[front cover]
KEYSTONE
[photo of globe with a frame in the background]
INTERNATIONAL
FUND INC.
[Keystone logo]
SEMIANNUAL REPORT
APRIL 30, 1996
<PAGE>
PAGE 1
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Keystone International Fund Inc.
Seeks long-term growth from overseas securities.
Dear Shareholder:
We are pleased to report to you on activities of Keystone International Fund
Inc. for the six-month period which ended April 30, 1996.
Performance
Your Fund returned 10.90% for the six-month period and 19.29% for the
twelve-month period which ended April 30, 1996. The Morgan Stanley Europe,
Australia and Far East Index (EAFE), a benchmark of international stock
performance, returned 13.21% for the six-month period and 11.40% for the
twelve-month period.
This satisfactory performance reflects a general strengthening in overseas
markets and our careful country and individual security selection.
Market Environment
Moderate growth in the U.S. economy and declining U.S. interest rates in 1995
had a positive influence on world markets, which improved significantly during
the six-month period. Emerging markets posted the largest gains, fueled in part
by greater participation from U.S. investors. European economic growth remained
slow, but low interest rates, continued cost cutting and improved efficiencies
increased the profitability of many companies. In Japan, there were indications
that the five-year recession was coming to an end. Increased commodities prices
benefitted companies in Australia, New Zealand and Canada.
A World of Opportunities
Our overall allocations remained fairly constant during the six-month period. As
of April 30, 1996, 51% of assets were invested in Europe and 41% in the Far
East, roughly the same percentages as at the beginning of the period. In Europe,
our largest country holdings were Switzerland, the United Kingdom and the
Netherlands. In the Far East, we increased our exposure to Japanese stocks from
20% on October 31, 1995 to 29% on April 30, 1996 to take advantage of improving
market conditions. Strong returns from several Japanese technology companies
contributed to positive Fund performance.
Combined Growth and Value Strategy
In selecting stocks for your Fund's portfolio, we search worldwide for stocks
that we believe are attractively priced or with attractive earnings. We believe
that owning both types of stocks enhances the stability of the portfolio,
because growth and value stocks tend to be in favor at different times during an
economic cycle. We believe combining the two styles reduces some of the
fluctuation associated with investing internationally.
(Continued on next page)
<PAGE>
PAGE 2
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Keystone International Fund Inc.
Looking Ahead
We have seen strong improvement in international markets which we believe should
continue. The improved stability of the U.S. dollar and the increased demand for
goods and services in emerging markets should continue to have a positive effect
on markets around the world. We think that increasing efficiency should result
in greater profitability for foreign companies, as it has in the U.S. We believe
that opportunities in selected international markets may be greater than those
in the U.S. in 1996.
We appreciate your ongoing 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 and President
Keystone Investments, Inc.
June 1996
[/s/ George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
June 1996
[Pictures of Albert H. Elfner, III and George S. Bissell
Albert H. Elfner, III George S. Bissell
[DALBAR Logo]
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 Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear Keystone portfolio
managers discuss their latest strategies. You can also listen to Keystone's
overall market outlook from James McCall, Chief Investment Officer. The service
is available 24 hours a day, seven days a week and updated at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2
[Logo of Receiver} [Logo of Telephone]
<PAGE>
PAGE 3
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A Discussion With
Your Fund Manager
Gilman C. Gunn is head of Keystone's international team and portfolio manager of
your Fund. An investment professional with 23 years of experience, Mr. Gunn has
spent more than ten years in investment management positions in London, Kuwait
and New York, and holds an MBA from New York University. Together with his
international investment team, he evaluates and selects
securities for your Fund from around the world.
Q How would you characterize the performance of the international markets during
the past six months?
A International markets performed well during the period,
particularly during the first four months of 1996. There was abundant liquidity
worldwide, in contrast with the previous year. U.S. investors who took advantage
of the rise in domestic stocks during 1995 began looking abroad for well priced
opportunities at the beginning of the new year. Slow growth and the downward
trend in interest rates created a positive investment environment in Europe. The
emerging markets, which declined so dramatically at the end of 1994, rebounded
sharply in 1996. During the first quarter of 1996, Eastern Europe was up 60%.
The Mexican stock market rose 20%, although the underlying economy hasn't
started to improve yet. Selected Asian countries had returns in the high teens.
Even Japan began to show signs of life after its protracted five-year recession.
Q What was the geographical allocation of the Fund's assets?
A Our general allocation remained relatively stable during the six months, with
about half of the Fund's stock investments in Europe, 44% in the Far East and 5%
in Canada. We increased stock holdings in Japan to 29% from 20% at the beginning
of the six-month period. Our largest weighting in Europe was 10% in the United
Kingdom. Latin American holdings comprised less than half of one percent of the
portfolio to minimize exposure to volatility in that region.
Q Please describe some of the Fund's European holdings.
A As of the end of the period, we held shares of Lonrho, an international
conglomerate headquartered in the U.K. Although it had a broad range of assets
spanning gold and platinum mining interests, agriculture and tourism, Lonrho's
price had been depressed due to historically poor management. Recent changes in
management are helping to turn the company around. We also held several Swiss
companies including SGS Surveillance which specializes in quality testing of
commodities, and Nestle, which has a strong global presence, especially in the
emerging markets. We think these companies have bright futures.
Fund Profile
Objective: Seeks long-term growth from overseas securities.
Commencement of investment operations: 1954
Number of countries: 26
Net assets: $154 million
Newspaper listing: "Intl"
<PAGE>
PAGE 4
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Keystone International Fund Inc.
Geographic Diversification
as of April 30, 1996
[Picture of map]
CANADA 5%
EUROPE 52%
FAR EAST 44%
LATIN AMERICA 0.3%
Other Assets and Liabilities -1.3%
(as a percentage of net assets)
Q What Japanese stocks did you favor?
A We continued to focus on property and casualty companies such as Mitsui. These
trade at a discount to their net asset value. We also owned exporting companies,
many of which are in technology, that benefitted from the relative weakness of
the yen in relation to the dollar, such as Toyota, Sony and Canon.
Q What about some of the Fund's newer holdings?
A We bought Reliance Industries during the period, an Indian petrochemical
manufacturer that sells at an attractive price/earnings ratio of 8 times
earnings. We expect this company to show strong growth over the next five years.
We also bought shares of Loewen Group when its price dipped substantially, but
briefly, because of a lawsuit that was subsequently resolved. Loewen is a
Canadian company that owns and operates a chain of funeral homes throughout
Canada and the United States. Its earnings have grown at approximately 25% per
year for the past five years.
Performance of World Markets
Twelve-month change as of 4/30/96
- ---------------------------
Americas 32.66%
- ---------------------------
Europe/Africa 15.11%
- ---------------------------
Asia/Pacific 4.75%
- ---------------------------
World (ex. U.S.) 9.27%
- ---------------------------
Source: Dow Jones & Co. Inc.
(expressed in U.S. dollars)
<PAGE>
PAGE 5
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Q How do you minimize the risks of international investing?
A We maintain a conservative investment approach and limit risk by diversifying
both geographically and by investment style. As of April 30, 1996, the Fund held
a combination of growth and value stocks from 24 countries and at least that
many industries. These included a number of large "blue chip" multinational
companies, such as Nestle, Sony and Toyota, which increase the quality of the
portfolio. We also own smaller stocks for added diversification. The Fund has a
small, emerging markets weighting, again as a diversification measure. For
additional protection, about 30% of the portfolio was essentially
dollar-denominated.
Q What is your outlook for the international markets?
A We believe the gradual worldwide economic improvement we saw during the
six-month period is likely to continue. We believe lower interest rates, cost
cutting and increased productivity in Europe are the start of a positive trend
that will continue. Real Gross Domestic Product in Japan should increase from 1%
in 1995 to 2.5% in 1996. We think the stronger, more stable U.S. dollar will
help the Japanese export market. We also believe returns in the emerging markets
may continue to be volatile, and we continue to invest in those countries very
selectively.
Top 10 Stock Holdings
as of April 30, 1996
Percent of
Stock Industry net assets
Canon (Japan) Office equipment 4.0
Nestle (Switzerland) Foods 3.4
Sony (Japan) Appliances/household
durables 2.7
Sumitomo Marine (Japan) Insurance 2.6
Lonrho (U.K.) Conglomerate 2.4
Fuji Photo Film (Japan) Leisure/entertainment 2.2
Royal Dutch Petroleum
(Netherlands) Energy 2.2
Mitsui Marine & Fire (Japan) Insurance 2.2
Toyota Motor (Japan) Automotive 2.1
British Steel (U.K.) Metals 1.9
[solid 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 International Fund Inc.
Your Fund's Performance
Growth of an investment in
Keystone International Fund Inc.
In Thousands
Initial Investment Reinvested Distributions
4/88 10168 14501
4/90 8492 12857
4/92 8142 13418
4/94 10782 17887
4/96 10782 20482
Total Value: $20,482
A $10,000 investment in Keystone International Fund Inc. made on April 30, 1986
with all distributions reinvested was worth $20,482 on April 30, 1996. Past
performance is no guarantee of future results.
Six-Month Performance as of April 30, 1996
Total returns* 10.90%
Net asset value 10/31/95 $7.11
4/30/96 $7.72
Dividends $0.10
Capital gains $0.05
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of April 30, 1996
If you If you did
Cumulative total return redeemed not redeem
1-year 16.29% 19.29%
5-year 60.70% 60.70%
10-year 104.82% 104.82%
Average annual total return
1-year 16.29% 19.29%
5-year 9.95% 9.95%
10-year 7.43% 7.43%
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 the original cost.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make an
exchange using Keystone's Automated Response Line (KARL). The Fund reserves the
right to change or terminate the exchange offer.
<PAGE>
PAGE 7
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SCHEDULE OF INVESTMENTS--April 30, 1996
NUMBER MARKET
OF SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (93.7%)
AUSTRALIA (3.8%)
Banking (1.3%)
National Australia Bank Ltd. 155,500 $ 1,394,980
Westpac Banking Corp. 115,500 560,715
- --------------------------------------------------------------------------------
1,955,695
- --------------------------------------------------------------------------------
Beverages & Tobacco (0.2%)
Foster's Brewing Group Ltd. 162,000 296,512
- --------------------------------------------------------------------------------
Energy Sources (1.6%)
Broken Hill Proprietary Co. Ltd. 165,137 2,541,268
- --------------------------------------------------------------------------------
Metals and Mining (0.7%)
WMC Ltd. 140,000 1,020,581
- --------------------------------------------------------------------------------
TOTAL AUSTRALIA 5,814,056
- --------------------------------------------------------------------------------
BELGIUM (1.1%)
Industrial Components (1.1%)
Bekaert S.A. 2,180 1,684,513
- --------------------------------------------------------------------------------
CANADA (4.3%)
Advertising & Publishing (1.6%)
Quebecor, Inc. 147,906 2,455,125
- --------------------------------------------------------------------------------
Conglomerates (0.5%)
Brascan Ltd. 26,400 519,662
Imasco Ltd. 15,000 286,449
- --------------------------------------------------------------------------------
806,111
- --------------------------------------------------------------------------------
Business & Public Service (0.7%)
Loewen Group Inc. 35,000 1,053,985
- --------------------------------------------------------------------------------
Fertilizer (1.5%)
Potash Corp. of Saskatchewan,
Inc. 32,380 2,306,911
- --------------------------------------------------------------------------------
TOTAL CANADA 6,622,132
- --------------------------------------------------------------------------------
CHILE (0.9%)
Gold Mines (0.9%)
Antofagasta Holdings 259,500 1,367,229
- --------------------------------------------------------------------------------
COLUMBIA (0.1%)
Paper & Packaging (0.1%)
Papeles Nacionales 18,300 $ 178,425
- --------------------------------------------------------------------------------
FINLAND (0.6%)
Chemicals (0.3%)
Kemira OY 56,200 539,983
- --------------------------------------------------------------------------------
Industrial Components (0.3%)
Fiskars Oy AB, Series K 4,400 231,837
Fiskars Oy AB 3,533 178,855
- --------------------------------------------------------------------------------
410,692
- --------------------------------------------------------------------------------
TOTAL FINLAND 950,675
- --------------------------------------------------------------------------------
FRANCE (5.6%)
Banking (1.0%)
Credit Commerce de France 33,088 1,657,762
- --------------------------------------------------------------------------------
Building Materials (0.7%)
Lafarge 13,600 871,137
Poliet 2,600 266,667
- --------------------------------------------------------------------------------
1,137,804
- --------------------------------------------------------------------------------
Cosmetics (0.8%)
L' Oreal S.A. 3,750 1,158,926
- --------------------------------------------------------------------------------
Energy Sources (0.7%)
Societe Nationale Elf Aquitaine 14,255 1,060,125
- --------------------------------------------------------------------------------
Industrial Components (0.8%)
Michelin 25,100 1,243,950
- --------------------------------------------------------------------------------
Insurance (0.3%)
AXA 8,500 506,463
- --------------------------------------------------------------------------------
Leisure / Tourism (0.6%)
Accor S.A. 6,851 951,914
- --------------------------------------------------------------------------------
Chemicals (0.7%)
Rhone Poulenc SA 43,300 1,039,032
- --------------------------------------------------------------------------------
TOTAL FRANCE 8,755,976
- --------------------------------------------------------------------------------
See Notes to Schedule of Investments. (continued on next page)
<PAGE>
PAGE 8
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Keystone International Fund Inc.
GERMANY (1.7%)
Capital Goods (0.2%)
Grohe (Friedrich) AG 1,100 $ 257,953
- --------------------------------------------------------------------------------
Chemicals (1.3%)
Hoechst AG 6,000 2,020,772
- --------------------------------------------------------------------------------
Metals and Mining (0.2%)
SGL Carbon 4,300 405,872
- --------------------------------------------------------------------------------
TOTAL GERMANY 2,684,597
- --------------------------------------------------------------------------------
HONG KONG (2.6%)
Automotive ( 0.1%)
Innovative International 590,000 179,239
- --------------------------------------------------------------------------------
Banking (1.2%)
HSBC Holdings 113,677 1,697,330
Wing Hang Bank 36,700 134,265
- --------------------------------------------------------------------------------
1,831,595
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Industrial Components ( 0.2%)
Sinocan Holdings 700,000 307,672
- --------------------------------------------------------------------------------
Merchandising (0.6%)
Giordano Holdings 1,117,000 1,032,454
- --------------------------------------------------------------------------------
Telecommunications (0.5%)
Hong Kong
- --------------------------------------------------------------------------------
Telecommunications Ltd. 392,400 748,226
- --------------------------------------------------------------------------------
TOTAL HONG KONG 4,099,186
- --------------------------------------------------------------------------------
INDONESIA (0.8%)
Merchandising (0.3%)
Matahari Putra 240,750 482,325
- --------------------------------------------------------------------------------
Textiles & Apparel (0.5%)
Indorama Synthetic 224,500 726,366
- --------------------------------------------------------------------------------
TOTAL INDONESIA 1,208,691
- --------------------------------------------------------------------------------
ITALY (1.8%)
Chemicals (0.1%)
Saes Getters 4,500 113,796
- --------------------------------------------------------------------------------
Food & Household Products (0.5%)
Industrie Natuzzi 13,500 $ 702,000
- --------------------------------------------------------------------------------
Telecommunications (1.2%)
Telecom Italia MOB 315,000 695,743
Telecom Italia 605,000 1,233,627
- --------------------------------------------------------------------------------
1,929,370
- --------------------------------------------------------------------------------
TOTAL ITALY 2,745,166
- --------------------------------------------------------------------------------
JAPAN (28.3%)
Appliances / Household Durables (3.6%)
Sharp Corp. 79,000 1,374,504
Sony Corp. 65,200 4,238,421
- --------------------------------------------------------------------------------
5,612,925
- --------------------------------------------------------------------------------
Beverages & Tobacco (0.2%)
Fuji Coca Cola Bottling 5,000 66,918
Kita Kyushu Coca Cola 9,000 221,978
- --------------------------------------------------------------------------------
288,896
- --------------------------------------------------------------------------------
Capital Goods (2.0%)
Daifuku Company 70,000 1,104,154
Mori Seiki Company 66,000 1,507,959
Sodick Company 43,000 550,834
- --------------------------------------------------------------------------------
3,162,947
- --------------------------------------------------------------------------------
Pharmaceuticals (3.1%)
Daiichi Pharmaceutical Company 89,000 1,497,443
Ono Pharmaceutical 21,000 792,983
Taisho Pharmaceutical Company 73,000 1,598,107
Terumo Corp. 74,000 940,873
- --------------------------------------------------------------------------------
4,829,406
- --------------------------------------------------------------------------------
Electrical / Electronics (2.3%)
Hitachi Ltd. 141,000 1,523,159
NEC Corp. 32,000 406,864
Toshiba Corp. 203,000 1,579,676
- --------------------------------------------------------------------------------
3,509,699
- --------------------------------------------------------------------------------
See Notes to Schedule of Investments.
<PAGE>
PAGE 9
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Electronic Components (0.2%)
Fanuc 7,700 $ 334,927
- --------------------------------------------------------------------------------
Financial Services (0.7%)
Nichiei Co. 16,000 1,070,695
- --------------------------------------------------------------------------------
Food & Household Products (0.1%)
Plenus 4,400 184,236
- --------------------------------------------------------------------------------
Industrial Components (1.1%)
Bridgestone Corp. 93,000 1,724,774
- --------------------------------------------------------------------------------
Automobiles (2.5%)
Fuji Heavy Industry 124,000 585,593
Toyota Motor Corp. 142,000 3,244,396
- --------------------------------------------------------------------------------
3,829,989
- --------------------------------------------------------------------------------
Insurance (6.3%)
Mitsui Marine and Fire 403,000 3,417,246
Nichido Fire and Marine 257,250 2,164,141
Sumitomo Marine and Fire 432,000 4,113,302
- --------------------------------------------------------------------------------
9,694,689
- --------------------------------------------------------------------------------
Leisure & Tourism (2.2%)
Fuji Photo Film Co. 112,000 3,490,464
- --------------------------------------------------------------------------------
Office & Business Equipment (4.0%)
Canon, Inc. 309,000 6,144,256
- --------------------------------------------------------------------------------
TOTAL JAPAN 43,877,903
- --------------------------------------------------------------------------------
KOREA (1.1%)
Electronic Components (0.4%)
Chung Ho Computer 6,117 573,776
- --------------------------------------------------------------------------------
Banking (0.1%)
Shinhan Bank 7,230 159,789
- --------------------------------------------------------------------------------
Electric / Electronics (0.1%)
Samsung Electronics 853 116,180
Samsung Electronics Co., Ltd., Global
Depository Shares 82 11,169
- --------------------------------------------------------------------------------
127,349
- --------------------------------------------------------------------------------
Metals & Mining (0.1%)
Pohang Iron & Steel Co., Ltd. 2,500 197,559
- --------------------------------------------------------------------------------
Utilities (0.4%)
Korea Electric Power 16,300 $ 689,072
- --------------------------------------------------------------------------------
TOTAL KOREA 1,747,545
- --------------------------------------------------------------------------------
MALAYSIA (1.2%)
Wholesale / International (0.2%)
Sime Darby BHD 88,000 243,533
- --------------------------------------------------------------------------------
Foods & Household Products (0.4%)
Nestle Malay Berhad 90,000 765,251
- --------------------------------------------------------------------------------
Leisure & Tourism (0.6%)
Genting Berhad 98,500 868,829
- --------------------------------------------------------------------------------
TOTAL MALAYSIA 1,877,613
- --------------------------------------------------------------------------------
MEXICO (0.3%)
Metals & Mining (0.3%)
Industrias Penoles S.A. de C.V. 96,500 406,521
- --------------------------------------------------------------------------------
NETHERLANDS (9.0%)
Advertising & Publishing (2.4%)
Telegraaf N.V. 10,000 1,785,819
Wolters Kluwer N.V. 17,424 1,904,590
- --------------------------------------------------------------------------------
3,690,409
- --------------------------------------------------------------------------------
Appliances / Household Durables (0.4%)
Philips Electronics N.V. 17,350 612,591
- --------------------------------------------------------------------------------
Beverages & Tobacco (1.6%)
Heineken N.V. 11,788 2,466,984
- --------------------------------------------------------------------------------
Energy Sources (2.2%)
Royal Dutch Petroleum Co. 23,740 3,381,928
- --------------------------------------------------------------------------------
Health & Personal Products (0.5%)
Unilever N.V. 5,615 766,144
- --------------------------------------------------------------------------------
Insurance (0.8%)
AEGON N.V. 26,920 1,281,980
- --------------------------------------------------------------------------------
Merchandising (0.8%)
Ahold 24,383 1,202,430
- --------------------------------------------------------------------------------
See Notes to Schedule of Investments. (continued on next page)
<PAGE>
PAGE 10
Keystone International Fund Inc.
- -------------------------------------------
Wholesale & International (0.3%)
Van Ommeren (Kon) 13,800 $ 515,435
- --------------------------------------------------------------------------------
TOTAL NETHERLANDS 13,917,901
- --------------------------------------------------------------------------------
NEW ZEALAND (0.6%)
Forest Products (0.1%)
Fletcher Challenge Paper 117,800 242,770
- --------------------------------------------------------------------------------
Utilities (0.4%)
Fletcher Challenge Energy 292,100 626,058
- --------------------------------------------------------------------------------
Building Materials (0.1%)
Fletcher Challenge Building 22,500 53,325
- --------------------------------------------------------------------------------
TOTAL NEW ZEALAND 922,153
- --------------------------------------------------------------------------------
NORWAY (1.0%)
Pharmaceuticals (1.0%)
Hafslund Nycomed 52,600 1,545,269
- --------------------------------------------------------------------------------
PERU (0.3%)
Banking (0.1%)
Credicorp Ltd. 14,300 243,100
- --------------------------------------------------------------------------------
Beverage & Tobacco (0.2%)
Backus & Johnston 215,000 288,420
- --------------------------------------------------------------------------------
TOTAL PERU 531,520
- --------------------------------------------------------------------------------
SINGAPORE (1.3%)
Business & Public Services (0.2%)
Venture Manufacturing 95,500 326,078
- --------------------------------------------------------------------------------
Conglomerates (0.3%)
Jardine Matheson 63,083 504,664
- --------------------------------------------------------------------------------
Beverages & Tobacco (0.8%)
Fraser & Neave 104,000 1,154,076
- --------------------------------------------------------------------------------
TOTAL SINGAPORE 1,984,818
- --------------------------------------------------------------------------------
SPAIN (1.5%)
Energy Sources (0.9%)
Repsol S.A. 37,300 1,367,960
- --------------------------------------------------------------------------------
Finance (0.6%)
BCO Santander SA 19,600 $ 910,660
- --------------------------------------------------------------------------------
TOTAL SPAIN 2,278,620
- --------------------------------------------------------------------------------
SWEDEN (8.2%)
Appliances & Household Durables (1.7%)
Electrolux AB 51,629 2,603,680
- --------------------------------------------------------------------------------
Automotive (1.4%)
Volvo AB 93,200 2,137,047
- --------------------------------------------------------------------------------
Business & Public Services (1.2%)
Esselte AB 94,900 1,903,150
- --------------------------------------------------------------------------------
Electrical & Electronics (0.7%)
Asea AB 10,000 1,014,510
- --------------------------------------------------------------------------------
Health & Personal Products (2.4%)
AB Astra 25,692 1,142,229
Pharmacia & Upjohn 67,000 2,548,956
- --------------------------------------------------------------------------------
3,691,185
- --------------------------------------------------------------------------------
Capital Goods (0.8%)
Assa Abloy (c) 114,000 1,294,385
- --------------------------------------------------------------------------------
TOTAL SWEDEN 12,643,957
- --------------------------------------------------------------------------------
SWITZERLAND (7.0%)
Merchandising (0.1%)
Fotolabo SA 250 112,758
- --------------------------------------------------------------------------------
Business & Public Services (1.1%)
SGS Holding 760 1,713,916
- --------------------------------------------------------------------------------
Chemicals (1.8%)
Ciba-Geigy AG 2,435 2,810,370
- --------------------------------------------------------------------------------
Food / Household Products (3.4%)
Nestle S.A. 4,731 5,262,171
- --------------------------------------------------------------------------------
Health and Personal Products (0.6%)
Sandoz AG 825 901,015
- --------------------------------------------------------------------------------
TOTAL SWITZERLAND 10,800,230
- --------------------------------------------------------------------------------
See Notes to Schedule of Investments.
<PAGE>
PAGE 11
- -------------------------------------------
TAIWAN, PROVINCE OF CHINA (0.5%)
Finance (0.4%)
Chronicle 2001 Mutual Fund 1,653,374 $ 722,826
- --------------------------------------------------------------------------------
Transportation (0.1%)
Evergreen Marine 30,800 57,239
- --------------------------------------------------------------------------------
TOTAL TAIWAN, PROVINCE OF CHINA 780,065
- --------------------------------------------------------------------------------
UNITED KINGDOM (9.2%)
Advertising / Publishing (1.1%)
Blenheim Group PLC 60,000 293,542
Pearson 132,000 1,394,912
- --------------------------------------------------------------------------------
1,688,454
- --------------------------------------------------------------------------------
Leisure & Tourism (0.7%)
Compass Group 140,688 1,158,458
- --------------------------------------------------------------------------------
Miscellaneous Materials (0.9%)
Pilkington PLC 438,914 1,407,326
- --------------------------------------------------------------------------------
Conglomerates (2.4%)
Lonrho PLC 1,253,184 3,650,325
- --------------------------------------------------------------------------------
Merchandising (0.3%)
Tie Rack 199,292 486,005
- --------------------------------------------------------------------------------
Metals & Mining (1.9%)
British Steel PLC 992,000 2,964,203
- --------------------------------------------------------------------------------
Oil (1.4%)
British Petroleum Co., PLC 234,000 2,111,742
- --------------------------------------------------------------------------------
Telecommunications (0.5%)
Vodafone Group 187,132 747,908
- --------------------------------------------------------------------------------
TOTAL UNITED KINGDOM 14,214,421
- --------------------------------------------------------------------------------
UNITED STATES (0.9%)
Textiles (0.9%)
Reliance Industries 88,000 1,452,000
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$113,545,375) 145,091,182
- --------------------------------------------------------------------------------
MATURITY MARKET
VALUE VALUE
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (7.5%)
REPURCHASE AGREEMENTS (7.5%)
Investments in repurchase agreements, in a
joint trading account, purchased 4/30/96,
5.34%, maturing 5/01/96(d) $11,607,698 $ 11,606,000
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost--$11,606,000) 11,606,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost--$125,151,375) (E) 156,697,182
- --------------------------------------------------------------------------------
FOREIGN CURRENCY HOLDINGS (0.1%)
New Taiwan Dollar (a) 5,888
- --------------------------------------------------------------------------------
TOTAL FOREIGN CURRENCY HOLDINGS
(Cost--$5,868) 5,888
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET
(-1.3%) (1,888,955)
- --------------------------------------------------------------------------------
NET ASSETS (100%) $154,814,115
- --------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS:
(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 agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at April 30, 1996.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- -------------------------------------------
Keystone International Fund Inc.
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Exchange In Exchange U.S. Value at Appreciation/
Date for U.S. $ April 30, 1996 (Depreciation)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
- -------------------------------------------------------------------------------------------------
05/20/96 667,361,500 Italian Lira $ 415,000 $ 426,394 ($ 11,394)
06/28/96 1,285,343,200 Japanese Yen $12,200,000 $12,386,419 ($186,419)
05/06/96 5,120,475 French Franc $ 1,005,000 $ 991,159 $ 13,841
05/20/96 2,314,594 British Pound $ 3,547,000 $ 3,482,992 $ 64,008
05/20/96 2,619,808 Swiss Franc $ 2,203,000 $ 2,114,278 $ 88,722
05/17/96 1,969,245 German Mark $ 1,350,000 $ 1,287,568 $ 62,432
06/09/96 2,965,442 Australian Dollar $ 2,304,000 $ 2,320,513 ($ 16,513)
05/20/96 15,035,000 Belgian Franc $ 500,000 $ 478,168 $ 21,832
05/13/96 70,298,910 Spanish Peseta $ 561,000 $ 552,195 $ 8,805
05/20/96 945,313 Finnish Markka $ 206,000 $ 195,517 $ 10,483
05/20/96 10,256,530 Netherlands Guilder $ 6,262,000 $ 5,994,692 $267,308
05/22/96 21,686,205 Swedish Krona $ 3,130,000 $ 3,195,043 ($ 65,043)
----------
$258,062
----------
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
- -------------------------------------------------------------------------------------------------
05/02/96 1,261,934 Australian Dollar $ 991,249 $ 991,307 $ 58
05/31/96 3,917,964 French Franc $ 762,546 $ 758,193 ($ 4,353)
05/01/96 468,826 British Pound $ 710,975 $ 705,745 ($ 5,230)
05/01/96 43,827,920 Japanese Yen $ 411,568 $ 418,984 $ 7,416
05/02/96 455,638 New Zealand Dollar $ 311,109 $ 313,002 $ 1,893
----------
($ 216)
----------
Net Unrealized Appreciation on Forward Foreign Currency Exchange Contracts $257,846
==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 13
- -------------------------------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year
Six Months Ended One Month
Ended October Ended
April 30, 31, October 31,
1996 1995 1994(e)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value beginning of period $ 7.11 $ 7.77 $ 7.67
- -------------------------------------------------------------------------------------
Income from investment operations
Net investment income (0.02) 0.07 0
Net gains (losses) on investments and
foreign currency related transactions 0.78 0.05 0.10
Net commissions paid on fund share sales
(a) 0 0 0
- -------------------------------------------------------------------------------------
Total from investment operations 0.76 0.12 0.10
- -------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.10) (0.04) 0
In excess of net investment income 0.00 0.00 0
Net realized gains on investments and
foreign currency related transactions (0.05) (0.74) 0
- -------------------------------------------------------------------------------------
Total distributions (0.15) (0.78) 0.00
- -------------------------------------------------------------------------------------
Net asset value end of period $ 7.72 $ 7.11 $ 7.77
- -------------------------------------------------------------------------------------
Total return (c) 10.90% 2.19% 1.30%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.47%(b)(d) 2.57% 2.52%
(0.66%)
Net investment income (d) 0.88% (0.20%)
Portfolio turnover rate 25% 76% 2%
Average commission rate paid $ 0.0006 N/A N/A
- -------------------------------------------------------------------------------------
Net assets end of period (thousands) $154,814 $128,674 $157,929
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
1994(e) 1993(e) 1992(e) 1991 1990
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 7.08 $ 6.01 $ 5.91 $ 5.35 $ 7.51
- -------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0 (0.03) (0.01) (0.01) (0.07)
Net gains (losses) on investments and
foreign currency related transactions 0.62 1.14 0.34 0.83 (1.74)
Net commissions paid on fund share sales
(a) 0 0 0 0 0
- -------------------------------------------------------------------------------------------------
Total from investment operations 0.62 1.11 0.33 0.82 (1.81)
- -------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.02) 0 0 0 0
In excess of net investment income (0.01) (0.04) (0.23) (0.03) 0
Net realized gains on investments and
foreign currency related transactions 0 0 0 (0.23) (0.35)
- -------------------------------------------------------------------------------------------------
Total distributions (0.03) (0.04) (0.23) (0.26) (0.35)
- -------------------------------------------------------------------------------------------------
Net asset value end of period $ 7.67 $ 7.08 $ 6.01 $ 5.91 $ 5.35
- -------------------------------------------------------------------------------------------------
Total return (c) 8.75% 18.59% 5.78% 15.59% (25.12%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.54% 2.94% 3.41% 3.14% 2.92%
Net investment income 0.01% (0.46%) (0.09%) (0.07%) (0.51%)
Portfolio turnover rate 121% 68% 74% 85% 42%
Average commission rate paid N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $154,529 $111,752 $64,135 $72,923 $73,768
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both financial
statement and tax purposes as capital charges. On June 11, 1987, the
Securities and Exchange Commission adopted a rule which required for
financial statements for periods ended on or after June 30, 1987, that net
commissions paid under Rule 12b-1 Distribution Plans be treated as operating
expenses rather than capital charges. Accordingly, beginning with the fiscal
year ended September 30, 1987, the Fund's financial statements reflect 12b-1
Distribution Plan expenses (i.e., shareholder service fees plus commissions
paid net of deferred sales charges received by the Fund) as a component of
net investment income.
(b) "Ratio of total expenses to average net assets" for the six months ended
April 30, 1996 and the year ended October 31, 1995 includes indirectly paid
expenses. Excluding indirectly paid expenses for the six months ended April
30, 1996 and the year ended October 31, 1995, the expense ratio would have
been 2.46% and 2.56%, respectively.
(c) Excluding contingent deferred sales charges and the year ended October 31,
1995 (CDSC).
(d) Annualized.
(e) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- -------------------------------------------
Keystone International Fund Inc.
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1996
- --------------------------------------------------------------------------------
Assets:
Investments at market value (identified
cost--$125,151,375) (Note 1) $156,697,182
Foreign currency holdings (identified
cost--$5,868) (Note 1) 5,888
- --------------------------------------------------------------------------------
Total investments and foreign currency
holdings (identified cost--$125,157,243) 156,703,070
- --------------------------------------------------------------------------------
Cash 953
Receivable for:
Unrealized appreciation on open foreign
currency contracts (Notes 1 and 5) 257,846
Fund shares sold 737,978
Interest and dividends 537,035
Refundable foreign tax withheld 64,943
Prepaid expenses 21,823
- --------------------------------------------------------------------------------
Total assets 158,323,648
- --------------------------------------------------------------------------------
Liabilities:
Payable for:
Investments purchased 3,277,924
Fund shares redeemed 49,437
Foreign tax withholding 80,624
Other accrued expenses 101,548
- --------------------------------------------------------------------------------
Total liabilities 3,509,533
- --------------------------------------------------------------------------------
Net assets $154,814,115
- --------------------------------------------------------------------------------
Net assets represented by:
Paid-in capital $122,676,296
Undistributed net investment income (268,778)
Accumulated net realized gains on
investments and foreign currency related
transactions 603,739
Net unrealized appreciation (depreciation) on:
Investments, foreign currency holdings and
other assets and liabilities 31,545,012
Foreign currency contracts 257,846
- --------------------------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest at 4/30/96
($7.72 a share on 20,050,080 shares
outstanding) $154,814,115
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the six months ended April 30, 1996
- --------------------------------------------------------------------------------
Investment income: (Note 1)
Dividends (net of foreign
withholding taxes of $124,839) $ 883,496
Interest 361,884
- --------------------------------------------------------------------------------
Total income 1,245,380
- --------------------------------------------------------------------------------
Expenses: (Notes 2 and 4)
Management fee $ 517,367
Transfer agent fees 309,094
Accounting, auditing and legal 33,974
Custodian fees--foreign 58,088
Custodian fees--domestic 51,066
Distribution Plan expenses 692,969
Printing expense 12,065
Registration fees 29,753
Directors fees 4,629
Miscellaneous expenses 4,092
- --------------------------------------------------------------------------------
Total expenses 1,713,097
- --------------------------------------------------------------------------------
Less: Expenses paid indirectly
(Note 4) (10,902)
- --------------------------------------------------------------------------------
Net expenses 1,702,195
- --------------------------------------------------------------------------------
Net loss from operations (456,815)
- --------------------------------------------------------------------------------
Netrealized and unrealized gain (loss) on investments and foreign currency
related transactions: (Notes 1, 3 and 5)
Realized gain (loss) on:
Investments 1,870,493
Foreign currency holdings (1,116,994)
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments
and foreign currency related
transactions 753,499
- --------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments and foreign currency
holdings 13,366,541
Foreign currency related transactions 933,448
- --------------------------------------------------------------------------------
Net change in unrealized appreciation or
depreciation 14,299,989
- --------------------------------------------------------------------------------
Net gain on investments and foreign
currency related transactions 15,053,488
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $14,596,673
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 15
- -------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Year
Ended Ended
April 30, 1996 October 31, 1995
- --------------------------------------------------------------------------------
Operations: (Notes 1 and 3)
Net investment income (loss) $ (456,815) $ 1,156,599
Net realized gain (loss) on investments
and foreign currency related transactions 753,499 2,703,078
Net change in unrealized appreciation or
depreciation 14,299,989 (2,473,142)
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 14,596,673 1,386,535
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,797,926) (701,392)
Net realized gains on investments and
foreign currency related transactions (894,541) (14,792,324)
- --------------------------------------------------------------------------------
Total distributions to shareholders (2,692,467) (15,493,716)
- --------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Proceeds from shares sold 108,232,917 84,005,110
Payments for shares redeemed (96,294,060) (112,505,516)
Net asset value of shares issued in
reinvestment of dividends and
distributions 2,297,397 13,352,659
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share
transactions 14,236,254 (15,147,747)
- --------------------------------------------------------------------------------
Total increase (decrease) in net assets 26,140,460 (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--($268,778) 1995--$1,985,964]
(Note 1) $154,814,115 $ 128,673,655
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PAGE 16
- -------------------------------------------
Keystone International Fund Inc.
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone International Fund Inc. (the "Fund") is an open-ended diversified
management investment company. The Fund is a Massachusetts corporation.
Keystone Management, Inc. ("KMI") is the Fund's Investment Manager and
Keystone Investment Management Company (formerly Keystone Custodian Funds,
Inc.) ("Keystone") is the Fund's Investment Adviser.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII")
(formerly Keystone Group, Inc.), a Delaware corporation. KII is a private
corporation predominantly owned by current and former members of management
of Keystone and its affiliates. Keystone Investor Resource Center, Inc.
("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles which
requires management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Investments, 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 under the
direction of the Board of Directors: (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. Those securities traded
in foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets, and liabilities at the daily rate
of exchange; and purchases and sales of investments, income, and expenses at the
rate of exchange prevailing on the respective dates of such transactions.
Short-term investments maturing in sixty days or less are valued at amortized
cost (original purchase cost as adjusted for amortization of premium or
accretion of discount) which, when combined with accrued, interest approximates
market. Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value. Short-term
investments maturing in more than sixty days when purchased which are held on
the sixtieth day prior to maturity are valued at amortized cost (market value on
the sixtieth day adjusted for amortization of premium or accretion of discount)
which, when combined with accrued interest, approximates market. Investments
denominated in a foreign currency are adjusted daily to reflect changes in
exchange rates.
All other investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Board of Directors.
B. The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures contract
is an agreement between two parties to buy and sell a specific amount of a
commodity, security, financial instrument, or, in the case of a stock index,
cash at
<PAGE>
PAGE 17
- -------------------------------------------
a set price on a future date. Upon entering into a futures contract the Fund is
required to deposit with a broker an amount ("initial margin") equal to a
certain percentage of the purchase price indicated in the futures contract.
Subsequent payments ("variation margin") are made or received by the Fund each
day, as the value of the underlying instrument or index fluctuates, and are
recorded for book purposes as unrealized gains or losses by the Fund. For
federal tax purposes, any futures contracts which remain open at fiscal year-end
are marked-to-market and the resultant net gain or loss is included in federal
taxable income. In addition to market risk, the Fund is subject to the credit
risk that the other party will not complete the obligations of the contract.
C. Securities transactions are accounted for no later than the day after the
trade date. Realized gains and losses are recorded on the identified cost basis.
Gains and losses on foreign currency related transactions are treated as
ordinary income for federal tax purposes. Interest income is recorded on the
accrual basis and dividend income is recorded on the ex-dividend date.
Distributions to shareholders are recorded by the Fund at the close of business
on the ex-dividend date.
D. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). Thus, the Fund will be relieved of any federal income
tax liability by distributing all of its net taxable investment income and net
taxable capital gains, if any, to its shareholders. The Fund intends to avoid
any excise tax liability by making the required distributions under the Internal
Revenue Code.
E. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed upon
date and price), the repurchase price of the securities will generally equal the
amount paid by the Fund plus a negotiated interest amount. The seller under the
repurchase agreement will be required to provide securities ("collateral") to
the Fund whose value will be maintained at an amount not less than the
repurchase price, and which generally will be maintained at 101% of the
repurchase price. The Fund monitors the value of collateral on a daily basis,
and if the value of the collateral falls below required levels, the Fund intends
to seek additional collateral from the seller or to terminate the repurchase
agreement. If the seller defaults, the Fund would suffer a loss to the extent
that the proceeds from the sale of the underlying securities were less than the
repurchase price. Any such loss would be increased by any cost incurred on
disposing of such securities. If bankruptcy proceedings are commenced against
the seller under the repurchase agreement, the realization on the collateral may
be delayed or limited. Repurchase agreements entered into by the Fund will be
limited to transactions with dealers or domestic banks believed to present
minimal credit risks, and the Fund will take constructive receipt of all
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.
F. In connection with portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain currency assets, the
Fund may enter into forward foreign currency exchange contracts ("con-
<PAGE>
PAGE 18
- -------------------------------------------
Keystone International Fund Inc.
tracts"). Additionally, from time to time the Fund may enter into contracts to
hedge certain foreign currency assets. Contracts are recorded at market value
and marked-to-market daily. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. In addition to market risk, the Fund is subject to the
credit risk that the other party will not complete the obligations of the
contract.
G. The Fund distributes net investment income and net capital gains, if any,
annually. Distributions are determined in accordance with income tax
regulations. The significant difference between financial statement amounts
available for distribution and distributions made in accordance with income tax
regulations is due to the differing treatment of 12b-1 expenses and foreign
currency gains and losses for financial statement and federal income tax
purposes.
(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:
Six Months Year
Ended Ended
- -------------------------------------------------------------
4/30/96 10/31/95
Share s sold 14,784,436 12,460,964
Shares redeemed (13,150,930) (16,703,211)
Shares issued in reinvestment of
distributions 327,732 2,010,943
- -------------------------------------------------------------
Net increase (decrease) 1,961,238 (2,231,304)
- -------------------------------------------------------------
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. Under it's Distribution Plan, the Fund pays Keystone Investment
Distributors Company (formerly Keystone Distributors, Inc.) ("KIDC"), the
principal underwriter and a wholly-owned subsidiary of Keystone, amounts which
in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without any
initial sales charge. From the amounts paid by the Fund to KIDC under its the
Distribution Plan, and subject to the limitations discussed below, KIDC
generally reallows to broker-dealers or others a commission equal to 4.0% of the
price paid for each Fund share sold as well as a shareholder service fee at a
rate of 0.25% per annum of the net asset value of shares maintained by such
recipients and outstanding on the books of the Fund for specified periods.
The Distribution Plan provides that the Fund may expend up to 0.3125%
quarterly (approximately 1.25% annually) of the Fund's average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. A rule of the National Association of Securities
Dealers, Inc. ("NASD Rule") limits the annual expenditures which the Fund may
incur under the Distribution Plan to 1.00% of the funds average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD Rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales since the inception of the Fund's 12b-1
Distribution Plan, plus interest at the prime rate plus 1.0% on unpaid amounts
thereof (less any contingent deferred sales charges paid by the shareholders to
KIDC) remaining unpaid from time to time.
With certain exceptions, when shares are redeemed within four calendar years,
a deferred sales charge may be imposed.
<PAGE>
PAGE 19
- -------------------------------------------
KIDC intends, but is not obligated, to continue to pay or accrue distribution
charges that exceed current annual payments permitted to be received by KIDC
from the Fund. KIDC intends to seek full payment of such charges from the Fund
(together with annual interest thereon at the prime rate plus 1.0%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
Contingent deferred sales charges applicable to shares of the Fund are to the
extent permitted by the NASD Rule, paid to KIDC.
During the period, the Fund paid KIDC $692,969 under the Distribution Plan
(1.00% of the Fund's average daily net asset value during the period.) During
the six months ended April 30, 1996, KIDC received $93,140 after payments of
commissions on new sales and service fees to dealers and others of $599,829.
During the same period, KIDC received $151,224 in contingent deferred sales
charges. Under the NASD rule, the maximum uncollected amount for which KIDC may
seek payment from the Fund under its Distribution plan is $2,079,598 (1.34% of
the Fund's net asset value as of April 30, 1996).
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities for the six months ended April 30, 1996 were $57,225,618
and $31,801,796, respectively.
(4.) Investment Management Agreement and Other Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, Keystone 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.
For the six months ended April 30, 1996 the Fund paid or accrued to KMI
investment management and administrative services fees of $517,367, which
represented 0.75% of the Fund's average daily net assets on an annualized basis.
Of this amount paid to KMI, $439,762 was paid to Keystone for its investment
advisory services to the Fund.
During the six months ended April 30, 1996, the Fund paid or accrued to KIRC
$11,370 and KII for certain accounting and printing services and $309,094 to
KIRC for transfer agent fees.
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended April 30, 1996 the Fund paid or incurred custody fees
in the amount of $109,154 and received credit of $10,902 pursuant to the expense
offset arrangement, resulting in a net custody expense of $98,252. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
(5.) Distributions to Shareholders
A distribution of net investment income of $0.10 per share and a distribution
of long-term capital gains of $0.05 per share were declared payable by December
6, 1995 to shareholders of record November 24, 1995. These distributions are
reflected in the accompanying financial statements.
<PAGE>
[back cover]
KEYSTONE
FAMILY OF FUNDS
[solid diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you
invest or send money. For a free prospectus on other Keystone funds, contact
your financial adviser or call Keystone.
[logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
KIF-R-6/96
17.5M [recycle symbol]
