Keystone Strategic Growth Fund (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 six-month period which ended
April 30, 1996.
Performance
For the six-month period which ended April 30, 1996, your Fund returned
7.35%. For the same period, the Standard & Poor's 500 Index (S&P 500)
returned 13.76%. For the twelve-month period which ended April 30, 1996, your
Fund returned 24.00%. For the same period, the S&P 500 returned 30.21%.
Strategic Growth Fund's six-month return, while disappointing when compared
to its longer term results, reflected short-term price swings in a
challenging market environment. The period was characterized by stronger-
than-expected economic growth, rising long-term interest rates and
fluctuating stock prices. These factors, combined with lower earnings
forecasts for some companies, introduced an element of uncertainty to the
market that resulted in price declines for some of your Fund's holdings
during the six-month period.
In managing your Fund, we employ a conservative approach to investing in a
broad range of growth companies. We seek companies that we believe should
benefit from positive economic growth. Our objective is to deliver superior
returns over the long run. At the end of the period, your Fund's investments
were diversified across many industries and in several countries.
Our Stock Selection Process
We maintain a disciplined approach to investing that begins with the setting
of investment policy. This policy is based upon an evaluation of economic and
market trends. Within this context, we seek companies that we believe have
leading market positions, strong growth records, good managements, and solid
finances. We seek to invest in the top growth companies in a broad range of
industries.
Our Outlook
Looking ahead, we believe the environment is healthy for the stocks of growth
companies. We think these companies have the ability to increase their
profits in an environment of low inflation and moderately increasing economic
growth. Our overall outlook for the market is favorable, although we do not
rule out the possibility of periodic corrections in stock prices. Lessons of
the past lead us to view short term corrections as opportunities for the
patient investor.
Because we are optimistic about the long-term prospects for growth stocks, we
encourage you to invest regularly, diversify your investments, and take a
long-term perspective when evaluating your Fund. Your investment advisor can
help you with this strategy.
(continued on next page)
1
<PAGE>
Keystone Strategic Growth Fund (K-2)
We appreciate your continued support of Keystone Strategic Growth Fund (K-2).
If you have any questions or comments about your investment, please feel free
to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
June 1996
[PHOTO] [PHOTO]
Albert H. Elfner, III George S. Bissell
[logo] DALBAR Dalbar Key Honors
HONORS COMMITMENT TO Honoring Commitment to Excellence
INVESTORS Keystone was recently recognized by Dalbar, an
1995 independent mutual fund rating organization, for
demonstrating a commitment to serving the needs of
customers. The award is intended to distinguish
companies who are committed to investors and have a
proven ability to provide good service.
[Graphic: Telephone Receiver with cord hanging]
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear Keystone portfolio
managers discuss their latest strategies. You can also listen to Keystone's
overall market outlook from James McCall, Chief Investment Officer. The
service is available 24 hours a day, seven days a week and updated at least
monthly.
Keystone Investment Insight Lin 1-800-346-3858, Press 2
[Graphic: Telephone (ringing)]
2
<PAGE>
A Discussion With
Your Fund Manager
[Photo Maureen E. Cullinane]
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 portfolio managers Margery C. Parker
and Judith A. Warners, Ms. Cullinane focuses on selecting
companies with favorable earnings potential.
Q What was the economic environment like during the six-month period?
A The economic environment changed during the period. For most of 1995,
economic growth was slow and inflation remained at a moderate level. In
this slow-growth environment, the Federal Reserve Board lowered short-term
interest rates in December 1995 and again in January 1996. As we moved
further into 1996, however, we began to see indications that the economy
was stronger than had previously been thought. The stronger-than-expected
economic data caused long-term interest rates to rise and raised concerns
that inflation could heat up.
Q Did the shift in the economy affect the market environment for growth
stocks?
A There was uncertainty among investors in the first four months of 1996. A
stronger economy, concerns about higher interest rates, and weaker
corporate earnings forecasts made investors more cautious. Some stocks
became more vulnerable in this environment and underperformed. However, the
general trend for stock prices was positive during the six-month period.
Q How did you manage the Fund in this environment?
A We maintained our conservative approach in selecting growth stocks. But, as
uncertainties about the economy and the market increased at the beginning
of 1996, we attempted to reduce the Fund's exposure to more volatile
issues. This meant reducing our holdings of primarily technology stocks at
an unfavorable time. We invested most of the proceeds in stocks of
established, "blue chip" companies.
- -------------------------------------------------------------------------------
Fund Profile
Objective: Seeks capital growth from a broad spectrum of domestic and foreign
securities.
Commencement of investment operations: September 11, 1935
Number of stocks: 74
Net assets: $507 million
Newspaper symbol: "StrGrK2"
- -------------------------------------------------------------------------------
3
<PAGE>
Keystone Strategic Growth Fund (K-2)
- -------------------------------------------------------------------------------
Your Fund Invests In . . .
(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
- -------------------------------------------------------------------------------
Despite this difficult environment, we continued to maintain a diversified
portfolio by investing in small-, mid-, and large-cap stocks in several
industries. We believe this diversification and our flexibility to invest in
any area of the market can provide the potential for attractive returns for
investors with long term investment horizons.
Many of the stocks of established companies that we added were in "cyclical"
industries--businesses that tend to fluctuate with the growth of the economy.
Our investments in cyclical stocks were primarily in the chemical, paper, and
energy industries.
Q What were some of the cyclical companies in which you invested?
A In the chemical industry, we added Morton International to the portfolio.
While best known for its salt operations, Morton also produces specialty
chemicals, such as coatings and adhesives. The company is the market leader
in airbag inflators. We believe Morton will benefit over the next few years
as the automotive industry expands the use of airbags to passenger
compartment and side impact airbags. In the paper sector, we added
Williamette Industries and Champion International. We expect both of these
companies to report stronger earnings over the next 12-18 months.
Q . . . and in the energy sector?
A We added to our holdings of oil, energy service, and natural gas stocks.
Higher oil prices have benefitted many of the large oil companies such as
Exxon and Mobil. In the energy services area, companies such as ENSCO have
benefited from an uptick in capital investment. Because energy companies
underinvested in capital equipment over the years, demand for drill bits,
rigs and other oil field service equipment has been strong. We also
invested in Anadarko, a natural gas company that we believe should profit
from increased exploration in new natural gas fields.
Q You added a number of food companies to the portfolio. Why were these
attractive?
A Food companies accounted for more than 6% of the Fund's net assets. The
Fund had been underweighted in this area, and increasing its exposure in
the food category was part of our diversification strategy. In addition, we
believe that many food stocks were undervalued. We added Pepsi and Nabisco
to the portfolio.
Q You reduced the Fund's holdings of technology stocks from 27% to 12% of net
assets as of April 30, 1995. Why?
A For most of 1995, we emphasized selected technology stocks which provided
handsome returns for much of the year. Late in 1995, however, earnings for
many technology companies fell short of expectations. We were fortunate
that we had already reduced the Fund's exposure to commodity semiconductors
and computer hardware manufacturers.
Top 5 Industries
as of April 30, 1996
Percentage of
Industry net assets
-------------------------------------
Finance 8.5
-------------------------------------
Drugs 7.7
-------------------------------------
Capital goods 6.7
-------------------------------------
Foods 6.2
-------------------------------------
Software services 5.2
-------------------------------------
4
<PAGE>
Top 10 Holdings
as of April 30, 1996
Percentage of
Stock Industry net assets
-----------------------------------------------------------
General Electric Capital goods 2.8
-----------------------------------------------------------
Warner Lambert Drugs 2.8
-----------------------------------------------------------
Exxon Oil 2.6
-----------------------------------------------------------
ENSCO International Oil services 2.4
-----------------------------------------------------------
Mobil Oil 2.3
-----------------------------------------------------------
Anadarko Petroleum Natural gas 2.2
-----------------------------------------------------------
System Software
Associates Software 2.1
-----------------------------------------------------------
SmithKline Beecham Drugs 2.0
-----------------------------------------------------------
Thermo Electron Business services 1.9
-----------------------------------------------------------
Digital Equipment Office products 1.8
-----------------------------------------------------------
Q At 5% of net assets on April 30, 1996, software companies were the Fund's
fifth largest weighting. Were software stocks unaffected by the weakness in
the technology sector?
A Certain software companies were not affected by the weakness in technology
stocks. Primarily, these were companies that have created products that add
value to existing technology. In selecting software stocks for the
portfolio, we sought companies that were part of this "value-added" theme,
and they performed well. One such business, BMC Software, produces software
for client server networks. Its products help manage, monitor and increase
the efficiency of databases, applications and networks.
Q Financial stocks accounted for the Fund's largest position on April 30,
1996. Did you make any changes in this area?
A We reduced the weighting in financial stocks from 14% to 8.5% of net
assets. We took profits in companies that we believed had become fairly
valued. These included Merrill Lynch, Golden West, and Greenpoint
Financial. We continue to favor financial stocks and believe that in the
long term financial institutions should benefit from industry
consolidation, an increase in the growth of their loan portfolios, and an
improved interest rate environment.
Q Are there any new themes in the portfolio?
A We increased foreign investments in the portfolio from 9% of net assets to
15% by April 30, 1995. We invested in selected stocks in Japan, Europe, and
Brazil.
In Japan we emphasized large exporting companies such as Toyota and Sony.
As the Japanese yen weakened vis-|f2-vis the U.S. dollar, we believed these
companies would benefit from a stronger export market. A weaker yen should
make Japanese products less expensive abroad. We believe our Japanese
stocks should benefit also from stronger economic growth in Japan.
Our European investments focused on companies in the United Kingdom and the
Netherlands. In the U.K. we added Compass Group PLC, an international
catering company, which provides food services to businesses, healthcare
establishments and airports throughout Europe. Compass has a record of
stable growth in earnings. Another U.K. investment is Pearson, a multimedia
company whose operations include periodicals such as The Economist and The
Financial Times as well as Thames television and Mme. Tussaud's. In the
Netherlands, we invested in Wolters Kluwer, a publisher of business, legal
and tax journals.
We added two Brazilian banks to the portfolio--Banco ITAU and Bradesco. We
are optimistic about the Brazilian economy. Economic growth has been strong
and inflation is under control.
Q What is your outlook?
A We are cautiously optimistic. We believe that the U.S. economy will
continue to grow moderately, and inflation will remain under control. We
also think that interest rates will remain relatively low. Our overall
5
<PAGE>
Keystone Strategic Growth Fund (K-2)
Your Fund's Performance
- --------------------------[Mountain Chart Plot Points]-------------------------
Initial Reinvested
Investment Distributions
4/86 10000 10000
4/87 10192 12343
4/88 7085 10687
4/89 7944 12419
4/90 7989 13217
4/91 8384 15343
4/92 8395 17591
4/93 8881 19639
4/94 9198 22287
4/95 8486 23193
4/96 9322 28760
A $10,000 investment in Keystone Strategic Growth Fund (K-2) made on April 30,
1986 with all distributions reinvested was worth $28,760 on April 30, 1996. Past
performance is no guarantee of future results.
- -------------------------------------------------------------------------------
outlook for the stock market is favorable, although we do not rule out the
possibility of a short-term correction. Stocks have produced strong gains
over the past fifteen months and prices are relatively high. Many
corporations have issued cautionary reports regarding their profit
potential. These conditions could generate a short-term pull back in
prices. In the long-term, however, our outlook is very positive. We believe
that the established growth companies in which your Fund invests should
reward those who take a long-term approach to investing.
Six-Month Performance as of April 30, 1996
==========================================
Total return* 7.35%
Net asset value 10/31/95 $ 8.05
4/30/96 $ 8.25
Distribution $ 0.02
Capital gains $ 0.35
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of April 30, 1996
================================================
If you If you did
Cumulative Total Return redeemed not redeem
1-year 21.00% 24.00%
5-year 87.44% 87.44%
10-year 187.60% 187.60%
Average Annual Total Return
1-year 21.00% 24.00%
5-year 13.39% 13.39%
10-year 11.14% 11.14%
The "if you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge for those investors who sold Fund shares after one
calendar year. Investors who retained their fund investment earned the
returns reported in the second column of the table.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone 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.
6
<PAGE>
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for managing
a portfolio's assets prudently and making appropriate investment decisions,
such as which securities to buy, hold and sell, based on the investment
objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or bonds)
that is exchangeable for a set number of another security type (usually
common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund. The
NAV per share is determined by subtracting a fund's total liabilities from
its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
7
<PAGE>
Keystone Strategic Growth Fund (K-2)
SCHEDULE OF INVESTMENTS--April 30, 1996
(Unaudited)
==============================================================
Market
Shares Value
COMMON STOCKS (86.3%)
BRAZIL
Finance (1.5%)
Banco Bradesco SA 430,200,000 $ 4,856,607
Banco Itau SA 6,441,000 2,519,008
- --------------------------------------------------------------
7,375,615
- --------------------------------------------------------------
JAPAN
Appliances and Furnishings (1.3%)
Sony Corp. 100,000 6,500,645
- --------------------------------------------------------------
Automotive (2.2%)
Fuji Heavy Industry 1,270,000 5,997,610
Toyota Motor Corp 230,000 5,255,007
- --------------------------------------------------------------
11,252,617
- --------------------------------------------------------------
Capital Goods (2.2%)
Mori Seiki Co. 220,000 5,026,528
Sodick Co. 460,000 5,892,644
- --------------------------------------------------------------
10,919,172
- --------------------------------------------------------------
Consumer Goods (1.1%)
Victor Co. of Japan 398,000 5,516,945
- --------------------------------------------------------------
Drugs (1.1%)
Taisho Pharmaceutical 260,000 5,691,889
- --------------------------------------------------------------
Electronics (1.1%)
Mitsubishi Electric Co. 700,000 5,514,077
- --------------------------------------------------------------
TOTAL JAPAN 45,395,345
- --------------------------------------------------------------
NETHERLANDS
Advertising & Publishing (1.0%)
Wolters Kluwer N.V. (c) 56,719 6,199,865
- --------------------------------------------------------------
TAIWAN
Finance (0.1%)
Chronicle 2001 Mutual Fund (c) 1,653,374 722,826
- --------------------------------------------------------------
UNITED KINGDOM
Business Services (1.1%)
Compass Group PLC 675,000 5,558,106
- --------------------------------------------------------------
Miscellaneous (1.0%)
Pearson PLC 500,000 $ 5,283,757
- --------------------------------------------------------------
TOTAL UNITED KINGDOM 10,841,863
- --------------------------------------------------------------
UNITED STATES
Aerospace (1.1%)
Boeing Co. (The) 69,300 5,691,263
- --------------------------------------------------------------
Amusement (1.9%)
Disney (Walt) Co. 50,000 3,100,000
HFS, Inc. (c) 64,000 3,288,000
Harrahs Entertainment Inc. 100,000 3,450,000
- --------------------------------------------------------------
9,838,000
- --------------------------------------------------------------
Automotive (2.6%)
Chrysler Corp. 45,000 2,823,750
Ford Motor Co. 80,000 2,870,000
Goodyear Tire and Rubber Co. 50,000 2,606,250
Lear Seating Corp. (c) 150,000 4,950,000
- --------------------------------------------------------------
13,250,000
- --------------------------------------------------------------
Building (0.8%)
Fastenal Co. 100,000 3,843,750
- --------------------------------------------------------------
Business Services (3.2%)
Molten Metal Tecnology, Inc. 200,000 6,400,000
Thermo Electron Corp. 160,000 9,860,000
- --------------------------------------------------------------
16,260,000
- --------------------------------------------------------------
Capital Goods (4.5%)
AGCO Corp. 333,000 8,408,250
General Electric Company 185,000 14,337,500
- --------------------------------------------------------------
22,745,750
- --------------------------------------------------------------
Chemicals (1.9%)
DuPont E. I. DeNemours and Co. 60,000 4,822,500
Morton International Inc. 140,000 4,952,500
- --------------------------------------------------------------
9,775,000
- --------------------------------------------------------------
Consumer Goods (3.2%)
CUC International, Inc. (c) 262,600 8,632,975
Estee Lauder Companies, Inc.
(The) 211,900 7,760,838
- --------------------------------------------------------------
16,393,813
- --------------------------------------------------------------
8
<PAGE>
Drugs (6.6%)
Gilead Sciences, Inc. 186,300 $ 5,728,725
Rhone Poulenc Rorer Inc. 55,900 3,465,800
Smithkline Beecham PLC 190,000 10,260,000
Warner-Lambert Co. 125,000 13,968,750
- --------------------------------------------------------------
33,423,275
- --------------------------------------------------------------
Electronics Products (1.0%)
Fluor Corp. 75,000 4,959,375
- --------------------------------------------------------------
Finance (6.9%)
Bank of Boston Corp. 181,700 8,789,738
Bankamerica Corp. 53,700 4,067,775
Federal Home Loan Mortgage
Corp. 90,000 7,503,750
Household International Inc. 46,800 3,235,050
NationsBank Corp. 46,800 3,732,300
Norwest Corp. 212,400 7,672,950
- --------------------------------------------------------------
35,001,563
- --------------------------------------------------------------
Foods (6.2%)
PanAmerican Beverages Inc. 130,000 5,703,750
Conagra, Inc. 64,800 2,502,900
Nabisco Holdings Corp. 205,000 6,278,125
Pepsico Inc. 80,000 5,080,000
Phillip Morris Co., Inc. 77,500 6,984,688
Sara Lee Corp. 150,000 4,650,000
- --------------------------------------------------------------
31,199,463
- --------------------------------------------------------------
Metals & Mining (1.0%)
Aluminum Co. of America 40,000 2,495,000
Inco Ltd. 80,000 2,690,000
- --------------------------------------------------------------
5,185,000
- --------------------------------------------------------------
Natural Gas (2.2%)
Anadarko Petroleum Corp. 190,000 11,067,500
- --------------------------------------------------------------
Office Products (3.6%)
Digital Equipment Corp. 155,000 9,261,250
EMC Corp. (c) 445,300 9,128,650
- --------------------------------------------------------------
18,389,900
- --------------------------------------------------------------
Oil (4.9%)
Exxon Corp. 155,000 $13,175,000
Mobil Corp. 100,000 11,500,000
- --------------------------------------------------------------
24,675,000
- --------------------------------------------------------------
Oil Services (4.8%)
ENSCO International, Inc. (c) 401,100 12,033,000
Schlumberger, Ltd. 100,437 8,863,565
Tidewater, Inc. 27,600 1,173,000
Weatherford Enterra Inc. 67,700 2,386,425
- --------------------------------------------------------------
24,455,990
- --------------------------------------------------------------
Paper & Packaging (1.7%)
Ball Corp. 80,000 2,490,000
Champion International Corp. 36,200 1,746,650
Willamette Industries Inc. 67,900 4,192,825
- --------------------------------------------------------------
8,429,475
- --------------------------------------------------------------
Restaurants (1.0%)
McDonald's Corp. 100,000 4,787,500
- --------------------------------------------------------------
Retail (3.2%)
Federated Department Stores 100,000 3,337,500
GAP Inc. 125,000 3,765,625
Staples Inc. 472,050 8,939,447
- --------------------------------------------------------------
16,042,572
- --------------------------------------------------------------
Software Services (5.2%)
BMC Software, Inc. (c) 125,000 7,632,813
Microsoft Corp. (c) 70,000 7,923,124
System Software Associates,
Inc. 450,000 10,659,375
- --------------------------------------------------------------
26,215,312
- --------------------------------------------------------------
Telecommunications (4.6%)
AT&T Corp. 150,000 9,187,500
Cognex Corp. 200,100 5,302,650
GTE Corp. 105,000 4,554,374
Lucent Technologies Inc. 116,800 4,102,600
- --------------------------------------------------------------
23,147,124
- --------------------------------------------------------------
(continued on next page)
9
<PAGE>
Textiles (0.5%)
Jones Apparel Group Inc. 51,500 $ 2,645,813
- --------------------------------------------------------------
TOTAL UNITED STATES 367,422,438
- --------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$387,268,146) 437,957,952
==============================================================
Maturity
Value
==============================================================
SHORT-TERM INVESTMENTS
Repurchase Agreement (8.7%)
Investment in repurchase
agreements, in a joint
trading account, purchased
4/30/96, 5.34%, maturing
5/1/96 (a) $43,924,515 43,918,000
- --------------------------------------------------------------
Federal Home Loan Mortgage
Corp. (4.7%)
Federal Home Loan Mortgage
Discount Notes purchased
4/30/96, 5.30%, maturing
5/1/96 24,074,000
- --------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost--$67,992,000) 67,992,000
==============================================================
TOTAL INVESTMENTS
(Cost $455,260,146) 505,949,952
FOREIGN CURRENCY HOLDINGS
(Cost $5,854) (0.1%) (b) 5,888
OTHER ASSETS AND LIABILITIES--
NET (.2%) 1,035,709
- --------------------------------------------------------------
NET ASSETS (100%) $506,991,549
==============================================================
See Notes to Financial Statements.
NOTES TO SCHEDULE OF INVESTMENTS:
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at April 30, 1996.
(b) 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.
(c) Non-income-producing security.
10
<PAGE>
SCHEDULE OF FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
U.S. Net
In Value at Unrealized
Exchange Exchange April 30, Appreciation/
Date for U.S. $ 1996 (Depreciation)
- --------------------------------------------------------------------------------
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
- -----------------------------------------
Pound
5/20/96 823,431 Sterling $ 1,275,000 $ 1,239,095 $ 35,905
7/25/96 1,812,364,000 Japanese Yen 17,200,000 17,526,955 (326,955)
----------
Net Unrealized Depreciation on Forward
Foreign Currency Exchange Contracts ($ 291,050)
==========
See Notes to Financial Statements.
11
<PAGE>
Keystone Strategic Growth Fund (K-2)
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended October 31,
Six
Months
Ended
April
30,
1996 1995 1994 1993 1992 1991
=============================================================================================
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Net asset value
beginning of
period $8.05 $7.54 $9.00 $7.60 $8.18 $6.52
- ---------------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment
income (loss) (0.02) (0.02) 0 (0.06) (0.01) 0.08
Net gains
(losses) on
investments
and
foreign
currency
related
transactions 0.59 1.13 0.23 1.89 0.42 2.24
- ---------------------------------------------------------------------------------------------
Total from
investment
operations 0.57 1.11 0.23 1.83 0.41 2.32
- ---------------------------------------------------------------------------------------------
Less
distributions
from:
Net investment
income (0.02) 0 0 0 (0.01) (0.16)
In excess of net
investment
income 0 0 0 (0.03) (0.05) 0
Net realized
gains on
investments
and
foreign
currency
related
transactions (0.35) (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 (0.03) 0 0 0
- ---------------------------------------------------------------------------------------------
Total
distributions (0.37) (0.60) (1.69) (0.43) (0.99) (0.66)
- ---------------------------------------------------------------------------------------------
Net asset value
end of period $8.25 $8.05 $7.54 $9.00 $7.60 $8.18
=============================================================================================
Total return (a) 7.35% 15.05% 3.55% 24.97% 6.38% 38.77%
Ratios/supplemental
data
Ratios to
average net
assets:
Total expenses
(b) 1.95% 2.01% 1.73% 1.83% 1.58% 1.52%
Net investment
income (loss) (0.63%) (0.25%) (0.17%) (0.57%) (0.15%) 0.99%
Portfolio
turnover rate 89% 140% 68% 65% 62% 86%
Average
Commission
rate paid $ 0.0026 N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Net assets end
of period
(thousands) $506,992 $491,610 $416,684 $403,693 $321,794 $339,359
=============================================================================================
</TABLE>
See Notes to Financial Statements.
(a) Excluding contingent deferred sales charge (CDSC).
(b) The annualized expense ratio includes indirectly paid expenses for the
period ended April 30, 1996. Excluding indirectly paid expenses, the
annualized expense ratio would have been 1.94%.
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
April 30, 1996 (Unaudited)
=================================================================
Assets:
Investments at market value: (Note 1)
Long-term investments (identified cost--
$387,268,146) $437,957,952
Short term investments 67,992,000
Foreign currency holdings (identified cost--
$5,854) (Note 1) 5,888
- -----------------------------------------------------------------
Total investments and foreign currency
holdings (identified cost $455,266,000) 505,955,840
- -----------------------------------------------------------------
Cash 925
Receivable for:
Investments sold 3,058,871
Fund shares sold 358,142
Dividends and Interest 387,207
Refundable foreign tax withholding 72,908
Prepaid expenses 58,263
- -----------------------------------------------------------------
Total assets 509,892,156
=================================================================
Liabilities:
Payable for:
Unrealized depreciation on open currency
contracts (Note 1 ) 291,050
Investments purchased 2,280,004
Fund shares redeemed 155,414
Other accrued expenses 174,139
- -----------------------------------------------------------------
Total liabilities 2,900,607
- -----------------------------------------------------------------
Net assets $506,991,549
=================================================================
Net assets represented by: (Notes 1 and 3)
Paid-in capital $383,889,423
Accumulated distributions in excess of net
investment income (Note 1) (2,176,502)
Accumulated net realized gains (losses) on
investment and foreign currency related
transactions 74,875,175
Net unrealized appreciation (depreciation) on
investments, foreign currency holdings and
other assets and liabilities 50,694,503
Open currency contracts (291,050)
- -----------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($8.25 a share
on 61,430,350 shares outstanding)
(Note 2) $506,991,549
=================================================================
STATEMENT OF OPERATIONS--
Six Months Ended April 30, 1996 (Unaudited)
============================================================================
Investment income: (Note 1)
Dividends (Net of foreign withholding taxes
of $66,250) $ 2,763,261
Interest 721,309
- ----------------------------------------------------------------------------
Total income 3,484,570
- ----------------------------------------------------------------------------
Expenses: (Notes 2 and 4)
Management fee $ 1,512,402
Transfer Agent fees 647,266
Accounting, auditing and legal 31,223
Custodian fees 158,489
Printing 15,842
Trustees' fees and expenses 18,379
Distribution Plan expenses 2,535,699
Registration fees 21,551
Miscellaneous expenses 7,736
- ----------------------------------------------------------------------------
Total expenses 4,948,587
Less: Expenses paid indirectly
(Note 4) (27,821)
- ----------------------------------------------------------------------------
Net expenses 4,920,766
- ----------------------------------------------------------------------------
Net investment loss (1,436,196)
- ----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions: (Notes 1 and 3)
Net realized gain (loss) on:
Investments 70,487,532
Foreign currency related transactions (337,810)
- ----------------------------------------------------------------------------
Net realized gain on investments and
foreign currency related transactions
(Notes 1 and 3) 70,149,722
- ----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments, foreign currency holdings and
other assets
and liabilities (32,286,749)
Open currency contracts (291,050)
- ----------------------------------------------------------------------------
Net change in unrealized appreciation or
depreciation (32,577,799)
- ----------------------------------------------------------------------------
Net gain (loss) on investments and
foreign currency related transactions 37,571,923
- ----------------------------------------------------------------------------
Net increase in net assets resulting from
operations $ 36,135,727
============================================================================
13
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Six Months
Ended Year Ended
April 30, October 31,
1996 1995
============================================================================
(Unaudited)
Operations:
Net investment loss (Note 1) ($ 1,436,196) ($ 1,153,028)
Net realized gain on investments and
foreign currency related transactions
(Notes 1 and 3) 70,149,722 60,454,842
Net change in unrealized appreciation or
depreciation (32,577,799) 8,987,189
- ----------------------------------------------------------------------------
Net increase in net assets resulting
from operations 36,135,727 68,289,003
- ----------------------------------------------------------------------------
Distributions to shareholders from:
(Note 1)
Net investment income (1,219,287) 0
Net realized gain on investments and
foreign currency related transactions (21,340,195) (34,582,438)
- ----------------------------------------------------------------------------
Total distributions to shareholders (22,559,482) (34,582,438)
- ----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Proceeds from shares sold 45,774,380 101,411,115
Payments for shares redeemed (64,153,344) (91,086,308)
Net asset value of shares issued in
reinvestment of dividends
and distributions 20,184,450 30,894,379
- ----------------------------------------------------------------------------
Net increase in net assets resulting
from capital share transactions 1,805,486 41,219,186
- ----------------------------------------------------------------------------
Total increase in net assets 15,381,731 74,925,751
- ----------------------------------------------------------------------------
Net assets:
Beginning of period 491,609,818 416,684,067
- ----------------------------------------------------------------------------
End of period [including accumulated
distributions in excess of net investment
income of ($2,176,502)--1996 and
undistributed net investment income of
$478,981--1995] $506,991,549 $491,609,818
============================================================================
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Strategic Growth Fund, K-2 (the "Fund") is an open-end diversified
management investment company. The Fund was created under Pennsylvania law as
a common law trust. Keystone Management, Inc. ("KMI") is the Fund's
Investment Manager and Keystone Investment Management Company ("Keystone") is
the Fund's Investment Adviser. The Fund's investment objective is to provide
shareholders with growth of capital.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation predominately owned by
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
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. 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. All other
investments are valued at market value or where market quotations are not
readily available at fair value as determined in good faith by the Board of
Trustees.
Reliable market quotations are generally not readily available for purposes
of valuing fixed income securities. As a result, depending on the particular
securities owned by the Fund it is likely that most of the valuations for
such securities will be based upon their fair value determined under
procedures approved by the Board of Trustees. The Board of Trustees has
authorized the use of a pricing service to determine the fair value of the
Fund's fixed income securities and certain other securities. Securities for
which market quotations are readily available are valued on a consistent
basis at that price quoted which, in the opinion of the Board of Trustees or
the person designated by the Board of Trustees to make the determination,
most nearly represents the market value of the particular security. Any
securities for which market quotations are not readily available or other
assets are valued on a consistent basis at fair value as determined in good
faith using methods prescribed by the Board of Trustees.
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
15
<PAGE>
Keystone Strategic Growth Fund (K-2)
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. Net unrealized foreign exchange gains/losses are a component of
unrealized appreciation/depreciation of investments. 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.
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. Gains and losses on foreign currency related
transcations are treated as ordinary income for federal income tax purposes.
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 by the Fund 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 to 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
16
<PAGE>
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 by the 15th day of December
following each fiscal year, and net capital gains, if any, at least annually.
Distributions are determined in accordance with income tax regulations.
Distributions from taxable net investment income and net capital gains can
exceed book basis net income and net capital gains. The significant
differences between financial statement amounts available for distribution
and distributions made in accordance with income tax regulations are
primarily due to the differing treatment of 12b-1 expenses prior to April
1995, foreign currency gains and losses and the classification of short term
capital gains for book and tax purposes.
(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:
Six Months
Ended Year Ended
April 30, 1996 October 31, 1995
- --------------------------------------------------------------------------------
Shares sold 5,689,579 13,738,533
Shares redeemed (7,946,007) (11,918,556)
Shares issued in reinvestment of
dividends and distributions 2,591,072 3,996,685
- --------------------------------------------------------------------------------
Net increase 334,644 5,816,662
================================================================================
The Fund bears some of the costs, as amended of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended. Under its Distribution Plan, the Fund pays Keystone
Investment Distributors Company ("KIDCO"), 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 paid by the Fund to KIDCO under
its Distribution Plan, and subject to the limitations discussed below, KIDCO
generally reallows to broker-dealers or others a commission equal to 4.00% of
the price paid for each Fund share sold as well as a shareholder service fee
at a rate of 0.25% per annum of the net asset value of shares maintained by
such recipients and outstanding on the books of the Fund for specified
periods.
The Distribution Plan provides that the Fund may expend up to 0.3125%
quarterly (approximately 1.25% annually) of the Fund's average daily net
asset value of its shares to pay distribution costs for sale of its shares
and to pay shareholder service fees. 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
17
<PAGE>
1.00% of the Fund's average daily net asset value of its share, of which
0.75% may be used to pay such distribution costs 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% per annum on unpaid amounts thereof (less any
contingent deferred sales charges paid by shareholders to KIDCO) remaining
unpaid from time to time.
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and service fees that exceed current annual maximum
payments permitted to be received by KIDCO from the Fund. KIDCO intends to
seek full payment of such charges from the Fund (together with annual
interest thereon at the prime rate plus 1.0%) 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 applicable to shares of the Fund are, to
the extent permitted by the NASD Rule, paid to KIDCO rather than to the Fund.
During the six months ended April 30, 1996, KIDCO received $215,311 in
contingent deferred sales charges. During the period the Fund paid KIDCO
$2,535,699 (0.50% of the Fund's average daily net asset value during the
period) under its Distribution Plan. During the period, KIDCO received
$877,561 after payments of commissions on new sales to dealers and others of
$1,658,138. Under the NASD Rule, the maximum uncollected amount for which
KIDCO may seek payment from the Fund under its Distribution Plan is
$1,506,672 (0.30% of the Funds net asset value as of April 30, 1996).
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities during the six months ended April 30, 1996 were
$431,061,515 and $503,862,680, respectively.
(4.) Investment Management Agreement and Other Transactions With Affiliates
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 payable 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 shares 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 six months ended April 30, 1996, the Fund paid or accrued to KMI
investment management and administrative services fees of $1,512,402, which
represented 0.60% of the Fund's average daily net assets on an annualized
basis. Of such amount paid to KMI, $1,285,542 was paid to Keystone for its
services to the Fund.
During the six months ended April 30, 1996, the Fund paid or accrued to KII
and KIRC $11,817 for certain accounting and printing services and $647,266
for transfer agent fees, respectively.
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended April 30, 1996, the Fund paid custody fees in the
amount of $158,489 and received a credit of $27,821 pursuant to the expense
offset arrangement resulting in a net expense of $130,668. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
18
<PAGE>
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your investment
by automatically reinvesting your Fund's distributions at net asset value
with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans, including
IRA, SEP-IRA, profit sharing, money purchase, and defined contribution plans.
For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
19
<PAGE>
[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 Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you
invest or send money. For a free prospectus on other Keystone funds, contact
your financial adviser or call Keystone.
[logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
K2-R-6/96
33.1M [recycle symbol]
KEYSTONE
[photo of adult and child walking on beach]
STRATEGIC
GROWTH FUND (K-2)
[logo]
SEMIANNUAL REPORT
APRIL 30, 1996
