<PAGE>
[KEYSTONE COVER]
KEYSTONE
[PHOTO -- CLIMBER ON TOP OF SUMMIT]
OMEGA
FUND
[logo]
SEMIANNUAL REPORT
JUNE 30, 1996
<PAGE>
PAGE 1
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Keystone Omega Fund
Seeks maximum capital growth from common stocks.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Omega Fund for
the six-month period which ended June 30, 1996. Following this letter, we
have included an interview with your Fund manager discussing portfolio
strategy.
Performance
For the periods which ended June 30, 1996, your Fund produced the following
returns:
Class A shares returned 3.24% for the six-month period and 21.92% for the
twelve-month period.
Class B shares returned 2.78% for the six-month period and 20.80% for the
twelve-month period.
Class C shares returned 2.77% for the six-month period and 20.76 for the
twelve-month period.
For the same periods, the Standard & Poor's 500, a broad-based index of
common stocks, returned 10.09% for six months and 25.99% for twelve months.
In contrast to your Fund's long run record of positive performance, its most
recent performance was disappointing. These short term results reflected a
more cautious investment strategy that we adopted at the beginning of 1996.
This strategy may have been premature in view of the strong market rally in
the following months. Longer term, we believe this cautious strategy may have
been justified as witnessed by the sharp correction in stock prices in July,
after the close of your Fund's fiscal period.
At the beginning of this year we became concerned about the sustainability
of the long market rally, especially after the excellent returns of last
year. At the end of 1995 technology stocks had been one of the best
performing sectors, and as a result, we decided to reduce our holdings in
this volatile area. At the same time, we broadened your Fund's industry
diversification.
In the first half of 1996 the market and technology stocks rallied. As a
result, we did not fully participate in the rally. While our portfolio
adjustments may have been premature, we believe we took a prudent step in
view of market conditions.
After the close of the period the stock market experienced a sharp
correction, which brought prices down 10-15% as of late July. We think this
correction was healthy for the market by bringing stock valuations down to
more reasonable levels. We were expecting the possibility of a correction and
we think your Fund was well positioned for it.
A disciplined approach
In selecting stocks for the portfolio, we continue to employ a disciplined
strategy. We look for companies with earnings growth rates that exceed the
average growth rate of companies contained in the Standard & Poor's 500
Index. We also emphasize companies that are leaders in their industry with
strong management. These companies typically have new products or services
that we believe provide a competitive advantage.
Looking ahead
Our long-term outlook for stocks is favorable, especially with stock
valuations now at more reasonable levels. We believe the correction helped to
wring out some of the excesses in the market, and provided opportunities to
add to selected holdings at lower prices. Going forward we expect economic
growth to slow but remain healthy in the second half of the year. As a
result, interest rates should moderate and inflation should remain under
control. In this environment we expect the prospects for selected companies
to be attractive.
--Continued--
<PAGE>
PAGE 2
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Keystone Omega Fund
As you evaluate your investment and market conditions, we encourage you to
remember a few investment principles that have withstood the test of time in
all types of markets. Diversify your investments. By putting your money in
different types of investments, you can minimize your risk. Be patient. A
long term approach can provide more consistent results than trying to time
the market. Invest regularly. By making periodic investments over time, you
can lower your average cost per share. Of course, your investment will
fluctuate with market conditions, and there is no assurance that it will be
worth more when you sell shares.
Your investment adviser can help you with these strategies by developing a
plan to meet your particular needs. He or she is a professional with the
resources and expertise to help you achieve your investment goals. We
encourage you to take advantage of the services your adviser can provide.
We appreciate your continued support of Keystone Omega Fund. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
[PHOTO OF ALBERT H. ELFNER, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
[PHOTO OF GEORGE S. BISSELL]
George S. Bissell
Chairman of the Board
Keystone Funds
August 1996
[DALBAR GRAPHIC] Dalbar Key Honors
Honoring Commitment to Excellence
Keystone was recently recognized by Dalbar, an independent
mutual fund rating organization, for demonstrating a
commitment to serving the needs of customers. The award is
intended to distinguish companies who are committed to
investors and have a proven ability to provide good
service.
Keystone Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear Keystone portfolio
managers discuss their latest strategies, or listen to Keystone's
overall market outlook from James McCall, chief investment officer. Of
course, your financial adviser can provide you with more complete information
on Keystone Funds. This service is available 24 hours a day, seven days a
week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2 after the greeting
[FEATURES GRAPHIC OF A TELEPHONE AND RECEIVER]
<PAGE>
PAGE 3
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A Discussion With
Your Fund Manager
[PHOTO OF MAUREEN E. CULLINANE]
[CAPTION]
Maureen E. Cullinane is senior portfolio manager of your Fund and leads
Keystone's growth stock team. 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. The growth team is comprised of Ms.
Cullinane and portfolio manager Margery C. Parker, with support from
Keystone's 11 equity analysts. Together they search for stocks of companies
with above-average earnings growth rates.
[END CAPTION]
Q What was the investment climate like during the six-month period?
A The period was generally positive for growth stocks, but it was
characterized by increasing price volatility and uncertainty. After 18 months
of excellent stock market gains and a favorable investment environment, many
investors wondered how long the rally could last. A jump in the February
employment figures caused many to believe that growth was stronger than
expected. Bond investors worried that this spurt in growth, if sustained,
would heat up the economy and lead to higher inflation. Because inflation can
erode bond yields, interest rates rose. This contributed to market
uncertainty as investors attempted to gauge the growth of the economy.
Q How did this effect your selection process?
A It was a difficult period for stock selection because the market was being
driven more by short-term economic factors than by company earnings. In some
cases stocks with good earnings and solid market positions declined in price
because quarterly earnings were reported at the level expected. Investors had
come to expect that reported corporate earnings should exceed estimates.
Also, in contrast to last year, there has been little industry leadership as
investors rotated in and out of various stock sectors.
Q How did you manage the Fund in this environment?
A This market has not favored any major investment theme or single industry
sector over another. So, we cut back in several sectors that we had been
emphasizing and increased the portfolio's diversification. With our
individual security selection, we focused on companies that we believed had
demonstrated consistent earnings growth over a long period of time. Most were
established companies with strong products or global franchises. In our
opinion, these companies had the best chance of providing reliable
performance in an uncertain market.
Q Where did you cut back?
A While the percentage invested in technology stocks remained about the same
at the beginning and end of the period--at 23% of net assets--we made
significant changes within the sector. We eliminated
Fund Profile
Objective: Seeks maximum capital growth from common stocks.
Commencement of investment operations: February 8, 1968
Number of stocks: 70
Net assets: $253 million
Newspaper listing: "Omeg"
<PAGE>
PAGE 4
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Keystone Omega Fund
The Omega Investment Discipline
Management carefully selects growth stocks which meet
Omega's specific investment criteria:
(bullet) Earnings growth rates which exceed the S&P 500
(bullet) Strong management
(bullet) Industry leadership
(bullet) New products or services that are believed to provide a
competitive advantage.
most of our electronics holdings, as we believed supply/demand imbalances for
the industry would reduce the growth rates for electronics companies and, in
turn, would impact stock performance. Instead, we focused on software and
telecommunications industries, where the demand was accelerating for
productivity tools and faster channels of communications.
Q What were some of the software and telecommunications holdings you
favored?
A We added Microsoft, a leader in business and consumer software and we
retained Winstar Communications. Winstar specializes in radio communications
and should be a beneficiary of the recently deregulated local
telecommunications industry. We also continued to hold Parametric Technology,
a developer of industrial design software.
Q Where else did you cut back?
A We reduced the Fund's weighting in drug stocks from 13.4% of net assets on
December 31, 1995 to about 10% of net assets on June 30, 1996. The primary
focus of our reduction was biotechnology stocks. Most biotech companies are
still in the investment phase of their life cycles, meaning that they do not
have any earnings. In a period of higher interest rates, the valuation of
future earnings potential can be called into question. Although we believe in
the long-term prospects for many biotechnology companies, we reduced our
investment in this area in favor of major drug companies. We maintained our
holdings of Gilead Sciences, however, as we believed in the company's
research and in their progress toward developing new treatments for viral
diseases.
Q Which major drug companies did you add?
A We added American Home Products, Johnson & Johnson and Rhone Poulenc Rorer
to our drug holdings. In contrast to the biotechnology companies, these major
pharmaceutical companies have been reporting good near-term earnings growth.
Q What were some of the established companies you emphasized?
A We increased our holdings of General Electric, a solid contributor to your
Fund's performance during the period. Through additional investment and stock
appreciation, GE became the Fund's largest holding as of the end of the
period. This capital goods company comprised 4.3% of net assets on June 30,
1996. GE is a well managed, diversified company that we think
Top 10 Holdings
as of June 30, 1996
<TABLE>
<CAPTION>
Percentage of
Company Industry net assets
- ---------------------------------------------------------------
<S> <C> <C>
General Electric Capital goods 4.3
- ---------------------------------------------------------------
HFS Amusements 3.5
- ---------------------------------------------------------------
CUC International Consumer goods 2.9
- ---------------------------------------------------------------
ENSCO International Oil services 2.6
- ---------------------------------------------------------------
Microsoft Software services 2.5
- ---------------------------------------------------------------
Johnson & Johnson Drugs 2.3
- ---------------------------------------------------------------
Coca Cola Foods 2.2
- ---------------------------------------------------------------
Cardinal Health Health care 2.1
- ---------------------------------------------------------------
Tidewater Oil services 2.1
- ---------------------------------------------------------------
Bank of Boston Finance 2.1
- ---------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 5
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Top 5 Industries
as of June 30, 1996
<TABLE>
<CAPTION>
Percentage of
Industry net assets
<S> <C>
- --------------------------------------
Drugs 9.9
- --------------------------------------
Software services 7.3
- --------------------------------------
Oil services 7.1
- --------------------------------------
Finance 7.0
- --------------------------------------
Telecommunications 7.0
- --------------------------------------
</TABLE>
excels in nearly every business line. Today the company's businesses range
from power generating equipment and jet engines to financial services and
television broadcasting (NBC). We anticipate consistent earnings growth for
GE as a result of its excellent management, strong product franchises and
global presence.
We also increased our holdings of HFS. Formerly known as Hospitality
Franchise Systems, HFS is the world's largest franchisor of hotels, such as
Ramada, Days Inn and Howard Johnson. The company has acquired Avis Rent-A-Car
and the Century 21 residential real estate system. The company should
continue to benefit from the numerous cross-selling opportunities offered by
each of these divisions, as well as from the opportunity to expand
internationally. As with other fund holdings, HFS fits our investment
criteria: strong management, industry leadership and numerous marketing
opportunities.
Q You increased holdings of oil service stocks. What was attractive about
them?
A Several factors have made the oil service sector more attractive to
investors. First, the industry is emerging from a long period of downsizing,
the result of overbuilding in the 1980s. There are fewer participants today
as the industry has consolidated. With low inventories of natural gas and
higher energy prices, more projects are being funded and demand for oil
service equipment has accelerated. ENSCO, formerly known as Energy Services
Company, has been one of our favorite investments in this area. We have added
Diamond Offshore, Tidewater and Weatherford to the portfolio in anticipation
of improved earnings over the next year.
Q What is your outlook?
A Despite the strong economic reports in the first half of 1996, we believe
economic growth should slow to a more moderate pace and inflation should
remain relatively low during the second half. We believe the recent market
correction in July has been healthy for the market, helping to reduce market
risk and increase the attractiveness of selected stocks. We think the
fundamentals for many individual companies are positive, and stocks with
solid financials and demonstrated earnings records should provide the best
potential returns in the months ahead.
[diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street,
Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
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Keystone Omega Fund
Your Fund's Performance
[MOUNTAIN CHART]
Growth of an investment in Keystone Omega Fund Class A
<TABLE>
<CAPTION>
Initial Investment Reinvested Distributions
<S> <C> <C>
6/86 9,425 9,425
6/87 9,917 11,603
6/88 8,115 10,997
6/89 9,324 12,744
6/90 10,314 15,983
6/91 9,727 17,642
6/92 9,840 20,850
6/93 10,166 25,006
6/94 9,176 24,934
6/95 10,682 30,149
6/96 10,925 36,759
</TABLE>
A $10,000 investment in Keystone Omega Fund Class A made on
June 30, 1986 with all distributions reinvested was worth
$36,759 on June 30, 1996. Past performance is no guarantee
of future results.
[END MOUNTAIN CHART]
Class A shares are 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, 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C> <C>
Total returns* 3.24% 2.78% 2.77%
Net asset value 12/31/95 $19.56 $19.10 $19.13
6/30/96 $18.43 $17.87 $17.90
Dividends None None None
Capital gains $ 1.78 $ 1.78 $ 1.78
</TABLE>
*Before deduction of front-end or contingent deferred sales
charge (CDSC).
Historical Record as of June 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
1-year w/o sales charge 21.92% 20.80% 20.76%
1-year 14.91% 16.80% 20.76%
5-year 96.38% -- --
10-year 267.59% -- --
Life of Class -- 39.05% 42.22%
Average annual returns
1-year w/o sales charge 21.92% 20.80% 20.76%
1-year 14.91% 16.80% 20.76%
5-year 14.45% -- --
10-year 13.90% -- --
Life of Class -- 11.98% 12.85%
</TABLE>
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
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.
<PAGE>
PAGE 7
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Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 8
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Keystone Omega Fund
SCHEDULE OF INVESTMENTS--June 30, 1996
<TABLE>
<CAPTION>
(Unaudited) Market
Shares Value
---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.2%)
ADVERTISING & PUBLISHING (2.3%)
Clear Channel Communications, Inc. (a) 35,000 $ 2,883,125
Renaissance Communications Corp. (a) 90,000 2,902,500
---------------------------------------------------------------------------
5,785,625
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AEROSPACE (1.0%)
America West Airlines, Inc. (a) 112,100 2,466,200
---------------------------------------------------------------------------
AMUSEMENTS (3.4%)
HFS, Inc. (a) 125,000 8,750,000
---------------------------------------------------------------------------
AUTOMOTIVE (4.0%)
Chrysler Corp. 50,000 3,100,000
Ford Motor Co. 90,000 2,913,750
Gentex Corp. (a) 210,000 4,068,750
---------------------------------------------------------------------------
10,082,500
---------------------------------------------------------------------------
BUILDING MATERIALS (3.2%)
Fastenal Co. 60,000 2,617,500
Oakwood Homes Corp. 118,000 2,433,750
Sherwin-Williams Co. 65,000 3,022,500
---------------------------------------------------------------------------
8,073,750
---------------------------------------------------------------------------
BUSINESS SERVICES (6.0%)
GTS Duratek, Inc. 65,000 1,048,125
Molten Metal Technology, Inc. (a) 105,500 3,099,062
Peak Technologies Group, Inc. (a) 152,300 3,540,975
Thermo Electron Corp. (a) 97,500 4,058,438
Thermedics, Inc. (a) 135,000 3,375,000
---------------------------------------------------------------------------
15,121,600
---------------------------------------------------------------------------
CAPITAL GOODS (5.1%)
AGCO Corp. 73,600 2,042,400
General Electric Co. 125,000 10,812,500
---------------------------------------------------------------------------
12,854,900
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CHEMICALS (4.2%)
du Pont (E.I.) de Nemours 45,000 3,560,625
Hanna M.A. Co. 172,500 3,600,937
Morton International, Inc. 95,000 3,538,750
---------------------------------------------------------------------------
10,700,312
---------------------------------------------------------------------------
CONSUMER GOODS (2.9%)
CUC International, Inc. (a) 210,000 $ 7,455,000
---------------------------------------------------------------------------
DRUGS (9.9%)
American Home Products Corp. 53,300 3,204,662
Gilead Sciences, Inc. (a) 200,600 5,040,075
Johnson & Johnson 120,000 5,940,000
Rhone Poulenc Rorer, Inc. 55,000 3,691,875
SmithKline Beecham PLC 50,000 2,718,750
Warner-Lambert Co. 80,000 4,400,000
---------------------------------------------------------------------------
24,995,362
---------------------------------------------------------------------------
ELECTRONICS (2.7%)
Analog Devices, Inc. (a) 82,500 2,103,750
Intel Corp. 65,000 4,773,438
---------------------------------------------------------------------------
6,877,188
---------------------------------------------------------------------------
FINANCE (7.0%)
BISYS Group, Inc. (The) (a) 120,000 4,507,500
Bank of Boston Corp. 104,700 5,182,650
Federal Home Loan & Mortgage Corp. 48,700 4,163,850
TCF Financial Corp. 120,000 3,990,000
---------------------------------------------------------------------------
17,844,000
---------------------------------------------------------------------------
FOODS (4.2%)
Coca Cola Company 115,000 5,620,625
Kellogg Co. 35,000 2,563,750
Sara Lee Corp. 80,000 2,590,000
---------------------------------------------------------------------------
10,774,375
---------------------------------------------------------------------------
HEALTH CARE (3.2%)
Cardinal Health, Inc. 75,000 5,409,375
Medaphis Corp. (a) 66,000 2,619,375
---------------------------------------------------------------------------
8,028,750
---------------------------------------------------------------------------
INSURANCE (1.1%)
American International Group, Inc. 27,000 2,662,875
---------------------------------------------------------------------------
NATURAL GAS (3.4%)
Anadarko Petroleum Corp. 65,000 3,770,000
Nuevo Energy Corp. (a) 150,000 4,837,500
---------------------------------------------------------------------------
8,607,500
</TABLE>
<PAGE>
PAGE 9
- ------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value
---------------------------------------------------------------------------
<S> <C>
OFFICE & BUSINESS EQUIPMENT (2.6%)
EMC Corp. (a) 250,000 $ 4,656,250
Parametric Technology Corp. (a) 46,200 2,001,038
---------------------------------------------------------------------------
6,657,288
---------------------------------------------------------------------------
OIL (1.9%)
Exxon Corp. 30,000 2,606,250
Mobil Corp. 20,000 2,242,500
---------------------------------------------------------------------------
4,848,750
---------------------------------------------------------------------------
OIL SERVICES (7.1%)
Diamond Offshore Drilling, Inc. (a) 50,000 2,862,500
ENSCO International, Inc. (a) 200,000 6,500,000
Tidewater, Inc. 119,200 5,229,900
Weatherford Enterra, Inc. 110,300 3,309,000
---------------------------------------------------------------------------
17,901,400
---------------------------------------------------------------------------
PAPER & PACKAGING (0.9%)
Willamette Industries, Inc. 40,000 2,375,000
---------------------------------------------------------------------------
RETAIL (5.8%)
Corporate Express, Inc. (a) 95,400 3,821,963
Express Scripts, Inc. (a) 50,000 2,293,750
Petsmart, Inc. (a) 60,000 2,850,000
Staples, Inc. (a) 192,000 3,732,000
Sunglass Hut International, Inc. (a) 84,000 2,042,250
---------------------------------------------------------------------------
14,739,963
---------------------------------------------------------------------------
SOFTWARE SERVICES (7.3%)
America Online, Inc. (a) 55,000 2,399,375
Epic Design Technology, Inc. (a) 85,000 2,188,750
Microsoft Corp. (a) 53,000 6,363,313
Sterling Software, Inc. 30,600 2,356,200
System Software Associates, Inc. 140,000 2,406,250
Wonderware Corp. (a) 150,000 2,850,000
---------------------------------------------------------------------------
18,563,888
---------------------------------------------------------------------------
TELECOMMUNICATIONS (7.0%)
Airtouch Communications, Inc. (a) 60,000 $ 1,695,000
Allen Group Inc. 92,500 2,011,875
Brooks Fiber Properties, Inc. (a) 59,500 1,956,062
Cisco Systems, Inc. (a) 58,000 3,287,875
Tellabs Inc. (a) 40,000 2,675,000
3Com Corp (a) 50,000 2,284,374
Vodafone Group PLC 36,000 1,327,500
Winstar Communications, Inc. (a) 100,000 2,487,500
---------------------------------------------------------------------------
17,725,186
---------------------------------------------------------------------------
TRANSPORTATION (1.0%)
Fritz Companies, Inc. (a) 75,000 2,418,750
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$219,508,258) 246,310,162
---------------------------------------------------------------------------
Maturity
Value
---------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.3%)
REPURCHASE AGREEMENTS (2.3%)
Investments in repurchase agreements in a
joint trading account, purchased 06/28/96,
5.551%, maturing 07/01/96 (Cost
$5,849,000)(b) $5,851,706 5,849,000
---------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$225,357,258) 252,159,162
---------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%) 1,243,063
---------------------------------------------------------------------------
NET ASSETS (100%) $253,402,225
---------------------------------------------------------------------------
</TABLE>
(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 June 30, 1996.
See Notes to Financial Statements.
<PAGE>
PAGE 10
- ------------------------------------------------
Keystone Omega Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, -----------------------------------------------
1996 1995 1994 1993 1992(b) 1991
- ------------------------------------------- ------------ ------- ------ ------ ------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 19.56 $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.05) 0.00 0.04 (0.07) 0.00 (0.04)
Net realized and unrealized gains (losses)
on investments 0.70 5.58 (1.00) 3.07 0.39 6.92
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.65 5.58 (0.96) 3.00 0.39 6.88
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.00 0.00 0.00 0.00 0.00 (0.02)
In excess of net investment income 0.00 0.00 0.00 0.00 0.00 (0.05)
Capital gains (1.78) (1.56) (0.61) (1.73) (2.23) (2.50)
- ----------------------------------------------------------------------------------------------------------------
Total distributions (1.78) (1.56) (0.61) (1.73) (2.23) (2.57)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 18.43 $ 19.56 $ 15.54 $ 17.11 $ 15.84 $ 17.68
- ----------------------------------------------------------------------------------------------------------------
Total return (a) 3.24% 36.94% (5.66%) 19.33% 4.00% 54.49%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (c) 1.43%(d) 1.38% 1.41% 1.51% 1.52% 1.57%
Net investment income (loss) (0.34%)(d) 0.00% 0.27% (0.48%) (0.01%) (0.31%)
Portfolio turnover rate 112% 159% 137% 162% 176% 115%
Average commission rate paid $ 0.0631 N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $152,744 $135,079 $99,569 $90,404 $73,144 $58,671
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculated on average shares outstanding
(c) "Ratio of total expenses to average net assets" for the six months ended
June 30, 1996 and the year ended December 31, 1995 includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio
would have been 1.42% and 1.37%, respectively.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- ------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
August 2, 1993
(Date of Initial
Six Months Year Ended Public Offering)
Ended December 31, to
June 30, ---------------- December 31,
1996 1995 1994 1993
- ------------------------------------------------------- ------------ ------ ------ ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 19.10 $ 15.34 $ 17.06 $ 17.29
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.08) (0.09) (0.06) (0.05)
Net realized and unrealized gains (losses) on
investments 0.63 5.41 (1.05) 1.55
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.55 5.32 (1.11) 1.50
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Capital gains (1.78) (1.56) (0.61) (1.73)
- ----------------------------------------------------------------------------------------------------------------
Total distributions (1.78) (1.56) (0.61) (1.73)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 17.87 $ 19.10 $ 15.34 $ 17.06
- ----------------------------------------------------------------------------------------------------------------
Total return (a) 2.78% 37.50% (6.57%) 9.02%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 2.30%(c) 2.29% 2.30% 2.57%(c)
Net investment loss (1.20%)(c) (0.94%) (0.58%) (1.73%)(c)
Portfolio turnover rate 112% 159% 137% 162%
Average commission rate paid $0.0631 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $82,651 $71,636 $32,266 $ 7,423
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charge.
(b) "Ratio of total expenses to average net assets" for the six months ended
June 30, 1996 and the year ended December 31, 1995 includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio
would have been 2.28% and 2.27%, respectively.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- ------------------------------------------------
Keystone Omega Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
August 2, 1993
(Date of Initial
Six Months Year Ended Public Offering)
Ended December 31, to
June 30, -------------- December 31,
1996 1995 1994 1993
- ------------------------------------------------------- ------------ ------ ------ ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 19.13 $ 15.37 $17.09 $ 17.29
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.05) (0.13) (0.07) (0.06)
Net realized and unrealized gains (losses) on
investments 0.60 5.45 (1.04) 1.59
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.55 5.32 (1.11) 1.53
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Capital gains (1.78) (1.56) (0.61) (1.73)
- ----------------------------------------------------------------------------------------------------------------
Total distributions (1.78) (1.56) (0.61) (1.73)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 17.90 $ 19.13 $15.37 $ 17.09
- ----------------------------------------------------------------------------------------------------------------
Total return (a) 2.77% 35.62% (6.56%) 9.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 2.30%(c) 2.30% 2.30% 2.48%(c)
Net investment loss (1.20%)(c) (0.91%) (0.63%) (1.64%) (c)
Portfolio turnover rate 112% 159% 137% 162%
Average commission rate paid $0.0631 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $18,008 $13,963 $9,900 $ 3,620
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) "Ratio of total expenses to average net assets" for the six months ended
June 30, 1996 and the year ended December 31, 1995 includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio
would have been 2.28% and 2.29%, respectively.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- ------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Assets:
<S> <C>
Investments at market value (identified
cost--$225,357,258) (Note 1) $252,159,162
Cash 553
Receivable for:
Fund shares sold 307,345
Investments sold 1,508,386
Dividends and interest 84,487
Foreign tax receivable 1,548
Prepaid expenses and other assets 46,054
--------------------------------------------------------------------
Total assets 254,107,535
--------------------------------------------------------------------
Liabilities:
Payable for:
Investments purchased 547,715
Fund shares redeemed 77,890
Foreign taxes withheld 4,643
Other liabilities 75,062
--------------------------------------------------------------------
Total liabilities 705,310
--------------------------------------------------------------------
Net assets $253,402,225
--------------------------------------------------------------------
Net assets represented by: (Notes 1 and 3)
Paid-in-capital $217,170,190
Accumulated distributions in excess of net
investment income (802,670)
Accumulated net realized gain (loss) on investment
transactions 10,232,801
Net unrealized appreciation (depreciation) on
investments 26,801,904
--------------------------------------------------------------------
Total net assets $253,402,225
--------------------------------------------------------------------
Net asset value per share: (Notes 1 and 2)
Class A Shares
Net assets of $152,743,839 / 8,286,847 shares
outstanding $ 18.43
Offering price per share ($18.43 / 0.9425) (based
on sales charge of 5.75% of the offering price at
June 30, 1996) $ 19.55
Class B Shares
Net assets of $82,650,824 / 4,624,132 shares
outstanding $ 17.87
Class C Shares
Net assets of $18,007,562 / 1,005,821 shares
outstanding $ 17.90
--------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Investment income: (Note 1)
<S> <C> <C>
Dividends (net of foreign
withholding tax of $6,966) $ 862,834
Interest 405,814
--------------------------------------------------------------------
Total income 1,268,648
--------------------------------------------------------------------
Expenses: (Notes 2, 4, and 5)
Management fee $ 874,940
Shareholder services 337,853
Accounting 17,658
Auditing and legal 24,513
Custodian fees 95,718
Printing 39,423
Trustees' fees and expenses 5,564
Distribution Plan expenses 561,413
Registration fees 98,459
Prepaid expense 23,745
Miscellaneous expenses 12,160
--------------------------------------------------------------------
Total expenses 2,091,446
Less: Expenses paid indirectly
(Note 4) (20,128)
--------------------------------------------------------------------
Net expenses 2,071,318
--------------------------------------------------------------------
Net investment loss (802,670)
--------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments: (Notes 1 and 3)
Net realized gain on investments 26,808,908
--------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) on
investments (11,580,357)
--------------------------------------------------------------------
Net gain on investments 15,228,551
--------------------------------------------------------------------
Net increase in net assets resulting
from operations $ 14,425,881
======================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
- ------------------------------------------------
Keystone Omega Fund
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS Six Months
Ended Year Ended
June 30, December 31,
1996 1995
=================================================================== ============ ================
(Unaudited)
<S> <C> <C>
Operations:
Net investment loss ($ 802,670) ($ 548,862)
Net realized gain on investments 26,808,908 24,020,841
Net change in unrealized appreciation (depreciation) on investments (11,580,357) 30,134,778
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,425,881 53,606,757
- --------------------------------------------------------------------------------------------------------
Distributions to shareholders from: (Notes 1 and 5)
Net realized gain on investment transactions:
Class A Shares (12,256,195) (9,531,332)
Class B Shares (7,395,517) (4,676,811)
Class C Shares (1,549,997) (973,850)
- --------------------------------------------------------------------------------------------------------
Total distributions to shareholders (21,201,709) (15,181,993)
- --------------------------------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Proceeds from shares sold:
Class A Shares 33,073,648 21,425,010
Class B Shares 18,552,008 33,563,718
Class C Shares 5,561,980 4,723,834
Payments for shares redeemed:
Class A Shares (26,259,614) (20,370,219)
Class B Shares (9,274,476) (8,682,058)
Class C Shares (1,834,171) (4,086,346)
Net asset value of shares issued in reinvestment of distributions:
Class A Shares 11,299,273 8,685,153
Class B Shares 6,954,768 4,332,038
Class C Shares 1,426,247 927,300
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from capital share
transactions 39,499,663 40,518,430
- --------------------------------------------------------------------------------------------------------
Total increase in net assets 32,723,835 78,943,194
Net assets:
Beginning of period 220,678,390 141,735,196
- --------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of net
investment income of ($802,670)--1996 and $0--1995] $253,402,225 $220,678,390
========================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1.) Significant Accounting Policies
Keystone Omega Fund (the "Fund") is registered under the Investment Company
Act of 1940, ("1940 Act"), as a diversified open-end management investment
company. The Fund was incorporated in Massachusetts on February 8, 1968.
Keystone Management, Inc. ("KMI") is the Fund's Investment Adviser. The Fund
seeks maximum capital growth by investing in a varied portfolio consisting
primarily of common stocks and securities convertible into common stocks.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation predominately owned by
current and former members of management of Keystone. Keystone Investor
Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the
Fund's transfer and dividend disbursing agent.
The Fund issues Class A, B and C 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 that varies
depending on when the shares were purchased and how long the shares have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year after purchase. Class C shares are
available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company ("KIDCO"), the
Fund's principal underwriter. KIDCO is a wholly-owned subsidiary of
Keystone.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets for the Fund.
A. Investments, including American Depository Receipts ("ADRs"), are usually
valued at the closing sales price, or in the absence of sales and for
over-the-counter securities, the mean of bid and asked quotations. Management
values the following securities at prices it deems in good faith to be fair,
by or under the direction of the Board of Trustees: (a) securities (including
restricted securities) for which complete quotations are not readily
available and (b) listed securities if, in the opinion of management, the
last sales price does not reflect a current value, or if no sale occurred.
ADRs, which are certificates representing shares of foreign securities
deposited in domestic and foreign banks, are traded and valued in United
States dollars.
Short-term investments, if purchased with maturities of sixty days or less,
are valued at amortized cost (original purchase costs 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, 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 day after the trade date.
Realized gains and losses are computed on the identified cost basis. Interest
income is recorded on the accrual basis and dividend income is recorded on
the ex-dividend date. Distributions to the shareholders are recorded by the
Fund at the close of business on the ex-dividend date.
<PAGE>
PAGE 16
- ------------------------------------------------
Keystone Omega Fund
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company (a "RIC") under the Internal Revenue Code of
1986, as amended ("Internal Revenue Code"). Thus, the Fund is relieved of any
federal income or excise tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund. The value of which 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
the collateral on a daily basis. 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 such loss
would be increased by any cost incurred on disposing of such securities. If
bankruptcy proceedings are commenced against the seller under the repurchase
agreement, the realization on the collateral may be delayed or limited.
Repurchase agreements entered into by the Fund will be limited to
transactions with dealers or domestic banks believed to present minimal
credit risks, and the Fund will take constructive receipt of all securities
underlying repurchase agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
E. In connection with portfolio purchases and sales of securities denominated
in foreign currency, the Fund may enter into forward foreign currency
exchange contracts. Such contracts are recorded at market value. 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 to shareholders net investment income and net capital
gains, if any, annually. Distributions are determined in accordance with
income tax regulations. Distributions from taxable net investment income and
net capital gains can differ from book basis net investment income and net
capital gains. The significant differences between financial statement
amounts available for distribution and distributions made in accordance with
income tax regulations, are due to the differing treatment of net operating
losses and short-term capital gains for financial statement and federal
income tax purposes.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial
<PAGE>
PAGE 17
- ------------------------------------------------
interest without par value. Transactions in shares of the Fund were as
follows:
<TABLE>
<CAPTION>
Class A Shares
--------------------------------
Six Months
Ended Year Ended
June 30, December 31,
1996 1995
===================================================
<S> <C> <C>
Shares sold 2,147,730 1,178,460
Shares redeemed (1,376,015) (1,161,391)
Shares issued
in reinvestment
of distributions 607,488 482,356
- ----------------------------------------------------
Net increase 1,379,203 499,425
====================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
--------------------------------
Six Months
Ended Year Ended
June 30, December 31,
1996 1995
===================================================
<S> <C> <C>
Shares sold 985,123 1,902,255
Shares redeemed (496,921) (499,966)
Shares issued
in reinvestment
of distributions 384,879 245,291
- ---------------------------------------------------
Net increase 873,081 1,647,580
===================================================
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
--------------------------------
Six Months
Ended Year Ended
June 30, December 31,
1996 1995
===================================================
<S> <C> <C>
Shares sold 294,931 273,387
Shares redeemed (97,981) (240,110)
Shares issued
in reinvestment
of distributions 78,798 52,465
- ---------------------------------------------------
Net increase 275,748 85,742
===================================================
</TABLE>
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B, and Class C shares
pursuant to Rule 12b-1 under the 1940 Act. Under its Distribution Plans, the
Fund pays KIDCO, amounts which in total may not exceed each Distribution
Plan's maximum.
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 KIDCO under the Class A Distribution Plan are currently used
to pay others, such as broker-dealers, service fees at an annual rate of up
to 0.25% of the average daily net asset value of Class A maintained by such
recipients and outstanding on the books for specified periods.
The Fund's Class B Distribution Plans each provides for expenditures at an
annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses related to the distribution of Class B shares. Amounts
paid by the Fund under the Class B Distribution Plans are currently used to
pay others (brokers-dealers) 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-dealer 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 such others on the Fund's books for specified
periods. A contingent deferred sales charge will be imposed, if applicable,
on Class B shares purchased on or after June 1, 1995 at rates ranging from a
maximum of 5.00% of amounts redeemed during the first twelve months from and
including the month of purchase to 1.00% of amounts redeemed during the sixth
twelve-month period. Class B shares purchased on or
<PAGE>
PAGE 18
- ------------------------------------------------
Keystone Omega Fund
after June 1, 1995 that have been outstanding for eight years from and
including 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 expenditures 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
(broker-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. Beginning approximately 15 months after purchase, the broker-dealer or
other party will receive a commission at an annual rate of 0.75% (subject to
applicable limitations imposed by the National Association of Securities
Dealers, Inc.) ("NASD") and service fees at the annual rate of 0.25%,
respectively, of the average net asset value of each Class C share maintained
by such others and on the books for specified periods.
Each of the Distribution Plans may be terminated at any time by a vote of
(i) the Independent Trustees or (ii) the outstanding voting shares of the
respective class. If a Distribution Plan is terminated, KIDCO may, at the
discretion of the Board of Trustees, continue as compensation for its
services which had been earned at any time the Distribution Plan was in
effect.
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and service fees which exceed the annual maximum payments
permitted to be received by KIDCO from the Fund. KIDCO intends to seek full
payment of such amounts from the Fund (together with annual interest thereon
at the prime rate plus 1.0%) at such time in the future as, and to the extent
that, payment thereof by the Fund would be within permitted limits.
During the six-month period ended June 30, 1996, the Fund paid KIDCO $91,650
pursuant to its Class A Distribution Plan; $249,978 for Class B shares sold
prior to June 1, 1995, and $139,072 for Class B shares sold on or after June
1, 1995 under its Class B Distribution Plans; and $80,713 under its Class C
Distribution Plan.
Under the NASD Rule, as of June 30, 1996 the maximum uncollected amounts for
which KIDCO may seek payment from the Fund under its Class B Distribution
Plans were $2,309,049 for Class B shares purchased prior to June 1, 1995 and
$1,912,435 for Class B shares purchased on or after June 1, 1995; and
$1,117,276 under its Class C Distribution Plan.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities
(excluding short-term securities), during the six month period ended June 30,
1996 were $265,607,157 and $248,855,320, respectively.
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI was paid a management fee computed and paid daily. The
management fee is determined by applying percentage rates, which starting at
0.75% and declining as net assets increase, to 0.50% per annum, to the net
asset value of the Fund.
<PAGE>
PAGE 19
- ------------------------------------------------
Pursuant to the Investment Management Agreement, KMI has entered into an
Investment Advisory Agreement with Keystone, under which Keystone provides
investment advisory and management services to the Fund. For its services,
Keystone receives an annual fee representing 85% of the management fee
received by KMI. For the six month period ended June 30, 1996 the Fund paid
or accrued to KMI investment management and administrative service fees of
$874,940, which represent 0.75% of the Fund's average net assets. Of such
amounts paid to KMI $743,699 was paid to Keystone for its services to the
Fund.
For the six month period ended June 30, 1996, the Fund paid or accrued to
KII $57,081 as reimbursement for certain accounting and printing services,
and $337,853 to KIRC for shareholder services.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of the fund
average net assets; 2.0% of the next $70 million of fund average net assets;
and 1.5% of fund average net assets over $100 million.
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of the applicable state expense
limit. However, Keystone is not required to make such reimbursement to an
extent which would result in the Fund's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code.
The Fund has entered into an expense offset arrangement with its custodian.
For the six month period ended June 30, 1996, the Fund paid or incurred
custody fees in the amount of $95,718 and received a credit of $20,128
pursuant to the expense offset arrangement, resulting in a net custody
expense of $75,590. The assets deposited with the custodian under the expense
offset arrangement could have been invested in income-producing assets.
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.) Distributions to Shareholders
Any taxable distribution which is declared in December and paid in the
following fiscal year will be taxable to shareholders in the year declared.
<PAGE>
[BACK COVER]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
[LOGO] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
OFI-R-8/96
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