Keystone Omega Fund
Seeks maximum capital growth from common stocks.
Dear Shareholder:
We would like to take this opportunity to report on the performance of
Keystone Omega Fund for the six-month period which ended June 30, l995.
Performance
Class A shares returned 15.96% for the six-month period and 20.91% for the
twelve-month period.
Class B shares returned 15.45% for the six-month period and 19.80% for the
twelve-month period.
Class C shares returned 15.42% for the six-month period and 19.77% for the
twelve-month period.
The Standard & Poor's 500 Index--a widely recognized benchmark of stock
price performance--returned 20.20% for the six-month period and 21.07% for
the twelve-month period.
Your Fund provided solid performance during the six-month period,
reflecting our careful selection of growing companies and an improved
environment for stocks compared to 1994. Corporate earnings continued to
exceed analysts' expectations and investor confidence improved as inflation
remained under control. Actions by the Federal Reserve Bank (the Fed)
appeared to be successful in engineering a "soft landing" for the economy,
that is, moderate economic growth with modest inflation. Many of Omega's
holdings benefited from this more favorable environment and rose strongly
during the period.
We continued to manage Omega with a disciplined, yet flexible approach
which has become its hallmark. We seek to invest in companies that are
industry leaders with demonstrated earnings growth rates in excess of the
Standard & Poor's 500 Index. These companies have strong managements with new
or competitive products or services. We believe this investment approach has
been responsible for Omega's impressive long-term performance record and
should continue to provide long-term investors with attractive returns.
A Dual Emphasis: Stable Growth and Productivity Stocks
We employed a two-pronged strategy during the period. We emphasized both
stable growth companies and companies involved in productivity enhancement.
Stable growth companies, such as consumer goods, pharmaceutical and service
companies, were attractive to us because we believed they could compete
effectively in a period of moderate economic growth. Companies involved in
productivity enhancement fall primarily in the technology sector, such as
electronics, telecommunications and software. These companies were attractive
to us because we believed they would provide the tools for US corporations to
compete effectively in a global economy. We think this dual strategy
contributed an important balance to the portfolio, offering the potential for
consistent returns over the long term.
--continued--
<PAGE>
Looking Ahead
With economic growth significantly slower in the first six months of 1995, we
think the "soft landing" may have arrived. Looking ahead, we believe there
are several reasons stocks should continue to be attractive. We expect lower
interest rates and modest inflation, which should be favorable for corporate
earnings. Productivity has continued to improve at many corporations. US
multinational companies in particular are in a more competitive position
abroad as a result of strong currencies in selected countries. In Washington,
we are encouraged by Congress's initiatives on fiscal responsibility. While
final legislation has not been signed into law yet, we believe that this new
direction may be a positive signal for the markets.
We think shareholders should keep the recent strong performance of markets
in perspective. We believe adhering to an investment program developed with
the advice of a financial adviser offers the greatest potential for reaching
your long-term financial goals.
Thank you for your continued support of Keystone Omega Fund. We encourage
you to call or write to us with any questions about your Keystone investment.
Sincerely,
[signature of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
August 1995
[photo] [photo]
Albert H. Elfner, III George S. Bissell
2
<PAGE>
A Discussion With
Your Fund Manager
Maureen E. Cullinane is a senior portfolio manager and leads Keystone's
growth stock group. A Chartered Financial Analyst, Ms. Cullinane has 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.
Q. What was the investment climate like during the six-month period?
A. The investment environment improved significantly from year-earlier levels.
After raising interest rates several times throughout l994, the Federal
Reserve Board (the Fed) appeared to have achieved its goal of reining in
economic growth and containing inflation. As economic growth showed signs of
moderating at the beginning of 1995, long-term bond yields declined. This was
good news not only for bond holders, but also for stock investors. Lower
interest rates and continued strong corporate earnings made stocks attractive
for investment. Stocks of large, established companies were the first to
rally, and we now believe mid-sized and small company growth stocks are
beginning to attract investors.
Q. What was your investment strategy in this environment?
A. During the six-month period, we employed a two-pronged approach in searching
for growth. We favored stable growth companies, primarily in the service
industry, and companies involved in productivity enhancement, particularly in
the technology sector.
Q. What attracted you to stable growth companies?
A. These companies accounted for nearly 45% of portfolio assets. Stable growth
companies are companies that have shown consistent earnings growth over the
course of a business cycle. Traditionally, stable growth companies tend to
report positive results regardless of the state of the general economy.
Because we believed that the US economy would slow in l995, we increased the
Fund's exposure to these companies.
Q. What are some examples of your stable growth company holdings?
A. Many stable growth companies are in the service sector of the economy. One of
our favorites is Thermo Electron, which is among our largest holdings. Thermo
Electron, through its subsidiaries, is involved in a wide range of products
and services, from cogeneration systems to toxic waste remediation and from
bomb detection systems to cardiovascular devices.
Other examples of stable growth companies are Peak Technologies and Loewen
Group. Peak Technolo-
Fund Profile
Objective: Seeks maximum capital growth from common stocks.
Inception date: February 8, 1968
Number of stocks: 70
Net assets: $166.3 million
3
<PAGE>
Top 5 Industries
as of June 30, 1995
Percentage of
Industry net assets
Finance 11.1
Services 8.3
Electronics products 7.1
Oil 6.8
Software services 6.8
gies distributes bar code data collection equipment and systems to industrial
users. The retail use of bar Peak Technologies and Loewen Group. Peak
Technologies distributes bar code data collection equipment and systems to
industrial users. The retail use of bar codes is widely recognized, but
manufacturers are now employing bar codes to control inventory and the
manufacturing process. Loewen Group owns and operates a chain of funeral
homes throughout Canada and the United States. Its earnings have grown at
approximately 25% per year for the past five years.
Q. Companies with a productivity theme also comprised an important part of
your strategy. Why?
A. To compete in a global economy, US companies must offer better products or
services at lower costs. Technology, whether electronic components,
computerized manufacturing systems or software, will play a major role in
improving corporate productivity. One of our largest holdings is Parametric
Technology, which develops software products for the automation of mechanical
design systems. Parametric's CAD/CAM systems enable users, such as automotive
or aeronautical engineers, to design and redesign new cars or planes by means
of the computer. By automating the design process, both the time and cost to
design and market a new product are reduced.
Q. You say that you favor technology stocks, but they were reduced from
nearly 30% of net assets to 20% by June 30. Why?
A. Because technology stocks were such strong performers in the latter part
of 1994 and early 1995, we took profits on selected technology holdings. The
technology industry is one of the most dynamic growth sectors of the stock
market, and our long-term outlook for technology stocks is still positive.
While we anticipate that technology stock prices may experience periodic pull
backs, we believe they should continue to provide growth opportunities for
some time.
Top 10 Holdings
as of June 30, 1995
Percentage of
Company Industry net assets
Warner Lambert Drugs 4.2
Thermo Electron Services 2.5
AGCO Capital goods 2.2
Bank of Boston Finance 2.2
CUC International Consumer goods 2.2
Parametric Technology Software services 2.1
Bowater Paper and packaging 2.0
Pioneer Hi Bred International Foods 2.0
American International Group Insurance 1.9
BankAmerica Finance 1.9
4
<PAGE>
The Omega Investment Discipline
Management carefully selects growth stocks which meet Omega's specific
investment criteria:
* Earnings growth rates which exceed the S&P 500
* Strong management
* Industry leadership
* New products or services that are believed to provide a competitive
advantage.
You increased the finance portion of the Fund from 2% of net assets to nearly
11% on June 30. Why were these stocks attractive?
When interest rates decline, finance companies tend to perform well. So, in
anticipation of declining interest rates during the six-month period, we
increased our holdings of interest-sensitive stocks. Declining rates have
historically benefitted financial companies such as banks, insurance
companies, and mortgage agencies. When interest rates decline, bank stocks
tend to rise because there is a widening gap between the rate of interest
charged to borrowers and the rate that is paid to depositors. We also
believed that selected banks would benefit from the trend toward
consolidation in the banking industry.
Lower interest rates have historically contributed to increased earnings
for insurance companies. Because bonds represent a significant portion of
insurance company assets, as interest rates decline, the value of bonds tends
to rise. This, in turn, generally benefits insurance company stocks.
What is your outlook?
Our outlook for stocks during the next twelve months is optimistic,
particularly for small and mid-sized company stocks. We believe these stocks
are still attractively valued on a relative basis, and they tend to perform
well especially in the later stages of a market rally. While economic growth
has slowed during the first half of 1995, we expect lower interest rates and
moderate inflation should promote further economic growth over the next
twelve months. Because stocks have made strong gains during the first half of
l995, we believe that a short-term pull back in prices could occur. Such a
short-term pull-back would be a normal event in the context of the long-term
positive trend we foresee for stocks.
[diamond]
This column is intended to answer common
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors Company, Inc.
Attn: Manager, Shareholder Communications
200 Berkeley Street,
Boston, Massachusetts 02116-5034.
5
<PAGE>
Your Fund's Performance
[Mountain Chart]
Reinvested Initial
Date Distributions Investment
6/85 9 425 9,425
6/86 11,708 12,253
6/87 12,319 15,085
6/88 10,080 14,298
6/89 11,582 16,569
6/90 12,812 20,779
6/91 12,083 22,937
6/92 12,223 27,107
6/93 12,628 32,510
6/94 11,398 32,417
6/95 13,269 39,197
Class A shares were initially offered on April 14, 1987. Performance is
reported at the current maximum front-end sales charge of 5.75%.
Class B shares were initially offered on August 2, 1993. Shares purchased
after June 1, 1995 are subject to a contingent deferred sales charge (CDSC)
that declines from 5% to 1% over six years from the month purchased.
Performance assumes that shares were redeemed after the end of a one-year
holding period and reflects the deduction of a 4% CDSC.
Class C shares were initially offered on August 2, 1993. Performance
reflects the return you would have received for holding shares for one year
and redeeming after the end of the period.
Six-Month Performance as of June 30, 1995
Class A Class B Class C
Total returns* 15.96% 15.45% 15.42%
Net asset
value 12/31/94 $15.54 $15.34 $15.37
6/30/95 $18.02 $17.71 $17.74
Dividends None None None
Capital gains None None None
*Before deduction of front-end or contingent deferred sales
charge (CDSC).
Historical Record as of June 30, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 20.91% 19.80% 19.77%
1-year 13.96% 15.80% 19.77%
5-year 77.79% -- --
10-year 291.97% -- --
Life of Class -- 13.59% 17.77%
Average annual returns
1-year w/o sales charge 20.91% 19.80% 19.77%
1-year 13.96% 15.80% 19.77%
5-year 12.20% -- --
10-year 14.64% -- --
Life of Class -- 6.88% 8.92%
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
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>
Keystone Omega Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Market
Shares Value
---------------------------------------- ----------- ------------
COMMON STOCKS (97.6%)
ADVERTISING & PUBLISHING (2.5%)
Clear Channel Communications, Inc. (a) 7,000 $ 450,625
LIN Television Corp. 65,000 2,185,625
Viacom, Inc., Class B (a) 35,000 1,623,125
--------------------------------------- ----------- ------------
4,259,375
--------------------------------------- ----------- ------------
AEROSPACE (1.9%)
Boeing Co. 50,000 3,131,250
--------------------------------------- ----------- ------------
AMUSEMENTS (1.5%)
Hospitality Franchise Systems, Inc. (a) 75,000 2,596,875
--------------------------------------- ----------- ------------
BUILDING MATERIALS (1.4%)
Sherwin-Williams Co. 65,000 2,315,625
--------------------------------------- ----------- ------------
CAPITAL GOODS (3.9%)
AGCO Corp. 96,800 3,630,000
General Electric Co. 50,000 2,818,750
--------------------------------------- ----------- ------------
6,448,750
--------------------------------------- ----------- ------------
CHEMICALS (1.5%)
Lubrizol Corp. 70,000 2,476,250
--------------------------------------- ----------- ------------
CONSUMER GOODS (4.3%)
Alberto Culver Co. 61,700 1,866,425
CUC International, Inc. (a) 85,000 3,570,000
Gillette Co., The 40,000 1,785,000
--------------------------------------- ----------- ------------
7,221,425
--------------------------------------- ----------- ------------
DRUGS (6.2%)
Abbott Laboratories 40,000 1,620,000
Merck & Co., Inc. 35,000 1,715,000
Warner-Lambert Co. 80,000 6,910,000
--------------------------------------- ----------- ------------
10,245,000
--------------------------------------- ----------- ------------
ELECTRONICS PRODUCTS (7.1%)
AG Associates, Inc. 62,500 1,078,125
Analog Devices, Inc. (a) 80,000 2,720,000
KLA Instruments Corp. (a) 35,000 2,708,125
Lam Research Corp. 45,000 2,874,375
Solectron Corp. (a) 70,000 2,388,750
--------------------------------------- ----------- ------------
11,769,375
--------------------------------------- ----------- ------------
FINANCE (11.1%)
BankAmerica Corp. 60,000 $ 3,157,500
Bank of Boston Corp. 95,700 3,588,750
BISYS Group, Inc. (The) (a) 53,200 1,177,050
Fleet Financial Group, Inc. 45,000 1,670,625
Federal National Mortgage Association 28,500 2,689,687
Greenpoint Financial Corp. 72,900 1,722,263
Standard Federal Bancorporation, Inc. 75,000 2,521,875
Washington Mutual, Inc. 80,600 1,889,063
--------------------------------------- ----------- ------------
18,416,813
--------------------------------------- ----------- ------------
FOODS (4.8%)
Pioneer Hi-Bred International, Inc. 80,000 3,350,000
Sara Lee Corp. 80,000 2,280,000
Wrigley (Wm) Jr. Co. 50,000 2,318,750
--------------------------------------- ----------- ------------
7,948,750
--------------------------------------- ----------- ------------
HEALTH CARE (1.8%)
Boston Scientific Corp. (a) 41,300 1,316,437
Cardinal Health, Inc. 35,000 1,653,750
--------------------------------------- ----------- ------------
2,970,187
--------------------------------------- ----------- ------------
INSURANCE (5.2%)
American General Corp. 70,000 2,362,500
American International Group, Inc. 28,000 3,192,000
MBIA, Inc., Common Rts. 46,000 3,059,000
--------------------------------------- ----------- ------------
8,613,500
--------------------------------------- ----------- ------------
NATURAL GAS (2.7%)
Anadarko Petroleum Corp. 65,000 2,803,125
Louisiana Land & Exploration Co. 45,000 1,794,375
--------------------------------------- ----------- ------------
4,597,500
--------------------------------------- ----------- ------------
OFFICE & BUSINESS EQUIPMENT (2.2%)
EMC Corp. (a) 101,000 2,449,250
Indigo N.V. (a) 23,100 1,166,550
--------------------------------------- ----------- ------------
3,615,800
--------------------------------------- ----------- ------------
See Notes to Financial Statements.
7
<PAGE>
Market
Shares Value
--------------------------------------- ----------- ------------
OIL (6.8%)
Amoco Corp. 40,000 $ 2,665,000
Mobil Corp. 15,000 1,440,000
Murphy Oil Corp. 50,000 2,050,000
Occidental Petroleum Corp. 103,600 2,369,850
Unocal Corp. 100,000 2,762,500
--------------------------------------- ----------- ------------
11,287,350
--------------------------------------- ----------- ------------
OIL SERVICES (4.1%)
ENSCO International, Inc. 150,000 2,381,250
Tidewater, Inc. 100,000 2,512,500
Weatherford International, Inc. 150,000 1,893,750
--------------------------------------- ----------- ------------
6,787,500
--------------------------------------- ----------- ------------
PAPER & PACKAGING (3.6%)
Bowater, Inc. 75,000 3,365,625
Fort Howard Corp. 70,500 991,406
Louisiana-Pacific Corp. 65,000 1,706,250
--------------------------------------- ----------- ------------
6,063,281
--------------------------------------- ----------- ------------
RESTAURANTS (1.2%)
Apple South, Inc. 100,000 1,937,500
--------------------------------------- ----------- ------------
RETAIL (3.3%)
Home Depot, Inc. (The) 55,000 2,234,375
Staples, Inc. (a) 52,000 1,504,750
Sunglass Hut International, Inc. 52,000 1,813,500
--------------------------------------- ----------- ------------
5,552,625
--------------------------------------- ----------- ------------
SERVICES (8.3%)
Allwaste, Inc. (a) 400,000 2,200,000
Loewen Group, Inc. (a) 75,000 2,662,500
Molten Metal Technology, Inc. (a) 50,000 1,175,000
Peak Technologies Group, Inc. 61,800 1,676,325
Thermo Electron Corp. 105,000 4,226,250
United States Filter Corp. 100,000 1,900,000
--------------------------------------- ----------- ------------
13,840,075
--------------------------------------- ----------- ------------
SOFTWARE SERVICES (6.8%)
Adobe Systems, Inc. 25,000 1,456,250
Broderbund Software, Inc. 34,300 2,182,337
Computer Sciences Corp. 40,000 $ 2,275,000
Epic Design Technology, Inc. (a) 52,600 1,847,575
Parametric Technology Corp. (a) 69,900 3,468,788
--------------------------------------- ----------- ------------
11,229,950
--------------------------------------- ----------- ------------
TELECOMMUNICATIONS (5.4%)
Cidco, Inc. 48,100 1,512,144
Cisco Systems, Inc. (a) 50,000 2,528,125
DSC Communications Corp. (a) 64,500 3,003,281
NetManage, Inc. (a) 110,000 1,897,500
--------------------------------------- ----------- ------------
8,941,050
--------------------------------------- ----------- ------------
TOTAL COMMON STOCKS
(Cost--$142,957,682) 162,265,806
--------------------------------------- ----------- ------------
Maturity
Value
--------------------------------------- ----------- ------------
SHORT-TERM INVESTMENTS (2.7%)
REPURCHASE AGREEMENT (2.7%)
Investments in repurchase agreements,
in a joint trading account, purchased
06/30/95, 6.21%, maturing 07/03/95
(Cost $4,445,000) (b) $4,447,300 4,445,000
--------------------------------------- ----------- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost--$4,445,000) 4,445,000
--------------------------------------- ----------- ------------
TOTAL INVESTMENTS
(Cost--$147,402,682) 166,710,806
--------------------------------------- ----------- ------------
OTHER ASSETS AND LIABILITIES--
NET (-0.3%) (427,026)
--------------------------------------- ----------- ------------
NET ASSETS (100%) $166,283,780
--------------------------------------- ----------- ------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income-producing security.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio.
8
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding thoughout the year)
<TABLE>
<CAPTION>
Six Months Year Ended December 31,
Ended -----------------------------------------------------
June 30, 1995 1994 1993 1992 (d) 1991 1990
------------------------------------- ------------- ------- ------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37 $ 16.03
------------------------------------- ------------- ------- ------- --------- --------- ----------
Income from investment operations
Net investment income (loss) 0.04 0.04 (0.07) 0 (0.04) 0.11
Net gain (loss) on investments 2.44 (1.00) 3.07 0.39 6.92 (0.39)
------------------------------------- ------------- ------- ------- --------- --------- ----------
Total from investment operations 2.48 (0.96) 3.00 0.39 6.88 (0.28)
------------------------------------- ------------- ------- ------- --------- --------- ----------
Less distributions from:
Net investment income 0 0 0 0 (0.02) (0.25)
In excess of net investment income
(a) 0 0 0 0 (0.05) (0.04)
Net realized gain on investments 0 (0.61) (1.73) (2.23) (2.50) (2.09)
------------------------------------- ------------- ------- ------- --------- --------- ----------
Total distributions 0 (0.61) (1.73) (2.23) (2.57) (2.38)
------------------------------------- ------------- ------- ------- --------- --------- ----------
Net asset value end of period $ 18.02 $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37
------------------------------------- ------------- ------- ------- --------- --------- ----------
Total return (b) 15.96% (5.66%) 19.33% 4.00% 54.49% (2.38%)
Ratio/supplemental data
Ratios to average net assets:
Total expenses 1.49%(c) 1.41% 1.51% 1.52% 1.57% 1.73%
Net investment income (loss) 0.14%(c) 0.27% (0.48%) (0.01%) (0.31%) 0.70%
Portfolio turnover rate 104% 158% 162% 176% 115% 108%
Net assets, end of period (thousands) $110,221 $99,569 $90,404 $73,144 $58,671 $38,531
------------------------------------- ------------- ------- ------- --------- --------- ----------
</TABLE>
(a) Effective January 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies". As a result, distribution amounts exceeding book basis net
investment income (or tax basis net income on a temporary basis) are
presented as distributions in excess of net investment income. Similarly,
capital gain distributions in excess of book basis capital gains (or tax
basis capital gains on a temporary basis) are presented as "Distributions
in excess of capital gains". For the fiscal years ended December 31,
1992, 1991, and 1990, distributions, if any, in excess of book basis net
income were charged to paid-in capital.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculated on average shares outstanding.
See Notes to Financial Statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
August 2, 1993
Six Months Year Ended (Date of Initial
Ended December 31, Public Offering) to
June 30, 1995 1994 December 31, 1993
------------------------------------ ------------- --------------- ----------------------
(Unaudited)
<S> <C> <C> <C>
Net asset value beginning of period $15.34 $17.06 $17.29
------------------------------------ ------------- --------------- ----------------------
Income from investment operations
Net investment income (loss) (0.10) (0.06) (0.05)
Net gain (loss) on investments 2.47 (1.05) 1.55
------------------------------------ ------------- --------------- ----------------------
Total from investment operations 2.37 (1.11) 1.50
------------------------------------ ------------- --------------- ----------------------
Less distributions from:
Net realized gain on investments 0 (0.61) (1.73)
------------------------------------ ------------- --------------- ----------------------
Total distributions 0 (0.61) (1.73)
------------------------------------ ------------- --------------- ----------------------
Net asset value end of period $17.71 $15.34 $17.06
------------------------------------ ------------- --------------- ----------------------
Total return (b) 15.45% (6.57%) 9.02%
Ratio/supplemental data
Ratios to average net assets:
Total expenses 2.35%(a) 2.30% 2.57%(a)
Net investment income (loss) (0.72%)(a) (0.58%) (1.73%)(a)
Portfolio turnover rate 104% 158% 162%
Net assets, end of period
(thousands) $45,482 $32,266 $7,423
------------------------------------ ------------- --------------- ----------------------
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
See Notes to Financial Statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
August 2, 1993
Six Months Year Ended (Date of Initial
Ended December 31, Public Offering) to
June 30, 1995 1994 December 31, 1993
------------------------------------ ------------- --------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Net asset value beginning of period $15.37 $17.09 $17.29
------------------------------------ ------------- --------------- --------------------
Income from investment operations
Net investment income (loss) (0.15) (0.07) (0.06)
Net gain (loss) on investments 2.52 (1.04) 1.59
------------------------------------ ------------- --------------- --------------------
Total from investment operations 2.37 (1.11) 1.53
------------------------------------ ------------- --------------- --------------------
Less distributions from:
Net realized gain on investments 0 (0.61) (1.73)
------------------------------------ ------------- --------------- --------------------
Total distributions 0 (0.61) (1.73)
------------------------------------ ------------- --------------- --------------------
Net asset value end of period $17.74 $15.37 $17.09
------------------------------------ ------------- --------------- --------------------
Total return (b) 15.42% (6.56%) 9.20%
Ratio/supplemental data
Ratios to average net assets:
Total expenses 2.35%(a) 2.30% 2.48%(a)
Net investment income (loss) (0.71%) (a) (0.63%) (1.64%) (a)
Portfolio turnover rate 104% 137% 162%
Net assets, end of period
(thousands) $10,581 $9,900 $3,620
------------------------------------ ------------- --------------- --------------------
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
See Notes to Financial Statements.
See Notes to Financial Statements.
11
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
Assets:
Investments at market value (identified
cost--$142,957,682) $162,265,806
Repurchase Agreements (identified
cost--$4,445,000) 4,445,000
------------------------------------------------------------- -------------
Total investments at market value (identified
cost--$147,402,682) (Note 1) 166,710,806
Cash 872
Receivable for:
Investments sold 3,972,328
Fund shares sold 891,517
Interest and dividends 180,923
Prepaid expenses 10,660
------------------------------------------------------------- -------------
Total assets 171,767,106
------------------------------------------------------------- -------------
Liabilities (Notes 2, 4 and 5):
Payable for:
Investments purchased 5,364,275
Fund shares redeemed 102,968
Other accrued expenses 16,083
------------------------------------------------------------- -------------
Total liabilities 5,483,326
------------------------------------------------------------- -------------
Net assets $166,283,780
------------------------------------------------------------- -------------
Net assets represented by (Note 1):
Paid-in capital $137,507,208
Accumulated distributions in excess of net investment
income (99,010)
Accumulated net realized gain (loss) on investments 9,567,447
Net unrealized appreciation (depreciation) on investments
and other assets and liabilities 19,308,135
------------------------------------------------------------- -------------
Total net assets $166,283,780
------------------------------------------------------------- -------------
Net Asset Value (Note 1):
Class A Shares
Net assets of $110,220,711 / 6,117,561 shares outstanding $ 18.02
Offering price per share ($18.02 / 0.9425) (based on a
sales charge of 5.75% of the offering price June 30, 1995) $ 19.12
Class B Shares
Net assets of $45,481,569 / 2,567,820 shares outstanding $ 17.71
Class C Shares
Net assets of $10,581,501 / 596,456 shares outstanding $ 17.74
------------------------------------------------------------- -------------
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1995 (Unaudited)
Investment income (Note 1):
Dividends (net of foreign withholding taxes of
$326) $ 752,619
Interest 476,050
- ----------------------------------------------- ---------- -------------
Total income 1,228,669
- ----------------------------------------------- ---------- -------------
Expenses (Notes 2 and 4):
Management fees $565,015
Transfer agent fees 332,608
Accounting, auditing and legal 19,752
Custodian fees 53,685
Printing 5,528
Trustees' fees and expenses 1,009
Distribution Plan expenses 312,360
Registration fees 36,612
Miscellaneous 1,110
- ----------------------------------------------- ---------- -------------
Total expenses 1,327,679
- ----------------------------------------------- ---------- -------------
Net investment loss (99,010)
- ----------------------------------------------- ---------- -------------
Net realized and unrealized gain (loss) on
investments (Notes 1 and 3):
Net realized gain (loss) on investments 11,581,094
- ----------------------------------------------- ---------- -------------
Net change in unrealized appreciation
(depreciation) on investments 11,060,652
- ----------------------------------------------- ---------- -------------
Net gain (loss) on investments 22,641,746
- ----------------------------------------------- ---------- -------------
<PAGE>
Net increase (decrease) in net assets
resulting from operations $22,542,736
=============================================== ========== =============
12
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
=================================================================== ================= ====================
(Unaudited)
<S> <C> <C>
Operations:
Net investment income (loss) $ (99,010) $ 79,708
Net realized gain (loss) on investment and foreign currency
related transactions 11,581,094 (2,218,472)
Net change in unrealized appreciation (depreciation) on investments 11,060,652 (4,649,148)
------------------------------------------------------------------- ----------------- --------------------
Net increase (decrease) in net assets resulting from operations 22,542,736 (6,787,912)
------------------------------------------------------------------- ----------------- --------------------
Distributions to shareholders from (Notes 1 and 5):
Net realized gain on investments:
Class A Shares 0 (3,782,055)
Class B Shares 0 (984,992)
Class C Shares 0 (322,709)
------------------------------------------------------------------- ----------------- --------------------
Total distributions to shareholders 0 (5,089,756)
------------------------------------------------------------------- ----------------- --------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 5,274,225 25,532,191
Class B Shares 11,349,238 30,415,780
Class C Shares 2,050,484 8,044,614
Payment for shares redeemed:
Class A Shares (10,009,541) (10,802,653)
Class B Shares (3,743,787) (4,383,078)
Class C Shares (2,914,771) (1,273,016)
Net asset value of shares issued in reinvestment of distributions
from net realized gain on investments:
Class A Shares 0 3,419,022
Class B Shares 0 909,009
Class C Shares 0 303,801
------------------------------------------------------------------- ----------------- --------------------
Net increase in net assets resulting from capital share
transactions 2,005,848 52,165,670
------------------------------------------------------------------- ----------------- --------------------
Total increase in net assets 24,548,584 40,288,002
Net assets:
Beginning of period 141,735,196 101,447,194
------------------------------------------------------------------- ----------------- --------------------
End of period [including accumulated distributions in excess of net
investment income as follows: June 1995--($99,010) and December
1994--$0] (Note 1) $166,283,780 $141,735,196
=================================================================== ================= ====================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Principles
Keystone Omega Fund, Inc. (the "Fund") (formerly Keystone America Omega Fund,
Inc.) is an open-end diversified management investment company incorporated in
Massachusetts on February 8, 1968. The Fund was reorganized as a Massachusetts
business trust on July 21, 1995 (see Note 6). Keystone Management, Inc. ("KMI")
is the Investment Manager and Keystone Investment Management Company (formerly
Keystone Custodian Funds, Inc.) ("Keystone") is the Investment Adviser. It is
registered under the Investment Company Act of 1940 as a diversified open-end
management investment company.
The Fund currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption which decreases depending on when shares were purchased and how
long they have been held. Class C shares are sold subject to a contingent
deferred sales charge payable upon redemption within one year of purchase. Class
C shares are available only through dealers who have entered into special
distribution agreements with Keystone Investment Distributors Company (formerly
Keystone Distributors, Inc.) ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned by
an investor group consisting of current and former members of management of
Keystone. KMI is a wholly-owned subsidiary of Keystone. Keystone Investor
Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the
Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles. A.
Investments are usually valued at the closing price, or in the absence of sales
and for over-the-counter securities, the mean of the bid and asked quotations.
Management values of the following securities at prices it deems in good faith
to be fair: (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 sales occurred. Short-term investments which are purchased with maturities
of 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.
B. Securities transactions are accounted for on the trade date. Realized gains
and losses are computed on the identified cost basis. Interest income is
recorded on the accrual basis and dividend income is recorded on the ex-dividend
date. Distributions to the shareholders are recorded by the Fund on the record
date.
C. The Fund has qualified and intends to qualify in the future as a regulated
investment company under the
14
<PAGE>
Internal Revenue Code of 1986, as amended ("Internal Revenue Code"). Thus,
the Fund is relieved of any federal income tax liability by distributing all
of its net taxable investment income and net taxable capital gains, if any,
to its shareholders. The Fund intends to avoid 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 the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any loss would be increased
by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury and/or Federal Agency obligations.
E. In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Fund may enter into forward foreign currency
exchange contracts ("contracts") to hedge certain foreign currency assets.
Contracts are recorded at market value and 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 income and net capital gains, if any, annually.
Distributions from investment income--net are based on tax basis net income.
From time to time, the Fund may distribute dividends which exceed book basis
net income. Effective January 1, 1993 the Fund adopted Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. As a result, the Fund changed the financial statement
classification of distributions to shareholders to more clearly reflect the
differences between financial statement amounts available for distribution
and amounts distributed to comply with income tax regulations.
The significant differences between financial statement amounts available
for distribution and distributions made in accordance with income tax
regulations are due to the deferral of losses for income tax purposes that
have been recognized for financial statement purposes.
15
<PAGE>
(2.) Capital Share Transactions
Two hundred million shares of the Fund with a par value of $1.00 are authorized
for issuance. Transactions in shares of the Fund were as follows:
Class A Shares
--------------------------------
Six Months Year Ended
Ended December 31,
June 30, 1995 1994
======================= ============= ================
Shares sold 320,066 1,577,169
Shares redeemed (610,724) (668,733)
Shares issued in
reinvestment of
distributions from
net realized gains 0 216,943
- ----------------------- ------------- ----------------
Net increase
(decrease) (290,658) 1,125,379
======================= ============= ================
Class B Shares
--------------------------------
Six Months Year Ended
Ended December 31,
June 30, 1995 1994
======================= ============= ================
Shares sold 696,668 1,881,751
Shares redeemed (232,319) (271,676)
Shares issued in
reinvestment of
distributions
from net
realized gains 0 58,195
- ----------------------- ------------- ----------------
Net increase 464,349 1,668,270
======================= ============= ================
Class C Shares
--------------------------------
Six Months Year Ended
Ended December 31,
June 30, 1995 1994
====================== ============= ================
Shares sold 128,549 493,899
Shares redeemed (176,424) (80,825)
Shares issued in
reinvestment of
distributions from
net realized gains 0 19,425
---------------------- ------------- ----------------
Net increase
(decrease) (47,875) 432,499
====================== ============= ================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940
Act").
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others such as dealers, service fees at an annual rate of up to 0.25% of
the average net asset value of Class A shares maintained by the recipient
outstanding on the Fund's books for specified periods.
The Class B Distribution Plan provides payment at an annual rate of 1.00%
of the average daily net asset value of Class B shares to pay expenses of the
distribution of Class B shares. Amounts paid by the Fund under the Class B
Distribution Plan are currently used to pay others (dealers) (i) a commission
at the time of purchase normally equal to 4.00% of the price paid for each
Class B share sold plus the first year's service fee in advance in the amount
of 0.25% of the price paid for each Class B share sold. Beginning
approximately 12 months after the purchase of a Class B share, the broker or
other party will receive service fees at an annual rate of 0.25% of the
average daily net asset value of such Class B shares maintained by the
recipient outstanding on the Fund's books for specified periods. A contingent
deferred sales charge will be imposed, if applicable, on Class B shares
purchased after June 1, 1995 at rates ranging from a maximum of 5.00% of
amounts redeemed during the first 12 months following the date of purchase to
1.00% of amounts redeemed during the sixth twelve month
16
<PAGE>
period following the date of purchase. Class B shares purchased on or after
June 1, 1995 that have been outstanding for eight years following the month
of purchase will automatically convert to Class A shares without a front end
sales charge or exchange fee. Class B shares purchased prior to June 1, 1995
will retain their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase in the amount of 0.75% of the
price paid for each Class C share sold, plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class C share, and,
beginning approximately 15 months after purchase, a commission at an annual
rate of 0.75% (subject to applicable limitations imposed by the rules of the
National Association of Securities Dealers, Inc.) ("NASD Rule") plus service
fees at the annual rate of 0.25%, respectively, of the average net asset
value of each Class C share maintained by the recipient outstanding on the
Fund's books for specified periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Directors or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, payments to KIDC may, at the discretion of the Board of
Directors, continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
For the six months ended June 30, 1995, the Fund paid KIDC $72,895,
$186,517, and $52,948 under its Class A, Class B, and Class C Distribution
Plans, respectively.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Class B and C Distribution Plans,
respectively, were $2,491,279 and $693,947 as of June 30, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
As of December 31, 1994, the Fund had a capital loss carryover for Federal
income tax purposes of approximately $452,000 which expires in the year 2002.
Additionally, the Fund has incurred capital losses of approximately $1,300,000
in the current fiscal year which are treated for tax purposes as occurring on
the first day of the Fund's next fiscal year and are available as an offset to
capital gains that may be recognized in the next fiscal year.
Cost of purchases and proceeds from sales of investment securities (including
proceeds received at maturity) for the six months ended June 30, 1995, were as
follows:
Cost of Proceeds
Purchases From Sales
===================== ============ ==============
Portfolio securities $ 163,108,647 $ 140,232,707
Short-term
investments 1,831,532,767 1,851,267,767
--------------------- ------------ --------------
$1,994,641,414 $1,991,500,474
===================== ============ ==============
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the Fund,
KMI provided investment management and administrative services to the Fund. In
return, KMI is paid a management fee computed and paid daily. The management fee
is determined by applying percentage rates, starting at 0.75% and declining as
net assets increase, to
17
<PAGE>
0.50% per annum, to the net asset value of the Fund. KMI has entered into an
Investment Advisory Agreement with Keystone, under which Keystone provides
investment advisory and management services to the Fund and receives for its
services an annual fee representing 85% of the management fee received by
KMI. During the six months ended June 30, 1995, the Fund paid or accrued to
KMI investment management and administrative services fees of $565,015, which
represented 0.75% of the Fund's average net assets on an annualized basis. Of
such amounts paid to KMI, $480,263 was paid to Keystone for its services to
the Fund.
During the six months ended June 30, 1995, the Fund paid or accrued to KII
$3,487 as reimbursement for the cost of accounting and printing services
provided to the Fund and $332,608 was paid or accrued to KIRC for transfer
agent fees.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
(5.) Distribution to Shareholders
The Fund intends to distribute to its shareholders dividends from net investment
income and all net taxable realized long-term capital gains, if any, annually.
Any distribution which is declared in December and paid before the next February
1 will be taxable to shareholders in the year declared.
(6.) Shareholder Meeting
A special Meeting of Shareholders was held on April 21, 1995. The following is a
brief description of the matters which were submitted to shareholders, and
certain information about how shareholders voted:
1. Proposal 1 was to approve the reorganization of the Fund as a
Massachusetts business trust, pursuant to which the existing Board of
Directors would become the Board of Trustees of the new entity, and the
present investment manager and investment adviser to the Fund would remain
the same.*
FOR AGAINST ABSTAIN
6,155,612.347 300,564.114 519,525.686
2. Proposal 2 was to select KPMG Peat Marwick LLP as the independent
public accountant of the Fund for the 1995 fiscal year.
FOR AGAINST ABSTAIN
6,159,296.725 95,860.769 334,863.015
* Action on Proposal 1 was postponed and the meeting adjourned until May
30, 1995, and thereafter until June 30, 1995, at which time the required vote
was received and the proposal was approved.
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.
