ANNUAL REPORT
November 30, 1996
Key Mutual Funds
SBSF Fund
SBSF Convertible Securities Fund
SBSF Capital Growth Fund
Key Mutual Funds is a series investment company consisting of several
different portfolios, three of which are included in this annual report
(the "Funds"). Spears, Benzak, Salomon & Farrell, Inc. ("SBSF"), an indirect
wholly-owned subsidiary of KeyCorp, is the investment adviser to the Funds.
SBSF and Key Trust Company of Ohio, N.A., the Funds' custodian and also a
subsidiary of KeyCorp, receive fees from the Funds for their services.
The Funds are distributed by BISYS Fund Services, which is not affiliated
with SBSF, KeyCorp, any KeyBank or its affiliates.
Shares of the Funds are not deposits or other obligations of, or guaranteed
or endorsed by SBSF, any KeyBank, any of their affiliates or any other bank.
Shares of the Funds are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. An
investment in mutual fund shares is subject to investment risks, including
the possible loss of the principal amount invested.
This report is submitted for the general information of the shareholders of
the Funds. It is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus, which
includes information regarding the Funds' objectives and policies, experience
of its management, marketability of shares and other information.
Board of Directors
Edward P. Campbell, Director
President of Nordson Corporation
Westlake, Ohio
Eugene J. McDonald, Director
Executive Vice President for Asset Management of
Duke University and President of Duke Management Co.
Durham, North Carolina
Frank A. Weil, Director and Non-Executive Chairman
Chairman and Chief Executive Officer of
Abacus Associates, Inc.
New York, New York
Leigh A. Wilson, Director and President
Chairman and Chief Executive Officer of
Glenleigh International Limited
New York, New York
KEY MUTUAL FUNDS
Letter to Our Shareholders
Dear Shareholders:
We are pleased to present the Annual Report for the SBSF portfolios of the
Key Mutual Funds for the year ended November 30, 1996. In the pages that
follow, your portfolio managers discuss the investment strategies employed
and performance of the Funds. These commentaries, along with the related
financial data, provide comprehensive information about your investment in
the Funds.
We would like to share with you some recent product innovations of the
KeyFunds, designed to expand the scope of investment products available to
investors with different risk profiles. Called the KeyChoice Funds, these
"funds of funds" pursue their investment objectives by investing in a
specific mix of mutual funds. The underlying portfolios for the KeyChoice
Funds include portfolios of the Key Mutual Funds and an affiliated fund
group, the Victory Funds, which are also advised by a subsidiary of KeyCorp.
The following three KeyChoice Funds became available at the beginning
of the 1997 calendar year:
KeyChoice Growth Fund--seeks to provide growth of capital. The Fund
pursues its objective by investing primarily in stock funds.
KeyChoice Moderate Growth Fund--seeks to provide growth of capital
combined with a moderate level of current income. The Fund pursues its
objective by investing primarily in stock funds and, to a lesser extent,
in bond funds.
KeyChoice Income and Growth Fund--seeks to provide current income
combined with moderate growth of capital. This Fund invests primarily
in bond funds and, to a lesser extent, in stock funds.
For more information about the KeyChoice Funds, including charges
and expenses, request a prospectus by calling 1-800-KEY-FUND. Please read
the prospectus carefully before investing or sending money.
We encourage you to read the annual report carefully and to respond to us
with your comments. Thank you for choosing to invest in the KeyFunds.
/S/Leigh A. Wilson
Leigh A. Wilson
President, The KeyFunds
January 15, 1997
1996 in Review
The stock market offered something for investors of every persuasion in the
second half of the Funds' fiscal year: for the bears, a heart-stopping
correction in July, the sharpest such setback in two and a half years and for
the bulls, a spirited rebound that sent most market averages to record highs
as the year drew to a close.
Aided by a favorable bond market over the twelve months ended November
30, 1996, equities enjoyed good performance over the last twelve months,
with the Standard & Poor's 500 Index rising by more than 20%. Looking
ahead, stock market conditions may not be quite so hospitable, as a
much-anticipated economic slowdown appears to be underway.
SBSF Fund
The performance of the SBSF Fund was the product of a number of factors.
Perhaps the largest single factor was the SBSF Fund's large exposure
to the financial sector, which includes industries such as insurance
and banking. These industries accounted for 23.5% of the Fund's total
assets as of November 30, 1996. This sector outperformed the market
as a whole, and the SBSF Fund's overall performance benefited as fears
of a slowing economy led investors to bid up the shares of financial
companies in anticipation of falling interest rates. The Fund's second
largest holdings were in the energy and natural resources sector,
with oil and gas industries representing 13.6% of the Fund's assets
as of November 30, 1996. While it is difficult for this sector to
keep pace with an overall market that is rising so quickly and dramatically,
energy stocks performed well this year, as the price of both oil and
natural gas rose to levels not seen in several years. We believe that
this sector will represent a defensive investment that could outperform
the overall market if stocks in general decline. Finally, the Fund
has increased its exposure to technology companies to 11.7% as of
November 30, 1996, but has purposefully restricted its investments
in this sector to those companies whose expected earnings growth rates
exceed their P/E multiples.
SBSF Convertible Securities Fund
The unrelenting upward momentum of equity prices during the past twelve
months, as well as the late surge in the fixed income markets, provided
a highly favorable environment for the SBSF Convertible Securities
Fund. The scenario of rising interest rates in the initial months
of the year negatively impacted the Fund's performance. By mid-year,
however, the Fund's heavy weighting in the financial sector began
to contribute significantly to the Fund's performance as three such
investments were the subject of takeovers. The Fund's holdings in
oil and gas industries also benefited from rising energy prices. By
the end of the fiscal year, the Fund's long standing strategy of seeking
high yield in addition to capital appreciation positively affected
performance as investors began to search for securities that provided
above average current income. For the year ended November 30, 1996,
the Fund provided shareholders with a total return of 20.28%.
Overall portfolio composition of the Fund did not materially change
during the past year. The Fund's major weightings in financial and energy
sectors remained intact. Minor additions to the portfolio were made in
technology, capital goods and real estate. It is expected that these new
investments will provide yield support if the stock market suffers a setback,
while the seasoned issues that have been in the portfolio for some time are
expected to provide capital appreciation.
SBSF Capital Growth Fund
While the large cap sector of the stock market has outperformed small
stocks during the past year, we believe the six-year-old bull market
for emerging growth stocks remains intact. The peak in performance
occurred in the second calendar quarter and coincided with the peak in
growth of the Gross Domestic Product (GDP). Over the summer, the increase
in interest rates, with yields on the long treasury bonds crossing over
7% for the first time in a year, penalized small and mid-cap growth stocks
the most.
Investor anxiety also rose in response to a string of earnings disappointments
and election year jitters. With the latter concern behind us and our
expectation that S&P 500 profits will slow in 1997, mid-cap growth stocks,
with the potential to deliver earnings gains in excess of 25% and selling
at meaningful P/E discounts to the rest of the market, should attract
investors.
The fundamental characteristics of the portfolio are compelling. On average
the companies represented have shown earnings gains of over 50% in the latest
twelve months. The portfolio remains broadly diversified with over twenty
industry groups represented. A salient feature of each investment is a strong
product cycle as measured by robust unit volume growth. This quality should
continue to support premium valuations in a slow growth, low inflation
environment which we envision for the coming year. The Fund's emphasis
continues to be technology (computer software services and electronics) and
energy (oil and gas drillers and exploration companies).
The SBSF Capital Growth Fund maintains investments in small capitalization
companies. These investments have historically experienced greater price
volatility than their large capitalization counterparts.
The Outlook for 1997
The Labor Market: Job growth was one of the brightest stars in the
economy this past year, helping to drive unemployment to a seven-year
low of 5.1%. Reflecting the tight market, average hourly earnings
nudged to its highest rate of increase of the current expansion. This
helped boost consumer confidence throughout 1996.
Corporate Profitability: What's good for the employee has proven troublesome
for the employer, however, as competitive forces have prevented most
companies from passing these higher production costs on in the form
of higher prices, thereby squeezing profit margins. Margin deterioration
has also been aggravated by rising commodity costs, most notably energy.
As a result, profit growth decelerated sharply throughout 1996 and
even blue chip companies like AT&T and Coca-Cola warned analysts of
disappointing earnings.
Our Economic Forecast: We believe the sluggish profit growth of 1996
could lead to fewer new jobs and higher unemployment
in 1997, which could in turn depress income growth and limit consumption.
As a result, we believe real GDP growth is likely to slow to 1.0%-2.0%,
with a bias toward the lower end of this range. Despite higher labor
costs, inflation should moderate a bit, and we expect that the CPI
will be 2.7%, give or take a few basis points, throughout the next
12-18 months.
Interest Rates: Should our economic scenario prove correct, long-term
interest rates are likely to move lower in fiscal 1997, establishing
a new range of 6.25%-7.0%. Short-rates have room to move lower as
well, and we think the Federal Reserve may ease sometime in the first
half of the year.
The Stock Market: Given the pressure on corporate profits, these lower
interest rates may not necessarily lead to sustainably higher stock
prices. Moreover, lower rates do little to mitigate the heightened
risks businesses face in a decelerating economic climate. All in all,
we expect continued market volatility in fiscal 1997 and recommend
that investors bear this in mind when constructing their investment
portfolios.
Note: The views expressed in the 1996 in Review and Outlook for 1997
are through January 15, 1997 and are subject to change at any time
based on market, economic and other conditions.
<TABLE>
TOP 5 POSITIONS AT NOVEMBER 30, 1996
SBSF Fund<F1>
<CAPTION>
Market % of
Company Value $ Net Assets
<S> <C> <C>
1. American International Group, Inc. 9,200,000 7.8
2. Komag, Inc. 5,256,750 4.5
3. International Business Machines Corp. 4,781,250 4.0
4. PartnerRe Ltd. 4,728,750 4.0
5. Federal Home Loan Mortgage Corp. 4,227,250 3.6
<FN>
<F1> Each Fund's composition is subject to change as market conditions warrant.
</TABLE>
<TABLE>
SBSF Convertible Securities Fund<F1>
<CAPTION>
Market % of
Company Value $ Net Assets
<S> <C> <C>
1. Unocal Corp. 6.25%, Conv. Prfd. 3,990,000 4.9
2. Bankers Trust of NY Corp. 3,480,000 4.3
3. Centocor, Inc. Euro, 6.75%, 10/16/01 3,342,500 4.1
4. AK Steel Holding Corp., 7%, Conv. Prfd. 3,133,125 3.8
5. Noble Drilling Corp. $1.50, Conv. Prfd. 2,761,525 3.4
<FN>
<F1> Each Fund's composition is subject to change as market conditions warrant.
</TABLE>
<TABLE>
SBSF Capital Growth Fund<F1>
<CAPTION>
Market % of
Company Value $ Net Assets
<S> <C> <C>
1. PartnerRe Ltd. 1,062,750 2.9
2. Viasoft, Inc. 905,000 2.4
3. Uniphase Corp. 892,500 2.4
4. Pacific Gateway Exchange, Inc. 843,750 2.3
5. Swift Energy Corp. 790,625 2.1
<FN>
<F1> Each Fund's composition is subject to change as market conditions warrant.
</TABLE>
<TABLE>
SBSF FUND
<CAPTION>
Annualized
<S> <C>
One Year Total Return 23.69%
Three Years 15.27%
Five Years 15.38%
Ten Years 12.85%
Since Inception 10/17/83 13.58%
</TABLE>
<TABLE>
SBSF FUND vs. S&P 500
<CAPTION>
SBSF Fund S&P 500<F1>
<S> <C> <C>
10/83 10030 9884
11/83 10030 10093
11/84 11009 10394
11/85 14263 13408
11/86 15911 17123
11/87 14724 16319
11/88 17866 20108
11/89 23235 26316
11/90 23080 25405
11/91 26056 30574
11/92 28285 36221
11/93 34776 39879
11/94 33041 40016
11/95 43075 54815
11/96 53281 70086
<FN>
<F1> The S&P 500 Index (S&P 500) is an index of widely held common stocks which is unmanaged and therefore not subject
to any fees or expenses. The performance figures presented for the SBSF Fund and the SBSF Convertible
Securities Fund are net of fees and expenses.
</TABLE>
<TABLE>
SBSF CONVERTIBLE SECURITIES FUND
<CAPTION>
Annualized
<S> <C>
One Year Total Return 20.28%
Three Years 11.48%
Five Years 13.53%
Since Inception 4/14/88 12.19%
</TABLE>
<TABLE>
SBSF CONVERTIBLE SECURITIES FUND vs. S&P 500 AND LIPPER CONV. SEC FUND INDEX
<CAPTION>
SBSF Conv. Fund S&P 500<F1> Lipper Conv. Sec.<F2>
<S> <C> <C> <C>
4/88 10000 10123 10125
11/88 10142 10835 10419
11/89 11955 14179 12224
11/90 11336 13689 11455
11/91 14321 16474 13897
11/92 15925 19517 16461
11/93 19496 21488 18869
11/94 18645 21562 18334
11/95 22455 29535 21621
11/96 27009 37764 25090
<FN>
<F1> The S&P 500 Index (S&P 500) is an index of widely held common stocks which is unmanaged and therefore not subject
to any fees or expenses. The performance figures presented for the SBSF Fund and the SBSF Convertible
Securities Fund are net of fees and expenses.
<F2> The Lipper Convertible Securities Fund Index (Lipper Conv. Sec.) is an equal weighted index of the largest mutual funds whose
protfolios consist primarily of convertible bonds and convertible preferred stocks.
</TABLE>
The accompanying presentations are hypothetical illustrations of the results
of a $10,000 investment on the respective inception dates of each Fund and
the subsequent reinvestment of all dividends and capital gain distributions
through November 30, 1996. Investment returns and principal values will
fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. The total return figures set forth
herein may reflect the waiver of a portion of certain fees for various
periods since the Funds' inception date. In such instances and without
such waiver of fees, the total returns would have been lower. Fee
waivers are voluntary and may be modified or terminated at any time.
The performance data quoted represent past performance and are not
predictive of future results.
<TABLE>
SBSF CAPITAL GROWTH FUND
<CAPTION>
Annualized
<S> <C>
One Year Total Return 4.22%
Three Years 9.14%
Since Inception 11/1/93 8.35%
</TABLE>
<TABLE>
SBSF CAPITAL GROWTH FUND vs. S&P 400 MIDCAP AND NASDAQ
<CAPTION>
SBSF
Capital S&P 400
Growth MidCap NASDAQ
<S> <C> <C> <C>
11/93 9850 9779 9625
2/94 10125 10322 10111
5/94 9450 9823 9380
8/94 9650 10320 9767
11/94 9450 9776 9572
2/95 9950 10491 10126
5/95 10475 11150 11057
8/95 12225 12435 13070
11/95 12288 12950 13589
2/96 12690 13551 14116
5/96 13657 14323 15962
8/96 12316 13912 14661
11/96 12806 15381 16611
</TABLE>
The above presentation is a hypothetical illustration of the results of a
$10,000 investment on the Fund's inception date and the subsequent
reinvestment of all capital gain distributions through November 30, 1996.
Investment returns and principal values will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth herein may reflect the waiver of
a portion of certain fees for various periods since the Fund's inception
date. In such instances and without such waiver of fees, the total returns
would have been lower. The performance data quoted represent past performance
and are not indicative of future results.
The S&P 400 MidCap Index (S&P 400 MidCap) is an index of 400 stocks, with
capitalization of between $200 million and $5 billion, listed on major
exchanges and traded in the over-the-counter market. This index is unmanaged
and therefore not subject to any fees or expenses. The SBSF Capital Growth
Fund's performance is reflected net of fees and expenses.
NASDAQ is a composite index of stocks listed on the Nasdaq Stock Market,
Inc. This index is unmanaged and therefore not subject to any fees or
expenses.
<TABLE>
November 30, 1996
SBSF FUND
Statement of Investments
<CAPTION>
SHARES VALUE
<S> <C>
COMMON STOCKS--95.6%
Automotive--3.8%
38,500 Borg-Warner Automotive, Inc. $ 1,540,000
90,000 Ford Motor Co. 2,947,500
4,487,500
Banks & Bank Holding Cos.--5.9%
50,000 Bank of New York Co., Inc. 1,793,750
25,000 J.P. Morgan & Co., Inc. 2,359,375
10,000 Wells Fargo & Co. 2,846,250
6,999,375
Biotechnology--4.7%
44,000 Genentech, Inc.<F1> 2,381,500
20,600 Genetics Institute, Inc.<F1> 1,400,800
76,000 Genzyme Corp.<F1> 1,729,000
5,511,300
Broadcasting--4.5%
125,000 News Corp. Ltd., ADR 2,656,250
177,900 Osborn Communications<F1> 2,624,025
5,280,275
Conglomerates--3.0%
75,000 Canadian Pacific, Ltd. 2,062,500
225,000 Noel Group, Inc.<F1> 1,462,500
3,525,000
Consumer Products--2.5%
23,000 First Brands Corp. 658,375
22,500 General Electric Co. 2,340,000
2,998,375
Electronics--1.2%
66,000 Vishay Intertechnology, Inc.<F1> 1,386,000
Finance & Financial Services--3.6%
37,000 Federal Home Loan Mortgage Corp. 4,227,250
Homebuilding--2.4%
175,000 Beazer Homes USA, Inc.<F1> 2,821,875
Hospital & Health Care--2.9%
45,000 Columbia/HCA Healthcare 1,800,000
75,000 Tenet Healthcare Corp.<F1> 1,678,125
3,478,125
Insurance--14.0%
145,500 PartnerRe Ltd. 4,728,750
80,000 American International Group, Inc. 9,200,000
47,000 Chubb Corp. 2,549,750
16,478,500
Leisure & Entertainment--2.2%
65,000 Time Warner, Inc. 2,648,750
Oil & Gas--13.6%
125,000 Enron Oil & Gas Co. 3,328,125
100,000 ENSERCH Corp. 2,337,500
89,300 Forcenergy, Inc.<F1> 2,734,813
61,500 Noble Affiliates, Inc. 2,898,188
36,000 Seagull Energy Corp.<F1> 823,500
50,000 Union Pacific Resources Group, Inc. 1,493,750
60,000 Unocal Corp. 2,445,000
16,060,876
Real Estate--8.6%
119,347 Avatar Holdings, Inc.<F1> 3,759,431
100,000 Cousins Properties, Inc. (REIT) 2,325,000
40,000 Crescent Real Estate Equities, Inc. (REIT) 1,755,000
30,000 Milwaukee Land Co.<F1> 200,625
108,333 Security Capital Industrial Trust (REIT) 2,058,327
10,098,383
Steel--2.0%
192,500 J&L Specialty Steel, Inc. 2,334,062
Technology--11.7%
30,000 Intel Corp. 3,806,250
30,000 International Business Machines Corp. 4,781,250
163,000 Komag, Inc.<F1> 5,256,750
13,844,250
Telecommunications--9.0%
141,400 AirTouch Communications, Inc.<F1> 3,623,375
153,000 Comcast Corp. Class A Special 2,562,750
48,500 GTE Corp. 2,176,437
135,000 Vanguard Cellular Systems, Inc. Class A<F1> 2,278,125
10,640,687
Total Common Stocks
(Cost $83,021,273) 112,820,583
PRINCIPAL AMOUNT
U.S. GOVERNMENT SECURITIES--4.5%
U.S. Treasury Bills<F3>--4.5%
$ 15,000 5.100%, 1/30/97 $ 14,876
30,000 5.235%, 1/30/97 29,751
140,000 5.075%, 4/17/97 137,298
315,000 5.065%, 5/01/97 308,291
530,000 5.075%, 5/01/97 518,710
600,000 5.055%, 5/08/97 586,680
1,150,000 5.070%, 5/08/97 1,124,470
75,000 5.020%, 5/15/97 73,260
2,600,000 5.035%, 5/15/97 2,539,680
Total U.S. Government Securities
(Cost $5,333,258) 5,333,016
Total Investments
(Cost $88,354,531)<F2> 100.1% 118,153,599
Other liabilities, net of other assets (0.1%) (70,067)
Net Assets 100.0% $118,083,532
<FN>
<F1> Non-income producing.
<F2> At November 30, 1996, the net unrealized appreciation on investments
based on cost for Federal income tax purposes of $88,354,531,
amounted to $29,799,068, which consisted of gross unrealized appreciation
of $30,924,541 and gross unrealized depreciation of $1,125,473.
<F3> Rate shown represents annualized yield on date of purchase.
ADR American Depositary Receipt.
REIT Real Estate Investment Trust.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
November 30, 1996
SBSF CONVERTIBLE SECURITIES FUND
Statement of Investments
<CAPTION>
SHARES VALUE
<S> <C>
COMMON STOCKS--11.5%
Banks & Bank Holding Cos.--7.4%
40,000 Bankers Trust of NY Corp. $ 3,480,000
100,000 Independence Bancorp, Inc. 2,525,000
6,005,000
Telecommunications--0.8%
15,000 GTE Corp. 673,125
Utilities--3.3%
100,000 Houston Industries, Inc. 2,200,000
20,000 Washington Gas Light Co. 477,500
2,677,500
Total Common Stocks
(Cost $6,283,686) 9,355,625
CONVERTIBLE PREFERRED STOCKS--46.4%
Banks & Bank Holding Cos.--5.0%
25,000 Boatman's Bancshares, Inc. 7%, Class A 1,435,938
35,000 Glendale Federal Bank 8.75%, Series E 1,868,125
25,000 Matewan BancShares, Inc. 7.50%, Series A 618,750
2,500 Union Planters Corp. 8%, Series E 126,875
4,049,688
Electrical Equipment--1.9%
90,000 Westinghouse Electric $1.30, Series C<F1> 1,563,750
Homebuilding--1.2%
37,600 Beazer Homes USA, Inc. 8%, Series A 991,700
Insurance--5.8%
15,000 Aetna, Inc., 6.25% 1,113,750
27,000 Jefferson-Pilot Corp., 7.25% 2,565,000
10,000 PennCorp Financial Group, $3.375 800,000
5,000 SunAmerica, Inc., $3.188 205,000
4,683,750
Leisure & Entertainment--2.6%
20,000 AMC Entertainment, Inc., $1.75 677,500
50,000 Cablevision Systems Corp. 8.50%, Series I 1,018,750
7,000 Wendy's Financing, Inc. 5%, Series A 371,875
2,068,125
Metals & Mining--3.2%
50,000 Amax Gold, Inc. $3.75, Series B 2,606,250
Oil & Gas--11.8%
20,000 Diamond Shamrock, Inc., $2.50<F1> 1,235,000
40,000 Enron Corp., 6.25% 1,020,000
58,600 Noble Drilling Corp., $1.50 2,761,525
70,000 Unocal Corp., 6.25% 3,990,000
15,000 Western Gas Resources, Inc. $2.625 573,750
9,580,275
Paper & Forest Products--4.8%
50,000 International Paper Co., 5.25% 2,381,250
30,000 James River Corp. $3.50, Series L 1,543,125
3,924,375
Real Estate--4.2%
27,000 Catellus Development Corp. $3.625, Series B<F1> 1,461,375
31,000 FelCor Suite Hotels, Inc. $1.95, Series A 856,375
10,000 First Union Real Estate 8.40%, Series A 357,500
30,000 Merry Land & Investment Co., Inc. $2.15, Series C 753,750
3,429,000
Steel--3.8%
90,000 AK Steel Holding Corp. 7% 3,133,125
Technology--1.0%
25,000 Unisys Corp. $3.75, Series A 825,000
Telecommunications--1.1%
20,000 AirTouch Communications, Inc. 4.25%, Series C 920,000
Total Convertible Preferred Stocks
(Cost $31,940,290) 37,775,038
NON-CONVERTIBLE PREFERRED STOCKS--4.8%
Banks & Bank Holding Cos.--4.8%
30,000 Chevy Chase Savings Bank 13%, Series A 1,005,000
45,000 Fidelity Federal Bank 12%, Series A 1,254,375
59,000 Riggs National Corp. 10.75%, Series B 1,681,500
Total Non-Convertible Preferred
Stocks (Cost $3,485,750) 3,940,875
PRINCIPAL AMOUNT
CONVERTIBLE BONDS--31.3%
Auto Parts--1.3%
$1,250,000 MascoTech, Inc. Sub. Debs., 4.50%, 12/15/03 $ 1,046,875
Banks & Bank Holding Cos.--2.7%
600,000 First Republic Bancorp Sub. Debs., 7.25%, 12/1/02 768,000
400,000 Fort Bend Holding Corp. Sub. Debs., 8.00%, 12/1/05 436,000
600,000 Midlantic Bank, Inc. Sub. Debs., 8.25%, 7/1/10 993,000
2,197,000
Diversified--0.9%
750,000 TRINOVA Corp. Euro Sub. Debs., 6.00%, 10/15/02 742,500
Drugs & Health Care--5.6%
3,500,000 Centocor, Inc. Euro Sub. Debs., 6.75%, 10/16/01 3,342,500
500,000 McKesson Corp. Sub. Debs., 4.50%, 3/1/04 440,000
142,000 Medical Imaging Centers of America, Inc. Sub. Debs., 6.00%, 4/30/99<F2> 142,000
750,000 Quantum Health Resources, Inc. Sub. Debs., 4.75%, 10/1/00 682,500
4,607,000
Electrical Equipment--1.4%
$1,000,000 General Signal Corp. Sub. Debs., 5.75%, 6/1/02 1,140,000
Insurance--3.8%
600,000 American Travellers Corp. Sub. Debs., 6.50%, 10/1/05 1,428,000
241,000 First Central Financial Corp. Sub. Debs., 9.00%, 8/1/00<F2> 241,000
250,000 Penn Treaty American Corp. Sub. Notes, 6.25%, 12/1/03<F1> 258,750
500,000 Pioneer Financial Services Sub. Notes, 6.50%, 4/1/03 527,500
600,000 Trenwick Group, Inc. Sub. Debs., 6.00%, 12/15/99 651,000
3,106,250
Lodging--0.7%
500,000 Hilton Hotels Corp. Sub. Notes, 5.00%, 5/15/06 537,500
Oil & Gas--1.3%
650,000 Pennzoil Co., Sub. Debs., 6.50%, 1/15/03 1,045,688
Steel--2.3%
2,000,000 USX-Corp. Sub. Debs., 5.75%, 7/1/01 1,882,500
Technology--8.1%
$ 500,000 Convex Computer Corp. Sub. Debs., 6.00%, 3/1/12 470,000
2,000,000 Data General Corp. Sub. Debs., 7.75%, 6/1/01 2,020,000
2,061,000 Recognition Equipment Corp. Sub. Debs., 7.25%, 4/15/11 1,932,187
500,000 Richey Electronics, Inc. Sub. Notes, 7.00%, 3/1/06 475,000
300,000 3 Com Corp. Sub. Notes, 10.25%, 11/1/01<F1> 680,250
1,000,000 VLSI Technology, Inc. Sub. Notes, 8.25%, 10/1/05 981,250
6,558,687
Telecommunications--0.2%
200,000 International CableTel Sub. Debs., 7.25%, 4/15/05<F1> 215,000
Utilities--3.0%
1,750,000 Consolidated Natural Gas Sub. Debs., 7.25%, 12/15/15 1,938,125
500,000 ENSERCH Corp. Euro Sub. Debs., 6.375%, 4/1/02 500,000
2,438,125
Total Convertible Bonds
(Cost $22,464,345) 25,517,125
NON-CONVERTIBLE BONDS--2.2%
Insurance--0.7%
$ 500,000 National Re Corp. Sr. Notes, 8.85%, 1/15/05 560,000
Oil & Gas--0.2%
200,000 Equitable Resources Sub. Debs., 7.50%, 7/1/99 207,000
Telecommunications--1.3%
1,000,000 Comcast Corp. Sub. Debs., 9.375%, 5/15/05 1,032,500
Total Non-Convertible Bonds
(Cost $1,728,584) 1,799,500
U.S. GOVERNMENT SECURITIES--1.5%
U.S. Treasury Bills<F4>--1.5%
$ 15,000 5.245%, 1/30/97 14,875
100,000 5.030%, 4/03/97 98,270
30,000 5.090%, 4/03/97 29,481
1,075,000 5.035%, 5/15/97 1,050,060
Total U.S. Government Securities
(Cost $1,192,821) 1,192,686
Total Investments
(Cost $67,095,476)<F3> 97.7% 79,580,849
Other assets, net of other liabilities 2.3% 1,897,166
100.0% $81,478,015
<FN>
<F1> These securities are restricted to resale to qualified institutional
investors only.
<F2> The following securities are restricted and values are determined in
good faith based on procedures approved by and under the supervision of the
Fund's Board of Directors.
</TABLE>
<TABLE>
<CAPTION>
% of
Security Acquisition Cost Date Acquired Net Assets
<S> <C> <C> <C>
First Central Financial Corp., Sub. Deb., 9%, 8/1/00 $239,872 August 1988 0.3%
Medical Imaging Centers of America, Inc. Conv. Sub. Deb., 6%, 4/30/99 $142,000 May 1989 0.2%
The Fund's prospectus permits the acquisition of restricted securities
consistent with the Fund's investment objective and policies.
The Fund has the right to include its shares, upon conversion, in any
registration undertaken by the issuing company.
<F3> At November 30, 1996, the net unrealized appreciation on investments
based on cost for Federal income tax purposes of $67,095,476,
amounted to $12,485,373, which consisted of gross unrealized appreciation
of $12,709,971 and gross unrealized depreciation of $224,598.
<F4> Rate shown represents annualized yield on date of purchase.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
November 30, 1996
SBSF CAPITAL GROWTH FUND
Statement of Investments
<CAPTION>
SHARES VALUE
<S> <C>
COMMON STOCKS--99.7%
Advertising--2.5%
15,000 Outdoor Systems, Inc.<F1> $ 380,625
20,000 Universal Outdoor Holdings, Inc.<F1> 545,000
925,625
Airlines--1.2%
10,000 Atlas Air, Inc.<F1> 465,000
Biotechnology--5.4%
10,000 Agouron Pharmaceuticals<F1> 548,750
10,000 BioChem Pharma, Inc.<F1> 428,281
20,000 Curative Technologies, Inc.<F1> 520,000
25,000 Interneuron Pharmaceuticals<F1> 487,500
1,984,531
Broadcasting--1.4%
6,000 Osborn Communications<F1> 88,500
15,000 Telemundo Group, Inc.<F1> 425,625
514,125
Computer Software Services--15.7%
25,000 BBN Corporation<F1> 575,000
10,000 Citrix Systems, Inc.<F1> 456,250
12,000 Cognos, Inc.<F1> 456,000
70,000 ForeFront Group, Inc.<F1> 358,750
20,000 Geoworks<F1> 440,000
15,000 Microchip Technology, Inc.<F1> 716,250
25,000 NETCOM On-Line Communication Services, Inc.<F1> 431,250
20,000 SPSS, Inc.<F1> 580,000
10,000 Siebel Systems, Inc.<F1> 450,000
30,000 Sunquest Information Systems, Inc.<F1> 446,250
20,000 Viasoft, Inc.<F1> 905,000
5,814,750
Electronics--5.1%
25,000 Network General Corp.<F1> 604,687
40,000 Printrak International, Inc.<F1> 385,000
15,000 Uniphase Corp.<F1> 892,500
1,882,187
Finance & Financial Services--4.6%
10,000 H.F. Ahmanson & Co. 330,000
10,000 Coast Savings Financial<F1> 355,000
15,000 Envoy Corp.<F1> 558,750
15,000 The Money Store, Inc. 453,750
1,697,500
Food & Lodging--4.8%
15,000 CKE Restaurants, Inc. 459,375
20,000 Dominick's Supermarkets, Inc.<F1> 420,000
20,000 Planet Hollywood Int'l., Inc.<F1> 460,000
15,000 Rainforest Cafe, Inc.<F1> 438,750
1,778,125
Health Care--1.6%
9,600 Atria Communities, Inc.<F1> 97,200
15,000 Vivus, Inc.<F1> 515,625
612,825
Insurance--4.2%
32,700 PartnerRe Ltd. 1,062,750
15,000 Allmerica Financial Corp. 496,875
1,559,625
Leisure & Entertainment--1.7%
20,000 Family Golf Centers, Inc.<F1> 625,000
Office Supplies--1.1%
20,000 American Pad & Paper Co.<F1> 397,500
Oil & Gas--24.0%
20,000 Benton Oil & Gas Co.<F1> 510,000
10,000 Diamond Offshore Drilling<F1> 637,500
15,000 Energy Ventures, Inc.<F1> 736,875
10,000 ENSCO International, Inc.<F1> 438,750
10,000 Falcon Drilling Co., Inc.<F1> 400,000
30,000 Global Industries Ltd.<F1> 532,500
70,000 Gulf Canada Resources, Ltd.<F1> 455,000
24,900 Marine Drilling Co., Inc.<F1> 395,288
14,000 Noble Affiliates, Inc. 659,750
30,000 Noble Drilling Corp.<F1> 577,500
15,000 Nuevo Energy Co.<F1> 750,000
20,000 Pride Petroleum Services, Inc.<F1> 362,500
25,000 Reading & Bates Corp.<F1> 725,000
25,000 Snyder Oil Corp. 431,250
25,000 Swift Energy Corp.<F1> 790,625
15,000 Weatherford Enterra, Inc.<F1> 457,500
8,860,038
Printing--1.9%
50,000 Mail-Well, Inc.<F1> 706,250
Railroads--1.7%
15,000 Wisconsin Central Transportation Corp.<F1> 611,250
Real Estate--3.5%
15,000 Beacon Properties Corp. (REIT) 474,375
20,000 CB Commmercial Real Estate Services Group, Inc.<F1> 360,000
10,000 Starwood Lodging Trust (REIT) 477,500
1,311,875
Retail--3.7%
12,000 Galoob Toys, Inc.<F1> 349,500
30,000 Sotheby's Holdings, Inc. Class A 528,750
25,000 Stein Mart, Inc.<F1> 478,125
1,356,375
SHARES/PRINCIPAL AMOUNT
Technology--4.4%
12,000 Adobe Systems, Inc. 474,000
20,000 Ciprico, Inc.<F1> 275,000
25,000 Gemstar International Group Ltd.<F1> 418,750
25,000 Systemsoft Corp.<F1> 459,375
1,627,125
Telecommunications Equipment--5.7%
15,000 Davox Corp.<F1> 570,000
30,000 Pacific Gateway Exchange, Inc.<F1> 843,750
30,000 Premiere Technologies, Inc.<F1> 697,500
2,111,250
Transportation--1.4%
8,000 Seacor Holdings<F1> 506,000
Waste Management--2.9%
20,000 U.S. Filter Corp.<F1> 685,000
12,000 USA Waste Services, Inc.<F1> 387,000
1,072,000
Wholesale--1.2%
15,000 Tech Data Corp.<F1> 450,000
Total Common Stocks
(Cost $33,683,643) 36,868,956
U.S. GOVERNMENT SECURITIES--1.5%
U.S. Treasury Bills<F3>--1.5%
$545,000 5.060%, 4/17/97 534,482
40,000 5.040%, 5/08/97 39,112
Total U.S. Government Securities
(Cost $573,621) 573,594
Total Investments
(Cost $34,257,264)<F2> 101.2% 37,442,550
Other liabilities, net of other assets (1.2%) (453,438)
100.0% $36,989,112
<FN>
<F1> Non-income producing.
<F2> At November 30, 1996, the net unrealized appreciation on investments
based on cost for Federal income tax purposes of $34,257,264,
amounted to $3,185,286, which consisted of gross unrealized appreciation
of $5,904,241 and gross unrealized depreciation of $2,718,955.
<F3> Rate shown represents annualized yield on date of purchase.
REIT Real Estate Investment Trust.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
November 30, 1996
KEY MUTUAL FUNDS
Statements of Assets and Liabilities
<CAPTION>
SBSF SBSF
Convertible Capital
SBSF Securities Growth
Fund Fund Fund
<S> <C> <C> <C>
ASSETS
Investment in securities, at value $118,153,599 $79,580,849 $37,442,550
Cash -- 16,694 18,751
Receivable for investment securities sold 1,012,500 1,222,775 25,050
Receivable for Fund shares sold 25,616 5,000 --
Dividends and interest receivable 103,020 786,836 5,355
-- -- 11,902
Prepaid expenses 2,429 1,509 638
Total Assets 119,297,164 81,613,663 37,504,246
LIABILITIES
Cash overdraft 999,292 -- --
Payable for investment securities purchased -- -- 441,250
Payable for Fund shares redeemed 744 400 --
Due to investment adviser--Note 3(a) 70,797 49,293 22,660
Due to administrator--Note 3(a) 16,972 13,957 7,553
Shareholder servicing fees payable--Note 3(c) 639 3,432 18
Accrued expenses and other liabilities 125,188 68,566 43,653
Total Liabilities 1,213,632 135,648 515,134
NET ASSETS--Applicable to 6,130,767, 6,012,299 and
3,725,117 shares, respectively, of common stock outstanding
(25 million shares authorized for each Fund) $118,083,532 $81,478,015 $36,989,112
NET ASSET VALUE AND REDEMPTION VALUE PER SHARE $19.26 $13.55 $9.93
IDENTIFIED COST OF INVESTMENT SECURITIES $ 88,354,531 $67,095,476 $34,257,264
ANALYSIS OF NET ASSETS
Paid-in capital $ 71,429,723 $64,611,032 $34,376,926
Accumulated net investment income 90,919 643,388 --
Accumulated net realized gain (loss) 16,763,822 3,738,222 (573,100)
Net unrealized appreciation 29,799,068 12,485,373 3,185,286
NET ASSETS $118,083,532 $81,478,015 $36,989,112
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
For the Year Ended November 30, 1996
KEY MUTUAL FUNDS
Statements of Operations
<CAPTION>
SBSF SBSF
Convertible Capital
SBSF Securities Growth
Fund Fund Fund
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign tax withheld of $30,773, $7,705
and $201, respectively) $ 1,715,437 $ 2,886,023 $ 126,285
Interest 334,154 2,001,267 92,047
Total Income 2,049,591 4,887,290 218,332
Expenses:
Investment advisory fees--Note 3(a) 898,884 566,242 249,032
Administration fees--Note 3(a) 223,192 163,169 83,351
Transfer agent fees 59,611 26,916 18,131
Professional fees 169,103 108,074 51,320
Custodian fees--Note 3(d) 31,035 20,537 19,417
Directors' fees and expenses--Note 3(b) 26,468 16,101 7,001
Shareholder reports 35,651 15,607 9,966
Federal and state registration fees 16,898 15,771 13,968
Distribution fees--Note 3(c) 2,597 9,735 381
Shareholder servicing fees--Note 3(c) 1,670 8,329 254
Amortization of deferred organization expenses--Note 2(e) -- -- 5,944
Miscellaneous 65,731 39,712 14,576
Total Expenses 1,530,840 990,193 473,341
Less administration fees waived--Note 3(a) (13,122) -- (2,314)
Total Expenses after fees waived 1,517,718 990,193 471,027
NET INVESTMENT INCOME (LOSS) 531,873 3,897,097 (252,695)
NET REALIZED AND UNREALIZED GAINS
Net realized gain (loss) 16,763,795 3,737,544 (573,100)
Net change in unrealized appreciation 7,632,424 6,370,235 1,847,585
Net realized and unrealized gain 24,396,219 10,107,779 1,274,485
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $24,928,092 $14,004,876 $1,021,790
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
For the Years Ended November 30, 1996 and 1995
KEY MUTUAL FUNDS
Statements of Changes in Net Assets
<CAPTION>
SBSF SBSF
SBSF Fund Convertible Securities Fund Capital Growth Fund
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 531,873 $ 1,006,275 $ 3,897,097 $ 3,258,948 $ (252,695) $ (14,224)
Net realized gain (loss) 16,763,795 13,315,892 3,737,544 1,851,621 (573,100) 348,226
Net change in unrealized
appreciation 7,632,424 14,528,504 6,370,235 6,158,941 1,847,585 1,389,568
Net increase in net assets
resulting from operations 24,928,092 28,850,671 14,004,876 11,269,510 1,021,790 1,723,570
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM
Net investment income (628,415) (1,381,884) (3,694,435) (3,264,148) -- --
Net realized gains (12,645,835) (6,410,386) (1,805,432) (2,024,717) (257,871) --
Total dividends
and distributions (13,274,250) (7,792,270) (5,499,867) (5,288,865) (257,871) --
CAPITAL STOCK TRANSACTIONS
Proceeds from sales of shares 6,595,476 9,655,102 15,872,775 10,607,323 30,439,903 2,870,339
Reinvestment of dividends
Note 2(c) 12,474,301 6,965,298 4,688,385 4,584,685 248,774 --
19,069,777 16,620,400 20,561,160 15,192,008 30,688,677 2,870,339
Cost of shares redeemed (26,490,516) (33,561,293) (15,799,899) (11,805,600) (2,889,938) (308,806)
Net increase (decrease) in net assets
from capital stock transactions (7,420,739) (16,940,893) 4,761,261 3,386,408 27,798,739 2,561,533
Total increase
in net assets 4,233,103 4,117,508 13,266,270 9,367,053 28,562,658 4,285,103
NET ASSETS
Beginning of period 113,850,429 109,732,921 68,211,745 58,844,692 8,426,454 4,141,351
End of period** $118,083,532 $113,850,429 $81,478,015 $68,211,745 $36,989,112 $8,426,454
**Includes accumulated net
investment income $ 90,919 $ 187,461 $ 643,388 $ 440,726 $ -- $ --
SHARE TRANSACTIONS
Shares sold 384,622 635,920 1,270,711 932,395 3,136,929 343,971
Dividends reinvested 789,960 495,839 385,311 425,055 26,437 --
1,174,582 1,131,759 1,656,022 1,357,450 3,163,366 343,971
Shares redeemed (1,520,772) (2,203,122) (1,253,058) (1,074,238) (295,144) (34,601)
Net increase (decrease) (346,190) (1,071,363) 402,964 283,212 2,868,222 309,370
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
SBSF FUND
Financial Highlights
<CAPTION>
Fiscal Year Ended November 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $17.58 $14.54 $17.59 $15.64 $16.47
Net investment income 0.08 0.15 0.21 0.34 0.42
Net realized and unrealized gain (loss) 3.63 3.98 (0.94) 3.01 0.91
Total from investment operations 3.71 4.13 (0.73) 3.35 1.33
Less dividends and distributions:
Dividends from net investment income (0.09) (0.20) (0.20) (0.39) (0.56)
Distributions from net realized gains (1.94) (0.89) (2.12) (1.01) (1.60)
Total dividends and distributions (2.03) (1.09) (2.32) (1.40) (2.16)
Net asset value, end of period $19.26 $17.58 $14.54 $17.59 $15.64
Total investment return +23.69% +30.37% -4.99% +22.95% +8.56%
RATIOS AND SUPPLEMENTAL DATA
Net assets end of period (in thousands) $118,084 $113,850 $109,733 $122,555 $105,325
Ratio of expenses to average net assets 1.27% 1.26% 1.23% 1.15% 1.16%
Ratio of net investment income
to average net assets 0.44% 0.93% 1.31% 2.05% 2.68%
Decrease reflected in above expense ratios
due to administration fees waived 0.01% -- -- -- --
Portfolio turnover rate 53% 59% 83% 70% 45%
Average commission rate per share $0.0341 -- -- -- --
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
SBSF CONVERTIBLE SECURITIES FUND
Financial Highlights
<CAPTION>
Fiscal Year Ended November 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.16 $ 11.05 $ 12.48 $ 10.98 $ 10.65
Net investment income 0.65 0.60 0.61 0.57 0.59
Net realized and unrealized gain (loss) 1.68 1.50 (1.12) 1.79 0.56
Total from investment operations 2.33 2.10 (0.51) 2.36 1.15
Less dividends and distributions:
Dividends from net investment income (0.62) (0.61) (0.61) (0.57) (0.72)
Distributions from net realized gains (0.32) (0.38) (0.31) (0.29) (0.10)
Total dividends and distributions (0.94) (0.99) (0.92) (0.86) (0.82)
Net asset value, end of period $ 13.55 $ 12.16 $ 11.05 $ 12.48 $ 10.98
Total investment return +20.28% +20.43% -4.36% +22.42% +11.20%
RATIOS AND SUPPLEMENTAL DATA
Net assets end of period (in thousands) $81,478 $68,212 $58,845 $64,537 $42,442
Ratio of expenses to average net assets 1.31% 1.31% 1.30% 1.24% 1.32%
Ratio of net investment income
to average net assets 5.17% 5.36% 5.20% 4.75% 6.78%
Portfolio turnover rate 40% 52% 49% 30% 42%
Average commission rate per share $0.0413 -- -- -- --
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
SBSF CAPITAL GROWTH FUND
Financial Highlights
<CAPTION>
Fiscal Year Ended November 30,
1996 1995 1994 1993<F1>
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.83 $ 7.56 $ 7.88 $ 8.00
Net investment income (loss) (0.04) (0.02) (0.01)<F4> (0.05)
Net realized and unrealized gain (loss) 0.44 2.29 (0.31)<F4> (0.07)
Total from investment operations 0.40 2.27 (0.32) (0.12)
Less: Distributions from net realized gains (0.30) -- -- --
Net asset value, end of period $ 9.93 $ 9.83 $ 7.56 $ 7.88
Total investment return +4.22% +30.03% -4.06% -1.50%<F2>
RATIOS AND SUPPLEMENTAL DATA
Net assets end of period (in thousands) $36,989 $ 8,426 $ 4,141 $ 1,656
Ratio of expenses to average net assets 1.42% 1.20% 1.22% 2.50%<F3>
Ratio of net investment income (loss)
to average net assets -0.76% -0.22% -0.17% -12.65%<F3>
Decrease reflected in above expense ratios due
to advisory and/or administration fees waived 0.01% 0.84% 1.00% 0.93%<F3>
Portfolio turnover rate 221% 97% 80% 0%
Average commission rate per share $0.0198 -- -- --
<FN>
<F1> From November 1, 1993 (commencement of operations) to November 30, 1993.
<F2> Not annualized.
<F3> Annualized.
<F4> Calculated using weighted average shares outstanding.
</TABLE>
See accompanying Notes to Financial Statements
KEY MUTUAL FUNDS
Notes to Financial Statements
Note 1
General
Key Mutual Funds (the "Company") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end management
investment company. The Company, incorporated in Maryland on May 26,
1983 under the name SBSF Funds, Inc., is currently doing business
under the name "Key Mutual Funds." Key Mutual Funds is a series investment
company currently issuing capital stock of several different investment
portfolios, three of which: the SBSF Fund, the SBSF Convertible Securities
Fund and the SBSF Capital Growth Fund (collectively, the "Funds"),
are included in this annual report. The Company has 25 billion shares
of $.01 par value capital stock authorized. On November 30, 1996,
the SBSF Convertible Securities Fund had two shareholders which owned
approximately 28% of the outstanding shares of the Fund.
The SBSF Fund's investment objective seeks a high total return over
the long term consistent with reasonable risk. The Fund pursues its
objective by investing primarily in common stocks which in the opinion
of the Adviser have the potential for appreciation in excess of market
averages during periods of market strength while attempting to preserve
capital during periods of market weakness.
The SBSF Convertible Securities Fund's investment objective seeks
a high level of current income together with long-term capital appreciation.
The Fund pursues its objective by investing primarily in debt and
preferred securities which are convertible into common stock.
The SBSF Capital Growth Fund's investment objective seeks capital
appreciation. The Fund pursues its objective by investing in equity
securities of companies which the Adviser believes are likely to have
rapid growth in earnings or cash flow.
Note 2
Significant Accounting Policies
The following is a summary of the significant accounting policies
consistently followed by the Funds in the preparation of their financial
statements. The policies are in conformity with generally accepted
accounting principles. The preparation of financial statements requires
the Administrator to make estimates and assumptions that affect the
reported amounts and disclosures. Actual results could differ from
those estimates.
(a) Investment Valuation
Securities traded on securities exchanges or the Nasdaq National Market
are valued as of the close of regular trading of the New York Stock
Exchange which is generally 4:00 p.m. (Eastern Time) on each business
day of the Funds. Listed and unlisted securities for which such information
is regularly reported are valued at the last sales price or, in the
absence of sales, at the mean between the most recent bid and offer
price. Listed debt securities and over-the-counter securities are
valued at the mean between the most recent bid and offer price. Securities
for which quotations are not readily available and any other assets
are valued at fair value as determined in good faith under the general
supervision of the Board of Directors. Money market instruments with
maturities over sixty days are valued at market value, and those with
maturities of sixty days or less are valued at amortized cost, which
approximates market value.
(b) Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis. Realized
gains and losses from securities transactions are recorded on the
identified cost method. Dividend income is recognized on the ex-dividend
date and interest income is recognized on the accrual basis. Discounts
on debt securities are accreted to interest income over the life of
the security with a corresponding increase in the security's cost
basis.
(c) Dividends to Shareholders
Dividends payable to shareholders are recorded by the Funds on the
ex-dividend date. The SBSF Convertible Securities Fund declares and
pays dividends from net investment income quarterly. The SBSF Fund
and SBSF Capital Growth Fund declare and pay dividends from net investment
income, if any, semi-annually. With respect to each Fund, distributions
from net realized capital gains, offset by loss carryovers, if any,
are declared and paid annually. The amount of dividends and distributions
from net investment income and net realized capital gains are determined
in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences
may be considered either temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and
net realized capital gains for financial reporting purposes but not
for tax purposes are reported as dividends in excess of net investment
income or distributions in excess of net realized capital gains. To
the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in
capital.
(d) Expenses
Assets, liabilities and operations are accounted for separately by
each investment portfolio of the Company. Expenses directly attributable
to each investment portfolio are charged to that investment portfolio's
operations; expenses which are applicable to several investment portfolios
are allocated among them in relation to the net assets of each investment
portfolio or on another reasonable basis.
(e) Organizational Expenses
Costs incurred in connection with the organization of the SBSF Capital
Growth Fund amounted to $29,638. Such amount is being amortized on
a straight-line basis over a period not to exceed sixty months from
the date the Fund commenced operations.
Note 3
Investment Advisory and Administration Fees
and Transactions with Affiliates
(a) Investment Advisory and Administration Fees
Spears, Benzak, Salomon & Farrell, Inc., the Funds' investment adviser
(the "Adviser" or "SBSF"), is a wholly owned subsidiary of KeyCorp
Asset Management Holdings, Inc. (KAMHI), and an indirect wholly-owned
subsidiary of KeyBank National Association (formerly Society National
Bank, N.A.) and KeyCorp, a financial services holding company.
Pursuant to an Investment Advisory Agreement between the Adviser and
the Company, on behalf of the Funds, each Fund pays fees to the Adviser
monthly, at the annual rate of 0.75% of the average daily net assets
of each Fund. The Investment Advisory Agreement provides that if in
any fiscal year the aggregate expenses of any Fund, excluding interest,
taxes, brokerage commissions and extraordinary expenses, exceed the
expense limitation of any state having jurisdiction over a Fund, the
Adviser will reimburse that Fund for the excess expense to the extent
required by such state laws.
Prior to April 1, 1996, SBSF, in addition to serving the Funds as
Adviser, served as Administrator to the Funds pursuant to an Administration
Agreement. For services rendered by SBSF and related expenses borne
by SBSF as Administrator, each Fund was obligated to pay SBSF a fee,
computed daily and payable monthly, based on the average daily net
assets of each Fund at an annual rate of 0.25 of 1% of the first $50
million; 0.15 of 1% of the next $50 million; and 0.05 of 1% of such
net assets in excess of $100 million. During the period from December
1, 1995 through March 31, 1996, SBSF received administration fees
of $70,151 and $53,761 from the SBSF Fund and the SBSF Convertible
Securities Fund, respectively. SBSF voluntarily waived administration
fees due from the SBSF Capital Growth Fund during the month of December
1995 in the amount of $2,314. On January 1, 1996, SBSF discontinued
its voluntary waiver of administration fees due from the SBSF Capital
Growth Fund and, accordingly, received administration fees of $20,834
from such Fund through March 31, 1996.
Concord Holding Corporation ("Concord"), a wholly-owned subsidiary
of the BISYS Group, Inc., served as Administrator to the Funds (the
"Administrator") during the period from April 1, 1996 through July
11, 1996 pursuant to an Administration Agreement. In this capacity,
Concord provided facilities, equipment, statistical and research data,
clerical services, fund accounting and internal compliance services
and personnel necessary to carry out all administrative services required
for the operation of the business affairs of the Funds. For services
rendered by Concord and related expenses borne by Concord as Administrator,
each Fund was obligated to pay Concord a fee, computed daily and payable
monthly, based on the average daily net assets of each Fund at an
annual rate of 0.25 of 1% of the first $50 million and 0.15 of 1%
of such net assets in excess of $50 million. During the period April
1, 1996 through July 11, 1996, Concord received administration fees
of $52,941 from the SBSF Fund, $41,268 from the SBSF Convertible Securities
Fund and $22,248 from the SBSF Capital Growth Fund. During this period,
Concord voluntarily waived administration fees for the SBSF Fund in
the amount of $6,592. Pursuant to its authority to delegate its
responsibilities under the Administration Agreement, Concord entered into
a Sub-Administration Agreement with SBSF whereby SBSF performed certain
sub-administrative and fund accounting services for the Funds at the expense
of Concord.
On July 12, 1996, BISYS Fund Services Limited Partnership, operating
under the name BISYS Fund Services, ("BISYS") assumed responsibilities
as Administrator to the Funds. The service and fee arrangements under
the new Administration Agreement with BISYS are substantially similar
to the previous agreement with Concord. SBSF continues to serve as
Sub-Administrator pursuant to a new Sub-Administration Agreement with
BISYS dated July 12, 1996. During the period from July 12, 1996 through
November 30, 1996, BISYS received fees of $86,978, $68,140 and $37,955
from the SBSF Fund, the SBSF Convertible Securities Fund and the SBSF
Capital Growth Fund, respectively. BISYS waived administration fees
for the SBSF Fund in the amount of $6,530 during this same period.
On July 1, 1996, BISYS succeeded Concord Financial Group, Inc. as
independent distributor (the "Distributor") of the Funds' capital
stock, for which it receives no compensation.
(b) Directors' Fees
Fees of $7,500 per annum and $750 per meeting, are paid to each director
of the Company.
(c) Distribution Plan and Shareholder Servicing Plan
Prior to July 12, 1996, pursuant to a plan of distribution adopted
under Rule 12b-1 under the Act, the Funds were permitted to make payments
for certain distribution related expenses and to compensate or reimburse
brokers, dealers and others in connection with sales of Fund shares
and service to shareholder accounts in an amount of up to 0.25% of
the average daily net asset value of shares of each Fund on an annualized
basis. During the period from December 1, 1995 through July 11, 1996,
the SBSF Fund, SBSF Convertible Securities Fund and the SBSF Capital
Growth Fund paid $2,597, $9,735 and $381, respectively, under such
distribution plan. On July 12, 1996, the Company implemented a revised
distribution plan for the Funds (the "Distribution Plan"). Separate
payments are not currently authorized under the Distribution Plan
except to the extent that any portion of fees paid under a Shareholder
Servicing Plan (described below) are subsequently deemed to be for
services primarily intended to result in the sale of Fund shares.
Also on July 12, 1996, the Company adopted a Shareholder Servicing
Plan under which the Funds may pay fees of up to an annual rate of
0.25% of their average daily net assets for fees incurred in connection
with personal service and the maintenance of accounts holding shares
of the Funds. Such agreements may be entered into between the Company,
on behalf of the Funds, and various shareholder servicing agents including
the Distributor and affiliates of KeyCorp and the Adviser. During
the period from July 12, 1996 to November 30, 1996, the SBSF Fund,
the SBSF Convertible Securities Fund and the SBSF Capital Growth Fund
paid $1,670, $8,329 and $254, respectively under such Shareholder
Servicing Plan.
(d) Custodian Fees
Key Trust Company of Ohio, N.A. ("Key Trust"), a subsidiary of KeyCorp
and an affiliate of the Adviser, is the custodian for the Funds' cash
and securities. Custodian fees, as reflected in the accompanying statements
of operations, represent fees paid by the Funds to Key Trust for services
it performs as custodian.
Note 4
Securities Transactions
For the year ended November 30, 1996, the cost of purchases and the
proceeds from sales of investment securities, excluding short-term
securities, for the Funds amounted to:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
SBSF Fund
Stocks and bonds $60,272,692 $83,406,676
SBSF Convertible Securities Fund
Stocks and bonds $34,434,057 $28,540,203
SBSF Capital Growth Fund
Stocks $97,390,422 $69,828,701
</TABLE>
Note 5
Federal Income Tax Status
It is the policy of each of the Funds to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute all of their taxable income to shareholders. Therefore,
no federal income tax provision is required. Each Fund is treated
as a separate entity for the purpose of determining such compliance.
During the year ended November 30, 1996, the SBSF Capital Growth Fund
reclassified its net investment loss of $252,695 and an excess capital
gain distribution of $14,387 to paid-in capital. As of November 30,
1996, the SBSF Capital Growth Fund had net capital loss carryovers
of $573,100 which may be used to offset future capital gain distributions,
if any. These carryovers expire in 2004.
Note 6
Subsequent Events
Dividend and Capital Gain Distributions
On December 19, 1996, the Funds declared the following dividends and
distributions per share:
<TABLE>
<CAPTION>
SBSF
Convertible
SBSF Securities
Fund Fund
<S> <C> <C>
Net investment income $0.023 $0.169
Short-term capital gains 0.402 --
Long-term capital gains 2.352 0.623
Total distribution $2.777 $0.792
</TABLE>
These dividends were paid on December 23, 1996 to shareholders of
record as of December 19, 1996.
KEY MUTUAL FUNDS
Report of Independent Accountants
To the Board of Directors and Shareholders
of Key Mutual Funds (SBSF Funds, Inc.):
In our opinion, the accompanying statements of assets and liabilities,
including the statements of investments, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
the SBSF Fund, the SBSF Convertible Securities Fund and the SBSF Capital
Growth Fund, three of the portfolios of Key Mutual Funds ((SBSF Funds,
Inc.), hereafter referred to as the "Funds") at November 30, 1996,
the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities owned
at November 30, 1996 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
/s/PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
January 15, 1997
Notice to Corporate Shareholders
(Unaudited)
The SBSF Fund and the SBSF Convertible Securities Fund have designated
53.3% and 73.9%, respectively, of their ordinary income for the fiscal
year ended November 30, 1996 as having been derived from qualifying
dividends of domestic U.S. corporations.
During the calendar year ended December 31, 1996, the SBSF Fund and
the SBSF Convertible Securities Fund have designated 48.4% and 70.3%,
respectively, of ordinary income dividends paid to shareholders, as
reported on Form 1099, as having been derived from qualifying dividends
of domestic U.S. corporations. Corporate shareholders of the Funds
may be entitled to the 70% dividends received deduction with respect
to these dividends and such shareholders should consult their tax
advisers in order to determine applicability.
Key Mutual Funds
Investment Adviser and
Sub-Administrator
Spears, Benzak, Salomon & Farrell, Inc.
45 Rockefeller Plaza
New York, New York 10111
Counsel
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Washington, DC 20006
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, Ohio 44114
Transfer Agent
State Street Bank
and Trust Company
225 Franklin Street
Boston, Massachusetts 02110-2875
Administrator and Distributor
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
