in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair under the direction of the Board of Trustees:
(a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value
or if no sale occurred. Short-term investments maturing in sixty days or less
are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. Short-term investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Short-term investments maturing in more than
sixty days when purchased which are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market. Investments denominated
in a foreign currency are adjusted daily to reflect changes in exchange
rates. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair
value on the basis of valuations furnished by a pricing service, approved by
the Trustees, which determines valuations for normal institutional-size
trading units of such securities using methods based on market transactions
for comparable securities and various relationships between securities which
are generally recognized by institutional traders.
The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or current exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income. In addition
to market risk, the Fund is subject to the credit risk that the other party
will not be able to complete the obligations of the contract.
<PAGE>
Page 16
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily
rates 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 gains/losses are a component of unrealized
appreciation/depreciation of investments.
B. Securities transactions are accounted for no later than one business
day after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. All discounts are
amortized for both financial reporting and federal income tax purposes.
Distributions to shareholders are recorded at the close of business on the
ex-dividend date.
C. 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 ("Internal Revenue Code"). Thus, the Fund expects to be 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 intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of
securities whereby the seller agrees to repurchase the securities at a
mutually agreed upon date and price) the repurchase price of the securities
will generally equal the amount paid by the Fund plus a negotiated interest
amount. The seller under the repurchase agreement will be required to provide
securities ("collateral") to the Fund whose value will be maintained at an
amount not less than the repurchase price, and which generally will be
maintained at 101% of the repurchase price. The Fund monitors the value of
collateral on a daily basis, and if the value of collateral falls below
required levels, the Fund intends to seek additional collateral from the
seller or terminate the repurchase agreement. If the seller defaults, the
Fund would suffer a loss to the extent that the proceeds from the sale of the
underlying securities were less than the repurchase price. Any such loss
would be increased by any cost incurred on disposing of such securities. If
bankruptcy proceedings are commenced against the seller under the repurchase
agreement, the realization on the collateral may be delayed or limited.
Repurchase agreements entered into by the Fund will be limited to
transactions with dealers or domestic banks believed to present minimal
credit risks, and the Fund will take constructive receipt of all securities
underlying repurchase agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
E. The Fund may enter into forward foreign currency exchange contracts
("contracts") to settle portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain currency assets.
Contracts are recorded at market value and are marked-to-market daily.
Realized gains and losses arising from such transactions are included in net
realized gain (loss) on foreign currency related transactions. The Fund is
subject to the credit risk that the other party will not complete the
obligations of the contract.
F. The Fund distributes net investment income and net capital gains, if
any, annually. Distributions are determined in accordance with income tax
regulations. The significant differences between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulations are
<PAGE>
Page 17
primarily due to the differing treatment of 12b-1 expenses prior to
April 1995 and foreign currency gains and losses.
(2.) Capital Share Transactions
The Trust agreement 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:
Year Ended October 31,
1995 1994
-----------------------------------------------------------------------------
Shares sold 13,738,533 10,107,902
Shares redeemed (11,918,556) (8,857,902)
Shares issued in reinvestment of
dividends and distributions 3,996,685 9,186,809
-----------------------------------------------------------------------------
Net increase 5,816,662 10,436,809
-----------------------------------------------------------------------------
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Under the Distribution Plan, the Fund pays Keystone Investment
Distributors Company (formerly Keystone Distributors, Inc.) ("KIDC"), the
Fund's principal underwriter and a wholly-owned subsidiary of Keystone,
amounts which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDC generally pays brokers or others a commission equal to 4.00% of the
price paid to the Fund for each sale of Fund shares as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of shares
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent Fund shares purchased prior to January 1, 1992 are redeemed
within four calendar years of original issuance, the Fund may be eligible to
receive a deferred sales charge from the investor as partial reimbursement
for sales commissions previously paid on those shares. This charge is based
on declining rates, which begin at 4.00%, applied to the lesser of the net
asset value of shares redeemed or the total cost of such shares.
The Distribution Plan provides that the Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.3125% of the Fund's average
daily net assets for any calendar quarter (approximately 1.25% annually)
occurring after the inception of the Distribution Plan. A rule of the
National Association of Securities Dealers, Inc. ("NASD Rule") limits the
annual expenditures which the Fund may incur under the Distribution Plan to
1.00% of which 0.75% may be used to pay such distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD Rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25%
of gross share sales since the inception of the Fund's Distribution Plan,
plus interest at the prime rate plus 1.0% on unpaid amounts thereof (less any
contingent deferred sales charges paid by the shareholders to KIDC).
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC intends to seek full payment of such
charges from the Fund (together with annual interest thereon at the prime
rate plus one percent) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC subsequent to January 1, 1992.
Commencing on July 8, 1992, contingent deferred sales charges applicable
to shares of the Fund issued
<PAGE>
Page 18
Keystone Strategic Growth Fund (K-2)
(formerly Keystone Custodian Fund, Series K-2)
after January 1, 1992 have, to the extent permitted by
the NASD Rule, been paid to KIDC rather than to
the Fund.
During the year ended October 31, 1995, the Fund paid KIDC $4,584,433
under its Distribution Plan. The amount paid by the Fund under its
Distribution Plan, net of deferred sales charges, was $4,580,713 (1.0% of the
Fund's average daily net asset value during the year). During the year ended
October 31, 1995, KIDC received $1,287,663 after payments of commissions on
new sales to dealers and others of $4,366,474.
Under a rule of the NASD, the maximum unreimbursed amounts for which KIDC
may seek payment from the Fund under its Distribution Plan is $1,629,795
(0.33% of the Fund's net asset value as of October 31, 1995).
(3.) Securities Transactions
Purchases and sales of investment securities (including proceeds received at
maturity) for the year ended October 31, 1995, were as follows:
Cost of Purchases Proceeds from Sales
- ------------------------------------------------------------------
Portfolio securities $ 624,915,709 $ 577,244,985
Short-term investments 8,858,314,839 8,908,567,839
- ------------------------------------------------------------------
$9,483,230,548 $9,485,812,824
- ------------------------------------------------------------------
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily. The
management fee is determined by applying percentage rates, that start at
0.70% and declines as net assets increase, to 0.35% per annum, to the net
asset value of the Fund. KMI has entered into an Investment Advisory
Agreement with Keystone, under which Keystone provides investment advisory
and management services to the Fund and receives for its services an annual
fee representing 85% of the management fee received by KMI. During the year
ended October 31, 1995, the Fund paid or accrued to KMI investment management
and administrative services fees of $2,799,544 which represented 0.61% of the
Fund's average net assets. Of such amount paid to KMI, $2,379,612 was paid to
Keystone for its services to the Fund.
During the year ended October 31, 1995, the Fund paid or accrued $24,342
to KII for certain accounting services and $1,296,268 to KIRC for transfer
agent services.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended October 31, 1995, the Fund paid custody fees in
the amount of $247,877 and received a credit of $64,847 pursuant to the
expense offset arrangement, resulting in a total expense of $312,724. The
assets deposited with the custodian under the expense offset arrangement
could have been invested in income-producing assets.
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS (Unaudited)
For the fiscal year ended October 31, 1995 a capital gain distribution of
$0.60 per share was paid, all of which is considered long term. The
distribution is taxable to shareholders in the year in which received by them
or credited to their accounts.
In January 1996, we will send you complete information on the
distributions paid during the calendar year to help you in completing your
federal tax return.
<PAGE>
Page 19
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Strategic Growth Fund (K-2)
We have audited the accompanying statement of assets and liabilities of
Keystone Strategic Growth Fund (K-2) (formerly Keystone Custodian Fund,
Series K-2), including the schedule of investments, as of October 31, 1995,
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 October 31, 1995 by correspondence with the custodian
and brokers. An audit 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 Strategic Growth Fund (K-2) as of October 31, 1995, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the ten-year period then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 8, 1995
<PAGE>
[back cover]
KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Exempt Trust
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 Keystone funds, contact your
financial adviser or call Keystone.
[logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
K-2-AR-12/95 [recycled symbol]
33M
[front cover]
KEYSTONE
[photo--man and dog fishing]
STRATEGIC
GROWTH FUND (K-2)
[logo]
ANNUAL REPORT
OCTOBER 31, 1995
