- ------------------------------------------------------------------------------
KEYSTONE AMERICA
FAMILY OF FUNDS
[DIAMOND]
Balanced Fund II
California Insured Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources and Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
World Bond 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.
[KEYSTONE INVESTMENTS LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
WBF-R-12/96
3.2M
[recycled logo]
<PAGE>
- ------------------------------------------------------------------------------
KEYSTONE
[PHOTO OF MAP AND TELESCOPE]
WORLD
BOND FUND
- ------------------------------------------------------------------------------
[KEYSTONE LOGO]
ANNUAL REPORT
OCTOBER 31, 1996
<PAGE>
PAGE 1
- ----------------------
Keystone World Bond Fund
Seeks current income from debt securities in the United States and abroad
Dear Shareholder:
We are pleased to report to you on the activities of Keystone World Bond Fund
for the fiscal year which ended October 31, 1996.
Performance
For the twelve-month period which ended October 31, 1996, your Fund produced a
strong double-digit total return, in addition to successfully meeting its
objective of current income. The Fund's investment results were as follows:
Class A shares returned 13.99%.
Class B shares returned 13.04%.
Class C shares returned 13.09%.
This strong performance reflected positive market conditions as well as the
Fund's asset allocation during the period. The Salomon World Government Bond
Index returned 5.37% for the twelve-month period. The average return of mutual
funds in the World Bond Fund category was 8.05% for the period, according to
Lipper Analytical Services, Inc.(1) The Fund's twelve-month performance ranked
in the top quartile of that category.
Market environment
The bond markets staged an impressive rally during the past fiscal year.
Virtually every market in which the Fund invests reported exceptional
performance. In Latin America, where the Fund had about one-third of its total
holdings, the total returns of some bonds outpaced the record-high returns of
U.S. stocks during the period.
The prevailing themes for the world's bond markets were declining inflation
and lower interest rates. Many U.S. investors looking for higher yields ventured
abroad to take advantage of government bonds in Australia, New Zealand, Europe
and Latin America, which offered high yields even after adjusting for inflation.
Managing the dollar's strength
The strength of the U.S. dollar hurt the returns of many international
portfolios but it benefitted your Fund. The portfolio maintained between 33% and
35% of net assets in U.S. dollar-denominated debt, which helped to enhance your
Fund's overall performance. We hedged our currency risk in European holdings. We
correctly anticipated that interest rates would decline in Europe, which would
weaken some European currencies.
Broad diversification helps to capture opportunities while reducing risk
Your Fund divided its holdings among a number of countries, seeking to increase
portfolio stability without sacrificing opportunities. For example, in Europe,
our investments were divided between the countries that we believed would
benefit from the European Monetary Union (EMU), as well as countries that in our
view would do better, and might help protect your Fund, if the EMU fell through.
In Latin America, we were more concerned with credit risk, so we analyzed every
single company from the bottom up to ensure it had a strong enough foundation to
withstand any downturns. At all times, we were mindful of the Fund's objective
of current income, and we invested in countries that paid high real yields in
addition to offering relatively stable environments.
- -----------
(1)Source: Lipper Analytical Services, Inc., an independent mutual fund rating
service. The average return in the World Bond Fund category was 8.05% for the
1-year and 7.48% for the 5-year periods which ended October 31, 1996. There are
125 funds in the 1-year and 34 funds in the 5-year World Bond Fund categories.
Performance is based on total return which includes reinvestment of dividends,
and does not include the effects of sales charges. Past performance is no
guarantee of future results.
(continued on next page)
<PAGE>
PAGE 2
- ----------------------
Keystone World Bond Fund
Looking ahead
We think that the markets in Europe, the Pacific Rim and the Americas are well
positioned for another successful year, although at more moderate levels than
during the past fiscal year. In the United States, the economy is in the sixth
year of an expansion, but economic fundamentals continue to be favorable and we
see no indications of a prolonged slowdown in the near future.
From the global perspective, we see strong indications of continued growth.
The emerging economies in Latin America, Asia, and Europe are supplying rising
demand for new technology, modern infrastructure, consumer goods and services.
The United States and, increasingly, other countries in Europe have been gearing
up to meet global demand.
Introducing the new portfolio manager
Richard A. Wisentaner, Vice President and Portfolio Manager, assumed
responsibilities as portfolio manager of Keystone World Bond Fund on October 1,
1996. As the principal analyst for your Fund during the previous two years, Mr.
Wisentaner is thoroughly familiar with your Fund's fixed-income investments and
he will maintain the continuity of management that contributed to your Fund's
success during the past fiscal year. Mr. Wisentaner will continue to work
closely with Gilman Gunn, Senior Vice President and head of the Keystone
International Investment team, who managed the Fund until October 1, 1996.
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, [photo of Albert H. Elfner, III and photo of George S. Bissell]
/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 [Albert H. Elfner, III George S. Bissell]
<PAGE>
PAGE 3
- ----------------------
A Discussion With
Your Fund Manager
[photo of Richard Wisentaner]
Richard Wisentaner is portfolio manager of Keystone World Bond Fund.
An investment professional with broad experience in international
fixed-income research and analysis, Mr. Wisentaner has been a member
of Keystone's International team since September 1994. He received
an A.B. in Economics at Harvard University, and an M.B.A. in Finance
and International Business at the University of Chicago.
Q What was the overall investment climate for the world fixed-income markets
during the past fiscal year?
A In general, the world bond markets produced excellent performance during the
past twelve months which ended October 31, 1996. It was a broad-based rally,
encompassing both the emerging and established economies. The markets from
Europe to Australia responded to lower inflation levels and declining interest
rates. In the emerging economies, improving political and economic climates
demonstrated the countries' resolve to be competitive global market players.
Q What would you classify as the most significant opportunity for the Fund
during the past fiscal year?
A The Fund was heavily weighted in countries whose currencies move with the U.S.
dollar and thus represent no currency risk for the portfolio. That was a good
place to be in the face of the strong U.S. dollar. At the close of the fiscal
year, the fund had 8.9% of net assets in Canada, 11.2% in New Zealand, and 3.6%
in Australia. Those countries had among the highest real interest rates, and
their inflation levels were declining. The Fund had both positive currency
performance and capital appreciation from those markets. Our other top
performers were Latin American Eurobonds in Brazil, Argentina, and Mexico, which
posted gains in the 20%-40% range in U.S. dollar terms for the twelve-month
period.
Q What effect did the rising dollar have on the Fund's holdings in Europe and
Latin America?
A The Fund hedged its currency exposure in Western Europe. We believed that with
interest rates declining, the European currencies were likely to weaken relative
to the U.S. dollar. We had no exposure in Eastern Europe because we allocated
our below-investment-grade investments to Latin America. Our Latin American
holdings were dollar-denominated, so there was no currency impact on the Fund
from those countries.
Fund Profile
Objective: Seeks current income from debt securities in the
United States and abroad.
Commencement of investment operations: January 9, 1987
Average quality: A
Average maturity: 6 years
Net assets: $14.6 million
<PAGE>
PAGE 4
- ----------------------
Keystone World Bond Fund
Geographic Diversification
as of October 31, 1996
- ------------------------
Americas 43.5%
- ------------------------
Europe 38.8%
- ------------------------
Pacific 14.8%
- ------------------------
Other* 2.9%
- ------------------------
*Includes other assets and liabilities and short-term obligations.
Q What is your assessment of the Fund's performance?
A We are pleased with the Fund's results during the past fiscal year. Keystone
World Bond Fund is managed to minimize volatility, and that can hurt performance
in bull markets. In this bull market, our performance was significantly ahead of
the Salomon World Government Bond Index. The strong results of emerging-market
bonds in the portfolio was a partial reason for the Fund's edge over the Index.
The Salomon World Government Bond Index does not include emerging-market debt.
Q How do you minimize the risks of investing in international bonds?
A We deal with three types of risk: currency risk, credit risk, and
interest-rate risk. Credit risk is especially significant in emerging countries.
In those regions we buy Eurobonds rather than Brady Bonds. Eurobonds tend to be
shorter in duration, and less sensitive to interest rate movements than Brady
Bonds. We buy strong companies with strong cash flows and good profit margins
that we believe can withstand economic downturns. We don't invest in high-risk
countries, like Russia or Panama.
We seek to minimize currency risk by buying U.S. dollar-denominated bonds,
dollar-bloc bonds, and by hedging.
Interest-rate risk is minimized by shortening the duration of the bonds. Most
maturities in the portfolio at fiscal year-end were less than 10 years.
Q How did the preparations for the European Monetary Union (EMU) affect the
Fund?
A We have about 50% of net assets in Europe, so we watch the EMU developments
very closely. During the past fiscal year, the impact on the Fund was very
favorable. The countries that want to join the Union on January 1, 1999 have
been scrambling to trim their budget deficits and put their fiscal houses in
order. These efforts produced lower inflation and interest rates across Europe
and boosted the values of bonds. The strongest advances occurred in the
countries of peripheral Europe, such as Italy, Portugal, Spain and Sweden, where
the Fund increased allocations over the past fiscal year. Those countries
benefitted more from improving economies than the "core Europe," such as Germany
and France, where economic risks are generally considered lower.
Q Is there a likelihood that the EMU might not come to pass?
A We believe that the EMU is an unknown. If the recovery doesn't pick up in
Europe and its currencies become weaker, the EMU might fall through. The Fund
hedged against that possibility by diversifying into both core and peripheral
Europe. If the EMU were to fall through, we would shift more to core Europe.
<PAGE>
PAGE 5
- ----------------------
Q What is your outlook?
A We think it's unlikely that we will repeat the appreciation in bond values
that we saw in the past fiscal year. For prices to rise that far again, interest
rates, which move in the opposite direction, would have to fall to unprecedented
lows. Still, we believe that there's enough fuel left in this rally to produce
attractive returns, especially in peripheral European countries and Latin
America. We expect that as long as interest rates in Japan, Germany and the U.S.
remain low, as we think they will, investors might be willing to take on
additional risks outside of those established markets in order to earn higher
yields.
Our outlook for inflation is cautious, especially in the United States. The
U.S. employment has been high and wage inflation has been emerging. U.S.
commodity prices have been in check largely due to the slowdowns in Asia and
Europe, but we believe these markets have been coming out of their doldrums.
Overall, we think that efforts of many governments to reduce budget deficits
and keep inflation in check should have a positive long-term impact on
international bonds. Short-term fluctuations in any one market are inevitable,
but we believe that Keystone World Bond Fund is well positioned to capitalize on
the considerable opportunities available in international markets.
[diamond]
This column is intended to answer
your questions about your Fund.
If you have a question, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
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Keystone World Bond Fund
Your Fund's Performance
Growth of an investment in
Keystone World Bond Fund Class A
[MOUNTAIN CHART]
In Thousands
Initial Reinvested
Investment Distributions
1/87 10000 10000
9524 9524
9810 10276
10/88 9619 10921
9200 11049
10/90 9629 12270
9857 13727
10/92 9667 14459
9124 16703
10/94 8019 15791
8019 16995
10/96 8524 19376
A $10,000 investment in Keystone World Bond Fund Class A made on January 9,
1987 with all distributions reinvested was worth $19,376 on October 31, 1996.
Past performance is no guarantee of future results.
**Class A shares were introduced on January 9, 1987. Performance is reported
at the current maximum front-end sales charge of 4.75%.
Twelve-Month Performance as of October 31, 1996
-----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 13.99% 13.04% 13.09%
Net asset value 10/31/95 $8.42 $8.45 $8.42
10/31/96 $8.95 $8.97 $8.94
Dividends $0.60 $0.54 $0.54
Capital gains None None None
* Before deducting any sales charges.
Historical Record as of October 31, 1996
-----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 13.99% 13.04% 13.09%
1-year** 8.58% 9.04% 13.09%
5-year** 34.43% -- --
Life of class* 93.76% 13.49% 16.01%
Average Annual Returns
1-year w/o sales charge 13.99% 13.04% 13.09%
1-year** 8.58% 9.04% 13.09%
5-year** 6.10% -- --
Life of class* 6.97% 3.97% 4.68%
Class B shares were introduced on August 2, 1993. Shares purchased after June
1, 1995 are subject to a contingent deferred sales charge (CDSC) that declines
from 5% to 1% over six years from the month purchased. Performance assumes that
shares were redeemed after the end of a one-year holding period and reflects the
deduction of a 4% CDSC.
Class C shares were introduced on August 2, 1993. Performance reflects the
deduction of the 1% contingent deferred sales charge which applies during the
first year owned.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by 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 7
- ----------------------
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone World Bond
Fund Class A, the Salomon World Government Bond Index, and the Consumer Price
Index.
In Thousands January 9, 1987 through October 31, 1996
Average Annual Total Return
- ---------------------------------------------------------
1 Year 5 Year Life of Class
Class A 8.58% 6.10% 6.97%
Class B 9.04% -- 3.97%
Class C 13.09% -- 4.68%
[LINE CHART]
Class A SWGBI CPI
1/87 9524 10000 10000
10276 10974 10434
10/88 10921 12299 10878
11049 12624 11367
10/90 12270 13889 12081
13727 15458 12434
10/92 14459 17606 12833
16703 19720 13186
10/94 15791 20432 13529
16995 23540 13910
10/96 19376 24803 14281
Past performance is no guarantee of future results. The performance of Class B
or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the different
classes. Class B and Class C shares were introduced February 1, 1993. The
Salomon World Government Bond Index and the Consumer Price Index are from
December 31, 1986. 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 World Bond Fund Class A
Your Fund seeks current income from debt securities in the U.S. and abroad. The
return is quoted after deducting sales charges (if applicable), fund expenses,
and transaction costs and assumes reinvestment of all distributions.
2. Salomon World Government Bond Index (SWGBI)
The SWGBI is a broad-based unmanaged index of foreign government bonds. It is
comprised of over 800 issues from 14 countries including the U.S. These
securities are selected and compiled by Salomon Brothers, Inc. 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 US. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
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
<PAGE>
PAGE 8
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Keystone World Bond Fund
evaluate fund performance in conjunction with the other important financial
considerations such as safety, stability and consistency.
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.
Keystone World Bond FundPerformance 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 for illustration only. An
investor cannot invest in an index.
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 9
- ----------------------
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for managing
a portfolio's assets prudently and making appropriate investment decisions, such
as which securities to buy, hold and sell, based on the investment objectives of
the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a claim
on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it has
borrowed money. A bond usually promises to pay interest income to the bondholder
at regular intervals and to repay the entire amount borrowed at maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or bonds)
that is exchangeable for a set number of another security type (usually common
stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund. The
NAV per share is determined by subtracting a fund's total liabilities from its
total assets, and dividing that amount by the number of fund shares outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses. Capital
gains are paid to fund shareholders on a per share basis. When a capital gain
distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net asset
value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified period
of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price at
which the share is sold to the public.
<PAGE>
PAGE 10
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Keystone World Bond Fund
SCHEDULE OF INVESTMENTS--October 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
=================================================================================================
<S> <C> <C> <C> <C>
INTERNATIONAL, GOVERNMENT AGENCIES AND ISSUES (97.1%)
AUSTRALIAN DOLLAR (3.6%)
New South Wales Treasury Corp. 12.600% 5/01/2006 500,000 $ 529,197
-------------------------------------------------------------------------------------------------
CANADIAN DOLLAR (8.9%)
Government of Canada 8.750 12/01/2005 1,500,000 1,303,126
-------------------------------------------------------------------------------------------------
DANISH KRONE (7.1%)
Kingdom of Denmark 9.000 11/15/1998 2,000,000 374,000
Kingdom of Denmark 7.000 12/15/2004 3,750,000 662,216
-------------------------------------------------------------------------------------------------
1,036,216
-------------------------------------------------------------------------------------------------
GERMAN DEUTSCHE MARK (4.6%)
Federal Republic of Germany 6.875 5/12/2005 950,000 665,138
-------------------------------------------------------------------------------------------------
IRISH POUND (4.8%)
Republic of Ireland 8.000 8/18/2006 400,000 698,258
-------------------------------------------------------------------------------------------------
ITALIAN LIRA (5.4%)
Republic of Italy 9.500 2/01/2006 1,105,000,000 792,147
-------------------------------------------------------------------------------------------------
NETHERLANDS GUILDER (4.0%)
Government of Netherlands 7.750 3/01/2005 875,000 581,202
-------------------------------------------------------------------------------------------------
NEW ZEALAND DOLLAR (11.2%)
Government of New Zealand 6.500 2/15/2000 700,000 485,072
Government of New Zealand 8.000 4/15/2004 750,000 551,822
Government of New Zealand 9.000 11/15/1996 850,000 601,344
-------------------------------------------------------------------------------------------------
1,638,238
-------------------------------------------------------------------------------------------------
PORTUGUESE ESCUDO (4.5%)
Republic of Portugal 10.625 06/23/2003 85,000,000 655,601
-------------------------------------------------------------------------------------------------
SPANISH PESETA (3.3%)
Kingdom of Spain 11.450 8/30/1998 32,000,000 270,431
Kingdom of Spain 12.250 3/25/2000 23,000,000 208,702
-------------------------------------------------------------------------------------------------
479,133
-------------------------------------------------------------------------------------------------
SWEDISH KRONA (5.1%)
Kingdom of Sweden 10.250 5/05/2003 4,200,000 747,655
-------------------------------------------------------------------------------------------------
UNITED STATES DOLLAR (34.6%)
Comtel Brasileira 10.750 9/26/2004 500,000 506,250
Grupo International Durango S.A. de CV 12.625 08/01/2003 600,000 627,000
Grupo Televisa S.A. de CV 11.875 5/15/2006 600,000 636,000
<PAGE>
PAGE 11
- ----------------------
Coupon Maturity Principal Market
Rate Date Amount Value
=================================================================================================
UNITED STATES DOLLAR--CONTINUED
Ispat Mexicana S.A. 10.375% 3/15/2001 1,025,000 $ 1,027,563
Klabin Fabricadora Papel 12.125 12/28/2002 250,000 257,500
Republic of Argentina 11.000 10/09/2006 500,000 487,500
Telecom Argentina 8.375 10/18/2000 500,000 488,750
Telecom Argentina STET France 12.000 11/15/2002 190,000 205,200
Telefonica de Argentina S.A. 11.875 11/01/2004 760,000 813,200
-------------------------------------------------------------------------------------------------
5,048,963
-------------------------------------------------------------------------------------------------
TOTAL INTERNATIONAL, GOVERNMENT AGENCIES & ISSUES (COST--$13,086,165) 14,174,874
=================================================================================================
TOTAL INVESTMENTS (COST $13,086,165)(A) 14,174,874
-------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (2.9%) 417,378
-------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $14,592,252
=================================================================================================
</TABLE>
(a) The cost of investments for federal income tax purposes is identical. Gross
unrealized appreciation and depreciation on investments, based on identified
tax cost, is as follows:
Gross unrealized appreciation $1,139,598
Gross unrealized depreciation (50,889)
-----------
Net unrealized appreciation $1,088,709
===========
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. $ Value
In at Unrealized
Exchange Exchange October 31, Appreciation/
Date for U.S. $ 1996 (Depreciation)
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to
Deliver
=========================================================================================================
11/13/96 21,243,600 Spanish Peseta $168,000 $166,395 $ 1,605
11/20/96 745,152 Deutsche Mark 502,500 492,654 9,846
11/20/96 2,033,783 Danish Krone 354,000 350,246 3,754
11/20/96 485,479 Netherland Guilder 292,000 286,497 5,503
01/09/97 318,829 Australian Dollar 250,000 252,144 (2,144)
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
=========================================================================================================
11/13/96 21,243,600 Spanish Peseta $165,985 $166,395 $ 410
</TABLE>
<PAGE>
PAGE 12
- ----------------------
Keystone World Bond Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended
October 31, Period from Year Ended December 31,
----------------- January 1, 1994 to -------------------------------
1996 1995 October 31, 1994 1993 1992 1991 1990
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of year $ 8.42 $ 8.42 $ 9.56 $ 8.69 $10.77 $ 9.82 $ 9.76
- --------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.54 0.61 0.32 0.44 0.64 0.66 0.63
Net realized and
unrealized gain
(loss) on investments
and foreign currency
related transactions 0.59 (0.01) (0.96) 1.03 (0.79) 0.99 0.31
- --------------------------------------------------------------------------------------------------------
Total from investment
operations 1.13 0.60 (0.64) 1.47 (0.15) 1.65 0.94
- --------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.60) (0.54) 0 (0.43) (0.96) (0.45) (0.52)
In excess of net
investment income 0 0 0 (0.17) (0.28) 0 (0.04)
Tax basis return of
capital 0 (0.06) (0.50) 0 0 0 0
Net realized gains on
investments and
foreign currency
related transactions 0 0 0 0 (0.69) (0.25) (0.32)
- --------------------------------------------------------------------------------------------------------
Total distributions (0.60) (0.60) (0.50) (0.60) (1.93) (0.70) (0.88)
- --------------------------------------------------------------------------------------------------------
Net asset value end of
year $ 8.95 $ 8.42 $ 8.42 $ 9.56 $ 8.69 $ 10.77 $ 9.82
========================================================================================================
Total return (c) 13.99% 7.62% (6.72%) 17.26% (1.24%) 17.48% 10.11%
Ratios/supplemental
data
Ratios to average net
assets:
Total expenses (a) 2.01(d) 2.46(d) 2.20%(b) 2.20% 2.20% 2.00% 2.00%
Net investment income 7.14% 7.21% 4.66%(b) 4.62% 5.44% 6.43% 6.48%
Portfolio turnover rate 58% 108% 100% 107% 185% 204% 154%
- --------------------------------------------------------------------------------------------------------
Net assets end of year
(thousands) $8,618 $9,956 $6,047 $8,403 $7,121 $11,843 $13,833
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
January 9, 1987
(Commencement of
Operations) to
1989 1988 December 31, 1987
================================================= =============================
<S> <C> <C> <C>
Net asset value beginning of year $ 10.04 $11.02 $10.00
------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.61 0.54 0.56
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions (0.27) (0.92) 1.27
------------------------------------------------------------------------------
Total from investment operations 0.34 (0.38) 1.83
------------------------------------------------------------------------------
Less distributions from
Net investment income (0.62) (0.54) (0.56)
In excess of net investment income 0 0 0
Tax basis return of capital 0 0 0
Net realized gains on investments
and foreign currency related
transactions 0 (0.06) (0.25)
------------------------------------------------------------------------------
Total distributions (0.62) (0.60) (0.81)
------------------------------------------------------------------------------
Net asset value end of year $ 9.76 $10.04 $11.02
==============================================================================
Total return (c) 3.07% (3.34%) 19.10%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 1.81% 1.19% 1.88%(b)
Net investment income 5.81% 5.34% 5.68%(b)
Portfolio turnover rate 73% 335% 171%
------------------------------------------------------------------------------
Net assets end of year (thousands) $14,806 $5,043 $4,774
==============================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the ratio
of total expenses to average net assets would have been 2.25%, 3.12%, 2.50%,
2.15% and 2.47% for the period from January 1, 1994 to October 31, 1994 and
the years ended December 31, 1993, 1992, 1991 and 1990, respectively.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses the expense ratio would have
been 2.00% and 2.44% for the years ended October 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- ----------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
August 2, 1993
Year Ended October 31, Period from (Date of Initial
---------------------- January 1, 1994 to Public Offering) to
1996 1995 October 31, 1994 December 31, 1993
===============================================================================================================
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 8.45 $ 8.46 $ 9.58 $ 9.47
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.55 0.52 0.31 0.16
Net realized and unrealized gain (loss)
on investments and foreign currency
related transactions 0.51 0.01 (0.99) 0.21
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 1.06 0.53 (0.68) 0.37
- ---------------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.54) (0.48) 0 (0.11)
In excess of net investment income 0 0 0 (0.15)
Tax basis return of capital 0 (0.06) (0.44) 0
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.54) (0.44) (0.26)
- ---------------------------------------------------------------------------------------------------------------
Net asset value end of year $ 8.97 $ 8.45 $ 8.46 $ 9.58
===============================================================================================================
Total return (c) 13.04% 6.68% (7.18%) 3.93%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 2.76%(d) 3.21%(d) 2.95%(b) 2.95%(b)
Net investment income 6.40% 6.43% 4.05%(b) 3.79%(b)
Portfolio turnover rate 58% 108% 100% 107%
- ---------------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $4,917 $3,680 $3,429 $2,544
===============================================================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the ratio
of total expenses to average net assets would have been 3.03% and 3.47% for
the period from January 1, 1994 to October 31, 1994 and for the period from
August 2, 1993 (Date of Initial Public Offering) to December 31, 1993,
respectively.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.74% and 3.19% for the years ended October 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- ----------------------
Keystone World Bond Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
August 2, 1993
Year Ended October 31, Period from (Date of Initial
---------------------- January 1, 1994 to Public Offering) to
1996 1995 October 31, 1994 December 31, 1993
===============================================================================================================
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 8.42 $ 8.42 $ 9.58 $ 9.47
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.56 0.56 0.30 0.18
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions 0.50 (0.02) (1.02) 0.19
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 1.06 0.54 (0.72) 0.37
- ---------------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.54) (0.48) 0 (0.12)
In excess of net investment income 0 0 0 (0.14)
Tax basis return of capital 0 (0.06) (0.44) 0
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.54) (0.44) (0.26)
- ---------------------------------------------------------------------------------------------------------------
Net asset value end of year $ 8.94 $ 8.42 $ 8.42 $ 9.58
===============================================================================================================
Total return (c) 13.09% 6.83% (7.61%) 3.93%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 2.78%(d) 3.21%(d) 2.95%(b) 2.95%(b)
Net investment income 6.37% 6.49% 3.94%(b) 3.79%(b)
Portfolio turnover rate 58% 108% 100% 107%
- ---------------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $1,057 $1,183 $1,591 $1,878
===============================================================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the ratio
of total expenses to average net assets would have been 3.03% and 3.40% for
the period from January 1, 1994 to October 31, 1994 and for the period from
August 2, 1993 (Date of Initial Public Offering) to December 31, 1993,
respectively.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.77% and 3.19% for the years ended October 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ----------------------
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
=======================================================================
Assets
Investments at market value (identified cost--
$13,086,165) $14,174,874
Receivable for:
Unrealized appreciation on forward foreign currency
exchange contracts 21,118
Interest 458,338
Prepaid expenses 7,474
-----------------------------------------------------------------------
Total assets 14,661,804
-----------------------------------------------------------------------
Liabilities
Payable for:
Unrealized depreciation on forward foreign currency
exchange contracts 2,144
Income distribution 23,167
Foreign taxes withheld 5,649
Other accrued expenses 38,592
-----------------------------------------------------------------------
Total liabilities 69,552
-----------------------------------------------------------------------
Net assets $14,592,252
=======================================================================
Net assets represented by
Paid-in capital $14,497,982
Undistributed net investment income 52,595
Accumulated net realized loss on investments and
foreign currency related transactions (1,066,795)
Net unrealized appreciation on investments and foreign
currency related transactions 1,108,470
-----------------------------------------------------------------------
Total net assets $14,592,252
=======================================================================
Net Asset Value and redemption price per share
Class A Shares
Net assets of $8,617,822 / 963,162 shares outstanding $8.95
Offering price per share ($8.95 / 0.9525) (based on a
sales charge of 4.75% of the offering price at October
31, 1996) $9.40
Class B Shares
Net assets of $4,917,178 / 548,173 shares outstanding $8.97
Class C Shares
Net assets of $1,057,252 / 118,324 shares outstanding $8.94
=======================================================================
STATEMENT OF OPERATIONS
Year Ended October 31, 1996
========================================================================
Investment income
Interest (net of foreign withholding taxes
of $7,569) $1,343,968
Expenses (Notes 4 and 5)
Management fee $ 93,994
Transfer agent fees 48,155
Accounting 20,918
Auditing and legal fees 24,015
Custodian fees 22,640
Printing expenses 19,338
Distribution Plan expenses 77,012
Registration fees 31,688
----------------------------------------------------------------------
Total expenses 337,760
Less: Expenses paid indirectly (Note 6) (1,671)
----------------------------------------------------------------------
Net expenses 336,089
----------------------------------------------------------------------
Net investment income 1,007,879
----------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign
currency related transactions Net realized gain on
investments and foreign currency related transactions 274,506
----------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments and
foreign currency related transactions 580,719
----------------------------------------------------------------------
Net realized and unrealized gain on
investments and foreign currency
related transactions 855,225
----------------------------------------------------------------------
Net increase in net assets resulting from
operations $1,863,104
======================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ----------------------
Keystone World Bond Fund
STATEMENTS OF CHANGES IN NET ASSETS Year Ended Year Ended
October 31, October 31,
1996 1995
=============================================================================
Operations
Net investment income $ 1,007,879 $ 1,011,006
Net realized gain (loss) on investments and
foreign currency related transactions 274,506 (583,415)
Net change in unrealized appreciation or
depreciation on investments and foreign
currency related transactions 580,719 685,420
- -----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 1,863,104 1,113,011
- -----------------------------------------------------------------------------
Distributions to shareholders from Net investment income:
Class A Shares (635,884) (653,425)
Class B Shares (279,243) (187,676)
Class C Shares (71,306) (82,887)
Tax basis return of capital:
Class A Shares 0 (65,389)
Class B Shares 0 (24,167)
Class C Shares 0 (7,767)
- -----------------------------------------------------------------------------
Total distributions to shareholders (986,433) (1,021,311)
- -----------------------------------------------------------------------------
Capital share transactions (Note 2)
Shares issued in acquisition of Keystone
Australia Income Fund: (Note 6) 0 6,401,180
Proceeds from shares sold:
Class A Shares 195,332 379,004
Class B Shares 2,034,239 1,382,294
Class C Shares 282,296 226,771
Payments for shares redeemed:
Class A Shares (2,510,565) (3,470,274)
Class B Shares (1,274,145) (1,277,770)
Class C Shares (514,425) (680,398)
Net asset value of shares issued in reinvestment
of distributions:
Class A shares 427,111 467,191
Class B shares 213,523 168,229
Class C shares 43,268 64,105
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share transactions (1,103,366) 3,660,332
- -----------------------------------------------------------------------------
Total increase (decrease) in net assets (226,695) 3,752,032
- -----------------------------------------------------------------------------
Net assets:
Beginning of year 14,818,947 11,066,915
- -----------------------------------------------------------------------------
End of year [including undistributed net
investment income (distributions in excess
of net investment income) in 1996 of
$52,595 and in 1995 of ($24,213)] $14,592,252 $14,818,947
=============================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ----------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone World Bond Fund (the "Fund") is a Massachusetts business trust 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
non-diversified, open-end investment company. The Fund offers three classes of
shares. The Fund's investment objective is to earn investment income while also
seeking capital appreciation.
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
Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate, other fixed income securities, mortgage and other
asset-backed securities, and other related securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities which are generally recognized by
institutional traders. 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 the procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities 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 related 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
<PAGE>
PAGE 18
- ----------------------
Keystone World Bond Fund
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amounts 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 date is included in realized gain (loss) on
investments and foreign currency related 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 investments and 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.
F. 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.
G. 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.
H. Distributions
The Fund distributes net investment income monthly 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 the deferral of
losses for income tax purposes that have been recognized for financial statement
purposes and treatment of foreign currency gains as ordinary income for tax
purposes.
I. Class Allocations
Class A shares are offered at a public offering price which includes a maximum
sales charge of 4.75% payable at the time of purchase. Class B shares are sold
subject to a contingent deferred sales charge that is payable upon redemption
and decreases depending on how long the shares have been held. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
will automatically convert to Class A shares. Class B shares purchased prior to
June 1, 1995 that have been outstanding for seven years will automatically
convert to Class A shares. Class C shares are sold subject to a contingent
deferred sales charge payable on shares redeemed within one year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets
<PAGE>
PAGE 19
- ----------------------
of each class. Currently, class specific expenses are limited to expenses
incurred under the Distribution Plans for each class.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transaction in shares of the Fund
were as follows:
Year ended October 31,
Class A 1996 1995
---------------------------------------------------------------------------
Shares sold 22,718 42,522
Shares redeemed (291,986) (425,398)
Shares issued in acquistion of Australia
Income Fund (Note 6) 789,935
Shares issued in reinvestment of dividends 49,623 57,481
----------- ------------
Net increase (decrease) (219,645) 464,540
===========================================================================
Year ended October 31,
Class B 1996 1995
---------------------------------------------------------------------------
Shares sold 235,196 166,498
Shares redeemed (147,436) (156,895)
Shares issued in reinvestment of dividends 24,700 20,548
----------- ------------
Net increase 112,460 30,151
===========================================================================
Year ended October 31,
Class C 1996 1995
---------------------------------------------------------------------------
Shares sold 32,761 27,481
Shares redeemed (59,947) (83,800)
Shares issued in reinvestment of dividends 5,032 7,882
----------- ------------
Net decrease (22,154) (48,437)
===========================================================================
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended October 31, 1996, were $8,090,824 and
$8,134,796, respectively.
As of October 31, 1996, the Fund has a capital loss carryover for federal
income tax purposes of approximately $1,060,000, which expires as follows:
$246,000--2002 and $814,000--2003.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter,
Keystone Investment Distributors Company ("KIDC"), a wholly-owned subsidiary of
Keystone, amounts that are calculated and paid daily.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares. During the year
ended October 31, 1996, the Fund paid $21,291 to KIDC under the Class A
Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays a
distribution fee which may not exceed 1.00% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.25% is used to pay service fees.
During the year ended October 31, 1996, under the Class B Distribution Plans,
the Fund paid or accrued $30,767 for Class B shares purchased before June 1,
1995 and $13,709 for Class B shares purchased on or after June 1, 1995. The Fund
paid $11,245 under the Class C Distribution Plan.
<PAGE>
PAGE 20
- ----------------------
Keystone World Bond Fund
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
KIDC may continue as compensation for services that had been earned while the
Distribution 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 Class B or Class C shares would
be within permitted limits.
At October 31, 1996, total unpaid distribution costs were $251,498 for Class B
shares purchased before June 1, 1995, and $54,841 for Class B shares purchased
on or after June 1, 1995. Unpaid distribution costs for Class C were $128,839 at
October 31, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid to
KIDC.
(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 paid daily, at an annual rate
of 1.50%of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining as net assets increase
to 0.40% per annum, to the average daily net asset value of the Fund. During the
year ended October 31, 1996, the Fund paid or accrued to Keystone investment
management and advisory fees of $93,994, which represented 0.64% of the Fund's
average net assets.
During the year ended October 31, 1996, the Fund paid or accrued $20,918 to
Keystone for certain accounting services. The Fund paid or accrued $48,155 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
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
(6.) Fund Reorganization
On December 30, 1994, the Fund acquired the net assets of Keystone Australia
Income Fund in exchange for Class A shares of the Fund pursuant to a plan of
reorganization approved by the shareholders of Keystone World Bond Fund on
December 30, 1994. The acquisition was accomplished by a tax-free exchange of
789,935 shares of the Fund for the net assets of Keystone Australia Income Fund.
The net assets of Keystone Australia Income Fund on that date, including $32,769
of unrealized depreciation on investments, were combined with the assets of the
Fund. The aggregate net assets of the Fund and Keystone Australia Income Fund
immediately before the acquisition were $10,313,320 and $6,401,180,
respectively. The net assets of the Fund immediately after the acquisition were
$16,714,500.
(7.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the year ended October 31, 1996, the Fund incurred total custody fees of $22,640
and received a credit of $1,671 pursuant to this expense offset arrangement,
resulting in a net custody expense of $20,969. The assets deposited with the
custodian under this expense offset arrangement could have been invested in
income-producing assets.
<PAGE>
PAGE 21
- ----------------------
(8.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.052 for Class A, $0.047 for Class
B and $0.047 for Class C were declared payable on December 5, 1996, to
shareholders of record November 25, 1996. This distribution is not reflected in
the accompanying financial statements.
(9.) 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 required regulatory and shareholder approvals, the proposed
merger is expected to take place in December 1996.
<PAGE>
PAGE 22
- ----------------------
Keystone World Bond Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone World Bond Fund
We have audited the accompanying statement of assets and liabilities of Keystone
World Bond Fund, 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 the two-year period then ended, the
period from January 1, 1994 to October 31, 1994, and the five-year period ended
December 31, 1993 for Class A shares and for the two-year period then ended, and
the periods from January 1, 1994 to October 31, 1994, and August 2, 1993 (Date
of Initial Public Offering) to December 31, 1993 for Class B and Class C shares.
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. The financial
highlights for the year ended December 31, 1988 and for the period January 9,
1987 (Commencement of Operations) to December 31, 1987 were audited by other
auditors whose report, dated February 3, 1989, expressed an unqualified opinion
thereon.
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. 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 World Bond Fund as of October 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended 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
<PAGE>
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FEDERAL TAX STATUS--Fiscal 1996 Distributions (Unaudited)
The per share distributions paid to you for the fiscal year ended October 31,
1996, whether taken in shares or cash, are as follows:
Class A Shares Class B Shares Class C Shares
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Income Income Income
Dividends Dividends Dividends
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$0.60 $0.54 $0.54
In January of 1997, complete information on calendar year 1996 distributions
will be forwarded to you to assist you in completing your 1996 federal income
tax return.
