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KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
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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.
[KEYSTONE INVESTMENTS LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
KIF-R-12/96
18M
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K E Y S T O N E
[PHOTO OF WORLD IN A PICTURE FRAME]
INTERNATIONAL
FUND INC.
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[KEYSTONE LOGO]
ANNUAL REPORT
OCTOBER 31, 1996
<PAGE>
PAGE 1
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Keystone International Fund Inc.
Seeks long-term growth from foreign securities.
Dear Shareholder:
We are pleased to report to you on the activities of Keystone International
Fund Inc. for the fiscal year which ended October 31, 1996.
Performance
Your Fund's total return for the twelve-month period was 10.47%. The Morgan
Stanley Europe, Australia and Far East Index (EAFE), a benchmark of
international stock performance, returned 10.48% for the period. EAFE is an
unmanaged index and it is not necessarily comprised of the same securities in
which your Fund invests.
We believe your Fund performed satisfactorily in a difficult year for
international investing. During the twelve months, growth rates and
investment opportunities varied widely, while currency movements had a major
influence on returns realized by the U.S. investor. In this environment, your
Fund's conservative strategy produced positive returns, in line with overall
benchmarks, while limiting the effects of the most significant risks.
Importantly, the Fund's price volatility was lower than that of the Standard
and Poor's 500 Stock Index and the Morgan Stanley World Index during the
reporting period.
Market Environment
We saw two major forces in the markets in which your Fund invests during the
twelve-month period which ended October 31, 1996. One was the renewed
economic progress in Europe and Latin America. The other was the strength of
the U.S. dollar.
In Europe, efforts to reduce budget deficits and to restructure corporations
led to lower inflation, declining interest rates and moderate economic
growth. The emerging economies in Russia, Hungary and Poland posted
impressive gains. Latin America generated success stories of its own,
starting with Mexico, which managed to restore stability to the peso since
its fall in 1994. In Brazil, Argentina and Venezuela, improving economies and
growth-oriented government policies contributed to strong market returns. In
Asia, Japan's economic recovery was tepid, despite low interest rates. The
ripple effect was evident in Thailand, Indonesia, and South Korea. The growth
in Asia's major economies decelerated, but overall, the fundamentals remained
solid.
A Timely Focus on Europe
Anticipating economic improvement in Europe, we increased our holdings there
and reduced our weighting in Japan. Also, we started investing, very
selectively, in the Czech Republic, Hungary, and Poland. These developing
economies are still small, but we believe, offer vast growth potential.
Managing the Dollar's Strength
Between April 1995 and the end of October 1996, the U.S. dollar soared 40%
against the yen and 12% against the German mark.(1) The impact was negative for
investors who purchased their foreign investments in dollars and who had
their returns converted back into dollars during that period. Your Fund
softened the effect of the dollar's strength on the portfolio by hedging
about 34% of its currency exposure.
Looking Ahead
We think that the markets in Europe, Asia and the Americas are well
positioned for another successful year. Lower interest rates and increasingly
tame inflation should stimulate demand for goods and services and spur
economic growth in markets around the world. Your Fund has holdings primarily
in developed and, to a limited extent, emerging economies. We believe that
this broad diversification should help us capture growth opportunities
worldwide, while limiting price fluctuations.
- ------
(1)Source: Business Week, October 28, 1996. (Continued on next page)
<PAGE>
PAGE 2
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Keystone International Fund Inc.
Keystone Acquired by First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired
by First Union Corporation. First Union is a financial services firm based in
Charlotte, North Carolina. It is the nation's sixth largest bank holding
company with assets of approximately $130 billion. First Union, through its
wholly owned subsidiary Evergreen Asset Management Corp., together with
Keystone mutual funds, manages more than $30 billion in 70 mutual funds.
Keystone will remain a separate entity and will continue to provide
investment advisory and management services to the Fund. Other services will
be provided under the "Evergreen Keystone Funds" name. We believe First
Union's acquisition of Keystone strengthens the investment management
services we provide you.
The past several months have been a time of dynamic change at Keystone
Investments. We appreciate the opportunity to share our news with you and
thank you for your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
December 1996
[PHOTO OF [PHOTO OF
ALBERT H. ELFNER, III GEORGE S. BISSELL
Albert H. Elfner, III George S. Bissell
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Keystone Investment Insight Line for Shareholders
You can keep up-to-date on your fund's current strategy and outlook by calling
Keystone Investment Insight Line. You can hear Keystone portfolio managers
discuss their latest strategies. You can also listen to Keystone's overall
market outlook from James McCall, Chief Investment Officer. The service is
available 24 hours a day, seven days a week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2
[GRAPHIC OF TELEPHONE]
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<PAGE>
PAGE 3
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A Discussion With
Your Fund Manager
[PHOTO OF GILMAN C. GUNN]
Gilman C. Gunn is portfolio manager of your Fund and head of Keystone's
international investment team. An investment professional with 23 years of
experience, Mr. Gunn has spent more than ten years in investment management
positions in London, Kuwait and Thailand.
Keystone's international team is comprised of several investment
professionals who have expertise in the economic, political and business
environments in specific areas. The team includes Sami Karam (Europe), John
Madden (natural resources and infrastructure), Eleanor Marsh (Far East), and
Francis X. Claro and Antonio Docal (Latin America).
Q What were the major developments in the international markets during the
past fiscal year?
A The twelve-month period which ended October 31, 1996 was one of stronger
market performance in Europe and big market gains in the emerging economies
of Eastern Europe and Latin America. In Asia, the recovery of the Japanese
economy was slower than expected. The U.S. stock market experienced
volatility in the first seven months of 1996, but resumed its ascent in the
second part of the year. Foreign markets also advanced in the second half of
1996, in sync with the United States.
Q What effect did the strong U.S. dollar have on the fund?
A The dollar's strength hurt many international funds during the past fiscal
year, and it held back the performance of Keystone International Fund Inc. to
some extent. But, because we hedged a portion of the fund's currency
exposure, the effect on the Fund was considerably lessened.
Q What is the Fund's hedging strategy?
A We hedge to limit the effects of currency fluctuations. We can vary the
hedging between zero and 75% of the Fund's holdings, although we are seldom
at either of these extremes.We hedge selectively when we feel that foreign
currencies are mis-aligned with the dollar. During the past fiscal year about
34% of our currency exposure was in U.S. dollars. We kept dollar-denominated
cash and invested in countries like Hong Kong, whose currencies are linked to
the dollar. We also used foreign exchange contracts to hedge our currency
risk.
Q Have you made any significant adjustments to the portfolio?
A We reduced our exposure to Japan from 28.3% of net assets on April 30,
1996, which was our heaviest weighting in Japan during the fiscal year, to
17.5% at the end of October because we felt that there were better
opportunities in Europe and Canada. Also, we started investing very
selectively in the Czech Republic, Hungary and Poland. Our positions were
small in Eastern Europe and we based our purchases on the merits of each
individual company, as well as the political and macroeconomic prospects of
the region.
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Fund Profile
Objective: Seeks long-term growth from foreign securities.
Commencement of investment operations: 1954
Number of countries: 26
Number of stocks: 116
Net assets: $148 million
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<PAGE>
PAGE 4
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Keystone International Fund Inc.
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Geographic Diversification-Equities
as of October 31, 1996
EUROPE
57%
|
|
|
|
|
CANADA
9% ---------------
[GRAPHIC [GRAPHIC
OF OF
MAP] MAP]
FAR EAST
----------------- 32%
LATIN AMERICA
2% ------------------------
(as a percentage of equities)
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Equities represented 93% of net assets. Other investments totaled 7% and
included short-term investments, repurchase agreements, foreign currency
holdings and other assets and liabilities.
Q What was the Fund's top-weighted geographic region?
A We had 57% of net assets in Europe because we had confidence in its
overall political and economic climate. In the developed European countries,
the preparations to meet tough requirements of European Monetary Union in
1999 led to reduced budget deficits and lower interest rates. Corporate
restructuring, which started in the United States several years ago, has also
begun to take hold in Europe. Eastern Europe was the best-performing
geographic region during the Fund's past fiscal year. The emerging markets in
Eastern Europe, including Hungary, Russia and Poland approached returns of
one hundred percent in local currency terms.
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Performance of World Markets
as of October 31, 1996
19.6% 13.5% 1.8% 8.1%
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Europe/ Asia/ World
Americas Africa Pacific (ex. U.S.)
Source: Dow Jones & Co. Inc.
(expressed in U.S. dollars)
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<PAGE>
PAGE 5
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Q What were your favorite industry sectors?
A We liked the banking and energy stocks because in our view they were
undervalued and had good growth prospects. Keystone International Fund Inc.
had 10.7% of net assets in the leading banks around the world (but no
Japanese banks) and 8.0% in energy stocks. We think the demand for cars in
the emerging markets is going to soar and the need for energy to run these
cars will be strong. We believe that same trend should fuel the demand for
financing and increase earnings growth in banks.
We had 11.2% of net assets in pharmaceutical and health & personal care
sectors. Many of these holdings were in Japanese pharmaceutical companies,
which we trimmed at fiscal year-end. We became concerned over renewed price
cutting for Japanese pharmaceutical products by the government.
Q Are you bearish on Japan as a whole?
A Not at all. We continue to view Japan as a very promising market. The
economic recovery there has been slower than we hoped for, but steady. The
weak yen has helped Japanese exports. According to some estimates, every
one-yen rise in the exchange rate translates into $90 million in operating
income for car makers in Japan.(2) Several of our top ten holdings are in
blue-chip export-oriented Japanese sectors.
Q What type of companies do you favor?
A We like established companies that have excellent name recognition and a
strong franchise. These types of holdings help us to reduce risk. In pursuit
of long-term growth we also invest in second-tier companies that we believe
offer promising prospects at a good price. To maintain broad portfolio
diversification, we invest in companies in many different regions and
industries. We buy both growth and value stocks. These stocks tend to be in
favor at different times during an economic cycle, so combining the two
styles reduces some of the fluctuations inherent in equity investing.
Top 10 Stock Holdings
as of October 31, 1996
Percentage of
Stock Industry net assets
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Sony (Japan) Appliances &
Household Durables 2.6
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Toyota Motor (Japan) Automobiles 2.3
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Fuji Photo Film (Japan) Leisure & Tourism 2.2
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Nestle (Switzerland) Food & Household
Products 2.2
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Ciba-Geigy (Switzerland) Pharmaceuticals 2.0
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Royal Dutch Petroleum
(Netherlands) Energy Sources 2.0
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HSBC Holdings (Hong Kong) Banking 1.8
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Royal Bank of Canada (Canada) Banking 1.8
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Lonrho (U.K.) Conglomerate 1.8
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Quebecor, Inc. (Canada) Advertising &
Publishing 1.7
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If you have a question about your Fund, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
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- ----------
(2)Source: Business Week, October 28, 1996
<PAGE>
PAGE 6
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Keystone International Fund Inc.
What were the Fund's top five holdings?
Sony was our largest holding at 2.6% of net assets. A brand name known for
quality throughout the world, Sony is in a position to charge a premium price
for its products. The company has an exciting array of digital consumer
electronics: videos, audio products, cameras. We believe that digital
products are poised for exceptional growth.
Number two was Toyota Motor at 2.3% of net assets. Excellent quality and
fiscal discipline are Toyota's hallmark. The company's balance sheet is
exceptionally strong. We like to think of Toyota as a bank with an automobile
company attached to it.
The third largest holding was Fuji Photo Film at 2.2% of net assets. Fuji is
also a household name. It is a company that we think has very good long-term
prospects. We believe that with so many emerging- market economies
flourishing, consumer products like Fuji Photo Film are going to do very
well. Another plus is the limited extent of competition in the film industry.
There are really only two globally dominant producers of film.
The fourth largest holding was a Swiss company, Nestle, at 2.2% of net
assets. Nestle's products are sold all over the world and its brand
recognition is outstanding. Stocks like Nestle help to increase portfolio
stability.
Number five was Ciba-Geigy at 2.0% of assets. A large and established Swiss
producer of health and personal care products, Ciba-Geigy is, in our view,
well-positioned to grow its earnings, given an increasing demand for these
goods in many emerging market economies.
Q What is your outlook for the international markets?
A We think 1997 is going to be another good year for international
investments. In Europe and Asia, economies have been recovering and
attractive stock valuations have been drawing investors. In Hong Kong the
uncertainty caused by the approaching unification with China in 1997 has
diminished and the Hong Kong market has produced good performance for the
second year in a row.
We don't expect the U.S. dollar to climb much higher against the yen. We
think the dollar might be able to sustain its current strength over the next
months if inflation and interest rates remain stable, but we don't see much
room for a continued rise.
Q What is your outlook for the emerging markets?
A Emerging markets will, in our view, keep on growing their economies,
buoyed by declining inflation and political environments that foster growth.
Taming of inflation is a big success story for many developing countries. For
example, Argentina's inflation rate during the period was 3%. That's the
country that five years ago had an inflation rate of 1,000%.
Progress notwithstanding, volatility is inherent in emerging markets and we
are always vigilant. We are very selective regarding emerging markets and the
companies we buy there. The fund had 5.9% of assets in emerging markets at
the close of the past fiscal year. We think this weighting should be just
enough to make a positive difference, but not enough to seriously hurt
returns if emerging markets underperform.
Overall, we believe that international investments should be a component of
every diversified portfolio. Short-term fluctuations in any one market are
inevitable, but we believe that Keystone International Fund Inc. is well
positioned to capitalize on the considerable opportunities available in many
regions of the world, while continuing to seek low volatility.
<PAGE>
PAGE 7
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Your Fund's Performance
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Growth of an investment in
Keystone International Fund Inc.
In Thousands
[MOUNTAIN CHART DEPICTING GROWTH OF A $10,000 INVESTMENT
IN KEYSTONE INTERNATIONAL FUND INC]
Total Value: $19,272
10/86 10000 10000
10066 11903
10/88 9380 13377
9485 13662
10/90 7731 11705
7863 12457
10/92 7823 12892
9644 15999
10/94 10251 17072
9380 17445
10/96 10145 19272
A $10,000 investment in Keystone International Fund Inc. made on October 31,
1986 with all distributions reinvested was worth $19,272 on October 31, 1996.
Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Twelve-Month Performance as of October 31, 1996
================================================
Total return* 10.47%
Net asset value 10/31/95 $ 7.11
10/31/96 $ 7.69
Distributions $ 0.10
Capital gains $ 0.05
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of October 31, 1996
========================================================
If you If you did
Cumulative total return redeemed not redeem
1-year 7.47% 10.47%
5-year 54.70% 54.70%
10-year 92.72% 92.72%
Average annual total return
1-year 7.47% 10.47%
5-year 9.12% 9.12%
10-year 6.78% 6.78%
The "If you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge (CDSC) for those investors who bought and sold Fund
shares after one calendar year. Investors who retained their fund investment
earned the returns reported in the second column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than their original cost.
You may exchange your shares for another Keystone fund by calling or writing
to Keystone directly, or through Keystone's Automated Response Line (KARL).
The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 8
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Keystone International Fund Inc.
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Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone International
Fund Inc., the Morgan Stanley Europe, Australia, and Far East Index and the
Consumer Price Index.
[3 LINE GRAPH COMPARING THE CHANGE IN VALUE OF $10,000
INVESTED IN THE FUND WITH THE EAFE AND THE CPI]
In Thousands October 1986 through October 1996
Fund Average
Annual Total Return
- -----------------------------
1 Year 5 Year 10 Year
7.47% 9.12% 6.78%
10/86 10000 10000 10000
11903 13332.97 10453
10/88 13377 16864.91 10898
13662 18297.59 11387
10/90 11705 15919.47 12103
12457 17049.36 12457
10/92 12892 14832.82 12856
15999 20385.85 13209
10/94 17072 22443.32 13554
17445 22359.95 13935
10/96 19272 24703.03 14306
Past performance is no guarantee of future results. The one-year return reflects
the deduction of the Fund's 3% contingent deferred sales charge for shares held
for at least one year. The Consumer Price Index is through September 30, 1996.
- --------------------------------------------------------------------------------
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone International Fund Inc.
The Fund seeks long-term growth from foreign securities. The return is quoted
after deducting sales charges (if applicable), fund expenses and transaction
costs and assumes reinvestment of all distributions.
2. Morgan Stanley Europe, Australia and Far East Index (EAFE)
The EAFE is a broad-based, unmanaged index of non-U.S. stocks. It is
comprised of stocks of developed world markets. These stocks are selected and
compiled by Morgan Stanley according to criteria that may be unrelated to
your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
<PAGE>
PAGE 9
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Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 10
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Keystone International Fund Inc.
SCHEDULE OF INVESTMENTS--October 31, 1996
NUMBER MARKET
OF SHARES VALUE
- -----------------------------------------------------------------------
COMMON STOCKS (91.5%)
AUSTRALIA (4.6%)
Banking (1.6%)
National Australia Bank 155,500 $ 1,707,098
Westpac Banking Corp. 115,500 659,163
- -----------------------------------------------------------------------
2,366,261
- -----------------------------------------------------------------------
Beverages & Tobacco (0.2%)
Foster's Brewing Group Ltd. 162,000 295,339
- -----------------------------------------------------------------------
Energy Sources (1.5%)
Broken Hill Proprietary Co. Ltd. 167,507 2,223,955
- -----------------------------------------------------------------------
Health Care (0.4%)
Sonic Health Care Ltd. 475,000 545,934
- -----------------------------------------------------------------------
Machinery & Engineering (0.2%)
Evans Deakin Industries 88,000 228,789
- -----------------------------------------------------------------------
Metals & Mining (0.6%)
WMC Ltd. 140,000 879,994
- -----------------------------------------------------------------------
Merchandising (0.1%)
Just Jeans Holdings 115,500 201,411
- -----------------------------------------------------------------------
TOTAL AUSTRALIA 6,741,683
- -----------------------------------------------------------------------
BELGIUM (0.8%)
Industrial Components (0.8%)
Bekaert S.A. 1,550 1,254,809
- -----------------------------------------------------------------------
BRAZIL (0.1%)
Industrial Components (0.1%)
Cofap Cia Fab Peca (c) 13,100 102,005
- -----------------------------------------------------------------------
CANADA (8.1%)
Banking (3.3%)
National Bank CDA Montreal Quebec 234,400 2,273,690
Royal Bank CDA Montreal Quebec 79,000 2,611,327
- -----------------------------------------------------------------------
4,885,017
- -----------------------------------------------------------------------
Advertising & Publishing (1.7%)
Quebecor, Inc. 147,905 2,527,253
- -----------------------------------------------------------------------
Conglomerates (0.6%)
Brascan Ltd. 26,400 $ 562,394
Imasco Ltd. 15,000 348,642
- -----------------------------------------------------------------------
911,036
- -----------------------------------------------------------------------
Business & Public Service (0.9%)
Loewen Group, Inc. 35,000 1,384,122
- -----------------------------------------------------------------------
Fertilizer (1.6%)
Potash Corp. of Saskatchewan, Inc. 32,380 2,292,838
- -----------------------------------------------------------------------
TOTAL CANADA 12,000,266
- -----------------------------------------------------------------------
COLOMBIA (0.1%)
Paper & Packaging (0.1%)
Papeles Nacionales (GDR) 36,500 255,500
- -----------------------------------------------------------------------
CZECH REPUBLIC (0.1%)
Banking (0.1%)
Komercni Banka (GDR) 7,000 171,500
- -----------------------------------------------------------------------
FINLAND (0.8%)
Chemicals (0.8%)
Kemira OY 101,400 1,109,028
- -----------------------------------------------------------------------
FRANCE (8.0%)
Banking (1.0%)
Credit Commerce de France 33,853 1,522,309
- -----------------------------------------------------------------------
Building Materials (1.3%)
Lafarge 30,467 1,828,318
- -----------------------------------------------------------------------
Cosmetics (0.9%)
L' Oreal S.A. 4,125 1,396,650
- -----------------------------------------------------------------------
Energy Sources (1.5%)
Societe Nationale Elf Aquitaine 26,655 2,131,357
- -----------------------------------------------------------------------
Automotive Supplies & Components (0.8%)
Michelin 25,401 1,224,713
- -----------------------------------------------------------------------
Insurance (1.0%)
AXA 24,400 1,523,896
- -----------------------------------------------------------------------
<PAGE>
PAGE 11
- ---------------------------------
SCHEDULE OF INVESTMENTS--October 31, 1996
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------
Leisure & Tourism (0.6%)
Accor S.A. 6,851 $ 860,312
- ----------------------------------------------------------------------
Chemicals (0.9%)
Rhone Poulenc S.A. 44,459 1,317,465
- ----------------------------------------------------------------------
TOTAL FRANCE 11,805,020
- ----------------------------------------------------------------------
GERMANY (2.8%)
Building Materials & Components (0.6%)
Grohe (Friedrich) AG 3,000 833,994
- ----------------------------------------------------------------------
Health Care (1.5%)
Hoechst AG 60,000 2,256,339
- ----------------------------------------------------------------------
Miscellaneous Materials & Commodities (0.7%)
SGL Carbon 8,900 1,002,014
- ----------------------------------------------------------------------
4,092,347
- ----------------------------------------------------------------------
HONG KONG (3.3%)
Automotive ( 0.2%)
Innovative International 590,000 240,359
- ----------------------------------------------------------------------
Banking (2.1%)
HSBC Holdings 131,677 2,682,177
Wing Hang Bank Ltd. 114,000 458,524
- ----------------------------------------------------------------------
3,140,701
- ----------------------------------------------------------------------
Packaging ( 0.2%)
Sinocan Holdings 700,000 332,700
- ----------------------------------------------------------------------
Merchandising (0.8%)
Giordano International Holdings 1,117,000 1,126,794
- ----------------------------------------------------------------------
TOTAL HONG KONG 4,840,554
- ----------------------------------------------------------------------
HUNGARY (0.3%)
Pharmaceuticals (0.1%)
Egis Gyogyszergyar 3,000 185,056
- ----------------------------------------------------------------------
Banking (0.2%)
OTP Bank 12,500 217,203
- ----------------------------------------------------------------------
TOTAL HUNGARY 402,259
- ----------------------------------------------------------------------
INDIA (0.7%)
Health Care (0.1%)
Core Health Care (GDR) 50,000 $ 75,000
- ----------------------------------------------------------------------
Textiles (0.6%)
Reliance Industries (GDS) 55,000 594,000
Reliance Industries (GDR) (b) 33,000 371,250
- ----------------------------------------------------------------------
965,250
- ----------------------------------------------------------------------
TOTAL INDIA 1,040,250
- ----------------------------------------------------------------------
INDONESIA (0.4%)
Textiles & Apparel (0.4%)
Indorama Synthetic 224,500 640,933
- ----------------------------------------------------------------------
ITALY (2.6%)
Food & Household Products (0.7%)
Industrie Natuzzi (ADR) 23,200 1,052,700
Merchandising (0.2%)
Safilo 14,200 252,736
- ----------------------------------------------------------------------
Telecommunications (1.7%)
Telecom Italia MOB 315,000 650,972
Telecom Italia 855,000 1,905,010
- ----------------------------------------------------------------------
2,555,982
- ----------------------------------------------------------------------
TOTAL ITALY 3,861,418
- ----------------------------------------------------------------------
JAPAN (17.5%)
Appliances & Household Durables (3.5%)
Sharp Corp. 79,000 1,200,386
Sony Corp. 65,200 3,911,256
- ----------------------------------------------------------------------
5,111,642
- ----------------------------------------------------------------------
Pharmaceuticals (3.2%)
Daiichi Pharmaceutical Company 89,000 1,281,981
Ono Pharmaceutical 21,000 654,780
Rohto Pharmaceutical 46,000 432,304
Taisho Pharmaceutical Company 73,000 1,449,036
Terumo Corp. 74,000 948,926
- ----------------------------------------------------------------------
4,767,027
- ----------------------------------------------------------------------
(continued on next page)
<PAGE>
PAGE 12
- ---------------------------------
Keystone International Fund Inc.
SCHEDULE OF INVESTMENTS--October 31, 1996
NUMBER MARKET
OF SHARES VALUE
- -----------------------------------------------------------------------
Electronic Components (0.6%)
Tokyo Electronics 34,000 $ 874,973
- -----------------------------------------------------------------------
Financial Services (0.7%)
Nichiei Co. 16,000 1,065,215
- -----------------------------------------------------------------------
Food & Household Products (0.1%)
Plenus 4,000 168,636
- -----------------------------------------------------------------------
Automotive Supplies & Components (1.0%)
Bridgestone Corp. 93,000 1,568,311
- -----------------------------------------------------------------------
Automobiles (2.3%)
Toyota Motor Corp. 142,000 3,354,969
- -----------------------------------------------------------------------
Insurance (2.6%)
Mitsui Marine & Fire 269,000 1,748,364
Sumitomo Marine & Fire 288,000 2,064,099
- -----------------------------------------------------------------------
3,812,463
- -----------------------------------------------------------------------
Leisure & Tourism (2.2%)
Fuji Photo Film Co. 112,000 3,216,723
- -----------------------------------------------------------------------
Office & Business Equipment (1.3%)
Canon, Inc. 29,000 555,268
Fujitsu 152,000 1,335,031
- -----------------------------------------------------------------------
1,890,299
- -----------------------------------------------------------------------
TOTAL JAPAN 25,830,258
- -----------------------------------------------------------------------
MALAYSIA (1.2%)
Wholesale/International ( 0.2%)
Sime Darby BHD 88,000 311,736
- -----------------------------------------------------------------------
Leisure & Tourism (0.5%)
Genting Berhad 98,500 727,298
- -----------------------------------------------------------------------
Foods & Household Products (0.5%)
Nestle Malay Berhad 90,000 705,324
- -----------------------------------------------------------------------
TOTAL MALAYSIA 1,744,358
- -----------------------------------------------------------------------
MEXICO (0.3%)
Metals & Mining (0.3%)
Industrias Penoles S.A. de C.V. 96,500 382,998
- -----------------------------------------------------------------------
NETHERLANDS (9.4%)
Advertising & Publishing (2.7%)
Telegraaf N.V. 80,000 $ 1,720,988
Wolters Kluwer N.V. 17,624 2,265,453
- -----------------------------------------------------------------------
3,986,441
- -----------------------------------------------------------------------
Appliances & Household Durables (0.8%)
Philips Electronics N.V. 31,950 1,126,074
- -----------------------------------------------------------------------
Beverages & Tobacco (0.7%)
Heineken N.V. 5,388 1,017,772
- -----------------------------------------------------------------------
Energy Sources (2.0%)
Royal Dutch Petroleum Co. 17,740 2,929,656
- -----------------------------------------------------------------------
Health & Personal Products (0.6%)
Unilever N.V. 5,615 853,816
- -----------------------------------------------------------------------
Insurance (0.9%)
AEGON N.V. 26,920 1,369,244
- -----------------------------------------------------------------------
Merchandising (1.0%)
Ahold (Kon) N.V. 24,870 1,451,129
- -----------------------------------------------------------------------
Transportation (0.7%)
Van Ommeren (Kon) 27,100 1,126,039
- -----------------------------------------------------------------------
TOTAL NETHERLANDS 13,860,171
- -----------------------------------------------------------------------
NEW ZEALAND (0.7%)
Forest Products (0.1%)
Fletcher Challenge Paper Ltd. 117,800 213,348
- -----------------------------------------------------------------------
Energy Sources (0.5%)
Fletcher Challenge Energy Ltd. 292,100 832,800
- -----------------------------------------------------------------------
Building Materials (0.1%)
Fletcher Challenge Building Ltd. 22,500 60,966
- -----------------------------------------------------------------------
TOTAL NEW ZEALAND 1,107,114
- -----------------------------------------------------------------------
PERU (0.4%)
Banking (0.2%)
Credicorp Ltd. 14,300 250,250
- -----------------------------------------------------------------------
<PAGE>
PAGE 13
- ---------------------------------
SCHEDULE OF INVESTMENTS--October 31, 1996
NUMBER MARKET
OF SHARES VALUE
- -----------------------------------------------------------------------
Beverage & Tobacco (0.2%)
Backus & Johnston 268,610 $ 270,640
- -----------------------------------------------------------------------
TOTAL PERU 520,890
- -----------------------------------------------------------------------
POLAND (0.1%)
Banking (0.1%)
WBK (Wielkopolski) 29,000 180,496
- -----------------------------------------------------------------------
SINGAPORE (0.7%)
Beverages & Tobacco (0.7%)
Fraser & Neave 104,000 1,033,724
- -----------------------------------------------------------------------
SPAIN (1.5%)
Energy Sources (0.8%)
Repsol S.A. 37,300 1,217,559
- -----------------------------------------------------------------------
Banking (0.7%)
BCO Santander S.A. 19,600 1,006,152
- -----------------------------------------------------------------------
TOTAL SPAIN 2,223,711
- -----------------------------------------------------------------------
SWEDEN (8.6%)
Appliances & Household Durables (1.5%)
Electrolux AB 41,629 2,317,048
- -----------------------------------------------------------------------
Automotive (1.3%)
Volvo AB 93,200 1,934,669
- -----------------------------------------------------------------------
Business & Public Services (1.4%)
Esselte AB 94,900 2,121,493
- -----------------------------------------------------------------------
Electrical & Electronics (1.4%)
Asea AB 18,800 2,095,655
- -----------------------------------------------------------------------
Health & Personal Products (2.0%)
Astra AB 36,692 1,685,141
Pharmacia & Upjohn 34,000 1,186,642
- -----------------------------------------------------------------------
2,871,783
- -----------------------------------------------------------------------
Building Materials & Components (1.0%)
Swedish Match (c) 93,200 277,799
Assa Abloy 78,000 1,198,047
- -----------------------------------------------------------------------
1,475,846
- -----------------------------------------------------------------------
TOTAL SWEDEN 12,816,494
- -----------------------------------------------------------------------
SWITZERLAND (6.9%)
Business & Public Services (1.1%)
SGS Holding 760 $ 1,725,633
- -----------------------------------------------------------------------
Banking (1.0%)
CS Holdings 14,400 1,438,291
- -----------------------------------------------------------------------
Food/Household Products (2.2%)
Nestle S.A. 2,931 3,183,752
- -----------------------------------------------------------------------
Pharmaceuticals (2.6%)
Ciba-Geigy AG 2,435 2,985,958
Sandoz AG 825 953,580
- -----------------------------------------------------------------------
3,939,538
- -----------------------------------------------------------------------
TOTAL SWITZERLAND 10,287,214
- -----------------------------------------------------------------------
TAIWAN (0.6%)
Electronic Components (0.1%)
Siliconware Precision (GDR) 10,800 87,480
- -----------------------------------------------------------------------
Finance (0.5%)
Chronicle 2001 Mutual Fund 1,653,374 748,041
- -----------------------------------------------------------------------
TOTAL TAIWAN 835,521
- -----------------------------------------------------------------------
UNITED KINGDOM (10.9%)
Advertising & Publishing (1.1%)
Pearson 132,000 1,628,516
- -----------------------------------------------------------------------
Amusements (0.5%)
London Clubs International 153,300 783,467
- -----------------------------------------------------------------------
Health & Personal Care (0.7%)
London International Group 420,200 1,066,914
- -----------------------------------------------------------------------
Electronic Components (0.8%)
Premier Farnell 105,000 1,170,654
- -----------------------------------------------------------------------
Leisure & Tourism (1.0%)
Compass Group 140,688 1,399,095
- -----------------------------------------------------------------------
Miscellaneous Materials (0.8%)
Pilkington PLC 438,914 1,221,587
- -----------------------------------------------------------------------
Conglomerates (1.8%)
Lonrho PLC 1,077,184 2,629,844
- -----------------------------------------------------------------------
(continued on next page)
<PAGE>
PAGE 14
- ---------------------------------
Keystone International Fund Inc.
SCHEDULE OF INVESTMENTS--October 31, 1996
NUMBER MARKET
OF SHARES VALUE
- -----------------------------------------------------------------------
Merchandising (0.4%)
Tie Rack 199,292 $ 593,594
- -----------------------------------------------------------------------
Metals & Mining (1.1%)
British Steel PLC 592,000 1,645,247
- -----------------------------------------------------------------------
Energy Sources (1.7%)
British Petroleum Co. PLC 236,082 2,536,997
- -----------------------------------------------------------------------
Telecommunications (1.0%)
British Telecommunications 130,800 756,826
Vodafone Group 188,717 729,496
- -----------------------------------------------------------------------
1,486,322
- -----------------------------------------------------------------------
TOTAL UNITED KINGDOM 16,162,237
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$108,744,749) 135,302,758
- -----------------------------------------------------------------------
PREFERRED STOCKS (1.5%)
BRAZIL (1.5%)
Banking (0.4%)
BCO Bradesco S.A. 74,000,000 630,952
- -----------------------------------------------------------------------
Conglomerate (1.1%)
Vale Rio Doce (CIA) 76,900 1,594,287
- -----------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost--$2,120,723) 2,225,239
- -----------------------------------------------------------------------
Maturity
Value
- ----------------------------------------------------------
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
Investment in repurchase
agreement, in a joint trading
account, purchased 10/30/96,
5.565%, maturing 11/1/96(d) $5,714,883 5,714,000
- ----------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(COST--$5,714,000) 5,714,000
- ----------------------------------------------------------
Market
Value
- --------------------------------------------------------
TOTAL INVESTMENTS
(COST--$116,579,472) (E) $143,241,997
- --------------------------------------------------------
FOREIGN CURRENCY HOLDINGS (0.1%)
French Franc 5,086
New Taiwan Dollar (a) 58,801
- --------------------------------------------------------
TOTAL FOREIGN CURRENCY HOLDINGS
(COST--$64,630) 63,887
- --------------------------------------------------------
OTHER ASSETS AND
LIABILITIES--NET (3.0%) 4,604,670
- --------------------------------------------------------
NET ASSETS (100%) $147,910,554
- --------------------------------------------------------
(a) Investments denominated in the local currency and/or foreign currency
holdings of certain countries are considered illiquid due to foreign
exchange restrictions of these markets.
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A of the Federal Securities Act of 1933. These securities have
been determined to be liquid under guidelines established by the Board of
Directors.
(c) Non-income-producing security.
(d) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at October 31, 1996.
(e) The cost of investments for income tax purposes amounted to $116,633,273.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost at October 31, 1996 are as follows:
Gross unrealized appreciation $29,076,524
Gross unrealized depreciation (2,467,800)
-----------
Net unrealized appreciation $26,608,724
===========
Legend of Portfolio Abbreviations:
ADR--American Depository Receipt
GDR--Global Depository Receipt
GDS--Global Depository Share
<PAGE>
PAGE 15
- ---------------------------------
SCHEDULE OF INVESTMENTS--October 31, 1996
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
In U.S. Value at Unrealized
Exchange Exchange October 31, Appreciation/
Date for U.S. $ 1996 (Depreciation)
- ----------------------------------------------------------------------------------------------------
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
01/09/97 4,137,122 Australian Dollar $3,244,000 $3,271,825 $ (27,825)
11/20/96 13,560,870 Belgian Franc 444,000 435,327 8,673
11/06/96 16,088,373 Belgian Franc 508,402 515,818 (7,416)
11/01/96 568,774 Brazilian Real 553,175 553,606 (431)
11/01/96 515,088 Brazilian Real 500,961 501,351 (390)
11/01/96 436,719 Brazilian Real 424,741 425,072 (331)
11/20/96 2,379,906 British Pound 3,683,000 3,871,844 (188,844)
11/20/96 679,993 Finnish Markka 153,000 150,128 2,872
11/06/96 11,482,980 French Franc 2,300,000 2,246,795 53,205
11/20/96 3,779,887 German Mark 2,549,000 2,499,055 49,945
11/07/96 111,018,160 Italian Lira 73,174 73,183 (9)
11/20/96 906,833,390 Italian Lira 593,000 596,931 (3,931)
01/27/97 1,023,040,000 Japanese Yen 9,200,000 9,096,305 103,695
11/01/96 406,815,080 Korean Won 489,549 492,363 (2,814)
11/01/96 140,303,397 Korean Won 168,938 169,807 (869)
Netherlands
11/20/96 12,516,053 Guilder 7,528,000 7,386,137 141,863
11/13/96 70,812,000 Spanish Peseta 560,000 554,650 5,350
11/20/96 3,404,039 Swiss Franc 2,838,000 2,698,513 139,487
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
- ----------------------------------------------------------------------------------------------------
11/13/96 70,812,000 Spanish Peseta 553,284 554,650 1,366
11/20/96 906,833,390 Italian Lira 590,187 596,931 6,744
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ---------------------------------
Keystone International Fund Inc.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
One Month
Year Ended Ended
October 31, October 31,
----------------------------------------------------
1996 1995 1994(d)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value beginning of year $ 7.11 $ 7.77 $ 7.67
- -----------------------------------------------------------------------------------------
Income from investment operations
Net investment income (0.02) 0.07 0
Net realized and unrealized gain
(loss) on investments and
foreign currency related
transactions 0.75 0.05 0.10
- -----------------------------------------------------------------------------------------
Total from investment operations 0.73 0.12 0.10
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.09) (0.04) 0
In excess of net investment
income (0.01) 0 0
Net realized gains on investments
and foreign currency related
transactions (0.05) (0.74) 0
- -----------------------------------------------------------------------------------------
Total distributions (0.15) (0.78) 0
- -----------------------------------------------------------------------------------------
Net asset value end of year $ 7.69 $ 7.11 $ 7.77
- -----------------------------------------------------------------------------------------
Total return (a) 10.47% 2.19% 1.30%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.43%(b) 2.57%(b) 2.52%(c)
Net investment income (0.21%) 0.88% (0.20%)(c)
Portfolio turnover rate 52% 76% 2%
Average commission rate paid $ 0.0011 N/A N/A
- -----------------------------------------------------------------------------------------
Net assets end of year
(thousands) $147,911 $128,674 $157,929
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------
1994(d) 1993(d) 1992(d) 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 7.08 $ 6.01 $ 5.91 $ 5.35 $ 7.51 $ 6.66 $ 9.53 $ 8.05
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0 (0.03) (0.01) (0.01) (0.07) (0.14) 0.03 0
Net realized and unrealized gain
(loss) on investments and
foreign currency related
transactions 0.62 1.14 0.34 0.83 (1.74) 1.06 (1.60) 2.65
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.62 1.11 0.33 0.82 (1.81) 0.92 (1.57) 2.65
- -------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.02) 0 0 0 0 (0.07) (0.08) (0.06)
In excess of net investment
income (0.01) (0.04) (0.23) (0.03) 0 0 0 0
Net realized gains on investments
and foreign currency related
transactions 0 0 0 (0.23) (0.35) 0 (1.22) (1.11)
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.03) (0.04) (0.23) (0.26) (0.35) (0.07) (1.30) (1.17)
- -------------------------------------------------------------------------------------------------------------------
Net asset value end of year $ 7.67 $ 7.08 $ 6.01 $ 5.91 $ 5.35 $ 7.51 $ 6.66 $ 9.53
- -------------------------------------------------------------------------------------------------------------------
Total return (a) 8.75% 18.59% 5.78% 15.59% (25.12%) 13.55% (15.55%) 39.96%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.54% 2.94% 3.41% 3.14% 2.92% 2.65% 2.04% 2.17%
Net investment income 0.01% (0.46%) (0.09%) (0.07%) (0.51%) (0.79%) 0.33% (0.04%)
Portfolio turnover rate 121% 68% 74% 85% 42% 42% 60% 61%
Average commission rate paid N/A N/A N/A N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Net assets end of year
(thousands) $154,529 $111,752 $64,135 $72,923 $73,768 $121,047 $115,712 $173,319
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 2.42% and 2.56% for the years ended October 31, 1996 and 1995,
respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ---------------------------------
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
=========================================================================
Assets
Investments at market value (identified cost--
$116,579,472) $143,241,997
Foreign currency holdings (identified cost--
$64,630) 63,887
- -------------------------------------------------------------------------
Total investments and foreign currency holdings
(identified cost--$116,644,102) 143,305,884
- -------------------------------------------------------------------------
Cash 857,100
Receivable for
Investments sold 3,162,210
Unrealized appreciation on open forward foreign
currency contracts 513,200
Fund shares sold 63,367
Interest and dividends 310,199
Refundable foreign tax withheld 114,851
Prepaid expenses 13,681
- -------------------------------------------------------------------------
Total assets 148,340,492
- -------------------------------------------------------------------------
Liabilities
Payable for:
Investments purchased 41,457
Unrealized depreciation on open forward foreign
currency contracts 232,860
Fund shares redeemed 44,104
Foreign tax withholding 41,553
Other accrued expenses 69,964
- -------------------------------------------------------------------------
Total liabilities 429,938
- -------------------------------------------------------------------------
Net assets $147,910,554
- -------------------------------------------------------------------------
Net assets represented by
Paid-in capital $118,493,262
Accumulated distributions in excess of net investment
income (129,662)
Accumulated net realized gains on investments and
foreign currency related transactions 2,593,391
Net unrealized appreciation (depreciation) on
investments and foreign currency related transactions 26,953,563
- -------------------------------------------------------------------------
Total net assets applicable to outstanding shares of
beneficial interest at 10/31/96 ($7.69 a share on
19,246,612 shares outstanding) $147,910,554
- -------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year ended October 31, 1996
=======================================================================
Investment income (Note 1)
Dividends (net of foreign withholding
taxes of $379,579) $ 2,596,115
Interest 584,705
- -----------------------------------------------------------------------
Total income 3,180,820
- -----------------------------------------------------------------------
Expenses (Notes 2 and 4)
Management fee $1,076,770
Transfer agent fees 624,905
Accounting, auditing and legal 67,473
Custodian fees 224,631
Distribution Plan expenses 1,442,473
Registration fees 34,857
Directors fees 7,852
Miscellaneous expenses 26,556
- -----------------------------------------------------------------------
Total expenses 3,505,517
- -----------------------------------------------------------------------
Less: Expenses paid indirectly
(Note 6) (20,006)
- -----------------------------------------------------------------------
Net expenses 3,485,511
- -----------------------------------------------------------------------
Net loss from investment
operations (304,691)
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency related transactions (Notes 1 and 3)
Realized gain (loss) on:
Investments 7,102,309
Foreign currency related
transactions (2,397,443)
- -----------------------------------------------------------------------
Net realized gain on investments and
foreign currency related transactions 4,704,866
- -----------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on:
Investments 8,482,495
Foreign currency related transactions 968,199
- -----------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments and
foreign currency related transactions 9,450,694
- -----------------------------------------------------------------------
Net realized and unrealized gain on
investments and foreign currency
related transactions 14,155,560
- -----------------------------------------------------------------------
Net increase in net assets resulting
from operations $13,850,869
- -----------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ---------------------------------
Keystone International Fund Inc.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1996 October 31, 1995
=============================================================================================================
<S> <C> <C>
Operations
Net investment income (loss) $ (304,691) $ 1,156,599
Net realized gain on investments and foreign currency related
transactions 4,704,866 2,703,078
Net change in unrealized appreciation or depreciation on investments
and foreign currency related transactions 9,450,694 (2,473,142)
- -------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 13,850,869 1,386,535
- -------------------------------------------------------------------------------------------------------------
Distributions to shareholders from
Net investment income (1,681,273) (701,392)
In excess of net investment income (117,517) 0
Net realized gains on investments and foreign currency related
transactions (894,973) (14,792,324)
- -------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,693,763) (15,493,716)
- -------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold 216,278,164 84,005,110
Payments for shares redeemed (210,495,769) (112,505,516)
Net asset value of shares issued in reinvestment of distributions 2,297,398 13,352,659
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions 8,079,793 (15,147,747)
- -------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 19,236,899 (29,254,928)
- -------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period 128,673,655 157,928,583
- -------------------------------------------------------------------------------------------------------------
End of period [including undistributed net investment income
(accumulated distributions in excess of net investment income) as
follows: 1996--($129,662) 1995--$1,985,964] (Note 1) $ 147,910,554 $ 128,673,655
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 19
- ---------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone International Fund Inc. (the "Fund") is a Massachusetts corporation
for which Keystone Management, Inc. ("KMI") is the Investment Manager, and
Keystone Investment Management Company ("Keystone") is the Investment
Adviser. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") and KMI is in turn a wholly-owned subsidiary of Keystone. The Fund is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end investment company. The Fund's primary
investment objective is long term growth of capital. As a secondary
objective, the Fund seeks modest income from its investments.
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 require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
Investments are usually valued at the closing sales price, or in the absence
of sales and for over-the- counter securities, the mean of the bid and asked
prices. Securities for which valuations are not available from an independent
pricing service (including restricted securities) are valued at fair value as
determined in good faith according to procedures established by the Board of
Directors.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
investments with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
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.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the
collateral daily and will require the seller to provide additional collateral
in the event the market value of the securities pledged falls below the
carrying value of the repurchase agreement.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as
follows: market value of investments, assets and liabilities at the daily
rate of exchange; purchases and sales of investments, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gain (loss) resulting from changes in foreign
currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement
date on investment securities transactions, foreign currency transactions and
the difference between the amounts of interest and dividends recorded on the
books of the Fund and the amount actually received. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between
the initial purchase trade date and subsequent sale trade
<PAGE>
PAGE 20
- ---------------------------------
Keystone International Fund Inc.
date is included in realized gain (loss) on foreign currency transactions
D. Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated
in a foreign currency and to hedge certain foreign currency assets or
liabilities. Forward contracts are recorded at the forward rate 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 bears the risk of an unfavorable change in the
foreign currency exchange rate underlying the forward contract and is subject
to the credit risk that the other party will not fulfill their obligations
under the contract. Forward contracts involve elements of market risk in
excess of the amount reflected in the statement of assets and liabilities.
E. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business 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
includes amortization of discounts and premiums. Dividend income is recorded
on the ex-dividend date.
F. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"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 also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly,
no provision for federal income taxes is required.
G. Distributions
The Fund distributes net investment income and net capital gains, if any, at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of foreign currency gains and losses.
(2.) Capital Share Transactions
One 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:
Year Ended Year Ended
10/31/96 10/31/95
- --------------------------------------------------------
Shares sold 28,960,907 12,460,964
Shares redeemed (28,130,870) (16,703,211)
Shares issued in
reinvestment of
distributions 327,732 2,010,943
- --------------------------------------------------------
Net increase (decrease) 1,157,769 (2,231,304)
- --------------------------------------------------------
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and foreign cash) for the year ended October 31, 1996,
were $88,583,275 and $69,000,413, respectively.
(4.) Distribution Plan
The Fund bears some of the costs of selling its shares under a Distribution
Plan (the "Plan") adopted pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan, the Fund pays its principal underwriter, Keystone Investment
Distributors Company ("KIDC"), a wholly-owned subsidiary of Keystone, amounts
which are calculated and paid daily.
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PAGE 21
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Under the Plan, the Fund pays a distribution fee amount which may not exceed
1.00% of the Fund's average daily net assets. Of that amount, 0.75% is used
to pay distribution expenses and 0.25% may be used to pay service fees.
The Plan 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 Fund.
However, after the termination of the Plan, at the discretion of the Board of
Directors, payments to KIDC may continue as compensation for its services
which had been earned while the Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. KIDC intends to seek
full payment of such distribution costs from the Fund at such time in the
future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and payable daily. The
management fee is calculated by applying percentage rates, which start at
0.75% and decline, as net assets increase, to 0.45% per annum, to the net
asset value of the shares of the Fund. KMI has an investment advisory
agreement with Keystone, under which Keystone provides investment advisory
and management services to the Fund and receives for its services an annual
fee representing 85% of the management fee received by KMI.
During the year ended October 31, 1996, the Fund paid or accrued $24,157 to
Keystone for certain accounting services. The Fund paid or accrued $624,905
to Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of
Keystone, for services rendered as the Fund's transfer and dividend
disbursing agent.
Certain officers and/or Directors of Keystone are also officers and/or
Directors of the Fund. Officers of Keystone and affiliated Directors receive
no compensation directly from the Fund.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the period ended October 31, 1996, the Fund incurred total custody fees
of $224,631 and received a credit of $20,006 pursuant to this expense offset
arrangement, resulting in a net custody expense of $204,625. The assets
deposited with the custodian bank under this expense offset arrangement could
have been invested in income-producing assets.
(7.) Agreement and Plan of Acquisition
On September 6, 1996, KII entered into an Agreement and plan of Acquisition
and Merger with First Union Corporation ("First Union") and First Union
National Bank of North Carolina ("FUNB-NC") and certain other parties
pursuant to which KII will be merged with and into a wholly-owned subsidiary
of FUNB-NC. Subject to the receipt of the required regulatory and shareholder
approvals, the proposed merger is expected to take place in December 1996.
<PAGE>
PAGE 22
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Keystone International Fund Inc.
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders
Keystone International Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Keystone International Fund Inc., including the schedule of investments, as
of October 31, 1996, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in
the two-year period then ended and the financial highlights for each of the
years in the two-year period then ended, the period from October 1, 1994 to
October 31, 1994 and for each of the years in the eight-year period ended
September 30, 1994. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 1996, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone International Fund Inc., as of October 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick llp
Boston, Massachusetts
November 29, 1996
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PAGE 23
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Federal Tax Status--Fiscal 1996 Distributions (Unaudited)
A distribution of $0.05 per share of net long-term capital gains and $0.10
per share of net investment income was paid during the fiscal year ended
October 31, 1996. Of the ordinary income distributions, 3% is eligible for
the corporate dividend received deduction.
The above figures may differ from those cited elsewhere in this report due
to differences in the calculation of income and capital gains for accounting
(book) purposes and the Internal Revenue Service (tax) purposes.
In January 1997, we will send complete information on the distributions paid
during the calendar year 1996 to help you in completing your federal tax
return.
