Keystone Strategic Income Fund
Seeks generous income from high yield, foreign
and U.S. government or agency obligations.
Dear Shareholder:
We would like to take this opportunity to report on the performance of
Keystone Strategic Income Fund for the twelve-month period which ended July
31, 1995.
Performance
Class A shares returned 8.52% for the six-month period and 3.00% for the
twelve-month period which both ended July 31, 1995.
Class B shares returned 8.03% for the six-month period and 2.12% for the
twelve-month period which both ended July 31, 1995.
Class C shares returned 8.03% for the six-month period and 2.27% for the
twelve-month period which both ended July 31, 1995.
The Lehman Aggregate Bond Index--a broad index of US corporate, government
and mortgage securities--returned 9.04% for the six-month period and 10.11%
for the twelve-month period.
Your Fund's returns reflect a significantly improved environment for
bonds, especially since the beginning of 1995. Investors benefited from
better performance as US interest rates fell and bond prices rose in the
first half of 1995. This was a reversal from the rising rate environment that
characterized most of 1994. Slowing economic growth and evidence of moderate
inflation so far this year have contributed to the favorable performance of
your Fund's holdings of high yield, foreign and US government securities.
Strategic Income Fund was designed to seek a premium yield and consistent
performance by allocating investments across a broad range of fixed-income
securities. We based this concept on our analysis which shows that a blended
portfolio of high yield, foreign and US government obligations can provide
more consistent returns than investing in a single bond category.
We manage the Fund according to changes in the economic and business
cycles. As a result, we have made several adjustments to the portfolio in an
attempt to capitalize on the changing environment. We continued to upgrade
the Fund's high yield bond holdings with BB-rated bonds, in anticipation of a
peak in economic growth. BB-rated bonds are characteristically more liquid
and provide better price stability than lower-rated high yield bonds when
economic growth slows. We think this approach helped the Fund as growth
slowed during the first half of 1995.
With growth slowing, we believed that US government bonds would offer
attractive returns with better price stability than foreign bonds. By the end
of March, we had reduced the Fund's foreign holdings and increased the US
government portion of the Fund to 25% of portfolio assets. US government
bonds--which are primarily influenced by changes in interest rates--rallied
strongly during this period, providing generous returns to the portfolio.
Later, as evidence of slower growth was factored into bond prices in the
US, we began to redeploy a portion of the Fund's US government holdings into
European government bonds. We made this change for several reasons. We were
seeking to increase the Fund's currency and regional diversification. We also
sought to de-link the foreign portion of the Fund from ties to the US dollar
and US interest rates. Further, we believed that the attractive yields and
weak economic outlook in selected European markets would be favorable. We had
just begun this gradual change towards the end of the twelve-month period.
Yet, we think it fits in well with the Fund's long-term strategy to increase
portfolio diversification and to provide consistent Fund returns to
shareholders.
-continued on next page-
1
<PAGE>
For most of the fiscal year, the Fund's foreign bond holdings were
principally invested in US dollar-denominated Latin American debt. This has been
one of the most attractive areas for fixed-income investors in the world.
However, it has also been one of the most volatile. We have been investing in
this rapidly growing region over several years for generous yields and
attractive values. However, higher US interest rates and the financial crisis in
Mexico in December 1994 shocked bond holders, causing a broad decline in many
Latin American bond markets. While your Fund did not hold any Mexican debt
during the twelve-month period, these events adversely affected nearly every
investor in Latin American securities. However, these emerging markets have
rebounded strongly since March, and your Fund's holdings in Latin America have
benefited from this strong rally.
Going forward, we expect Latin American debt to remain a significant, but
smaller percentage of your Fund's portfolio. While we continue to believe in
the attractiveness of these securities, we think a smaller position in Latin
American debt should help reduce the potential for price fluctuations and
contribute to more consistent performance.
Our Outlook
The "soft landing" we expected for the US economy has arrived. We believe it
should give way to moderate, sustainable growth in the second half of 1995.
This should provide an environment of improved stability for bond investors,
with most of the returns coming from income rather than price appreciation.
Going forward, we continue to remain confident in your Fund's diversified
strategy of seeking attractive income with reduced price fluctuations.
With this report we are pleased to introduce Richard Cryan, as the
portfolio manager of Keystone Strategic Income Fund. Mr. Cryan is co-group
leader of Keystone's high yield bond team. Dick has over 15 years of
investment management experience, and we look forward to his contribution as
portfolio manager of your Fund.
Thank you for your continued support of Keystone Strategic Income Fund. We
encourage you to write to us with questions or comments about your
investment.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
[PHOTO] [PHOTO]
September 1995
Albert H. Elfner, III George S. Bissell
2
<PAGE>
A Discussion With
Your Fund's Manager
[PHOTO]
Richard Cryan is a senior vice president and portfolio manager of Keystone
Strategic Income Fund. Mr. Cryan has more than 15 years of investment experience
and is co-group leader of Keystone's high yield bond team. Dick received his BS
from the University of Colorado and his MBA from Columbia University.
Q What was the investment climate like over the twelve-month period?
A The environment for bonds has improved significantly with interest rates
coming full circle during the period. The benchmark 30-year US Treasury bond
yield rose from 7.39% on July 29, 1994 to 7.70% on January 31, 1995. By your
Fund's fiscal year end on July 31, 1995, the yield was 6.84%. Because bond
prices tend to move in the opposite direction of interest rates, bonds prices
declined as yields rose during the last half of 1994. However, when it became
apparent that the Federal Reserve Bank (the Fed) had achieved its goal of
slowing economic growth and controlling inflation early in 1995, yields
declined and bond prices rose. Long-term US government bonds and selected
Latin American US dollar-denominated bonds were some of the strongest
performers in the second half of the twelve-month period.
Q How did you manage the Fund's asset allocation?
A We think we made some wise asset allocations during the twelve-month period.
On July 31, 1995 the portfolio's assets were divided 43.5% in high yield,(1)
35.3% in foreign and 18.7% in US government securities.(2) We reduced the
Fund's holdings of high yield securities from 52% of the portfolio on July
31, 1994 and added to the Fund's US government holdings. We believed that
slower economic growth in 1995 would be more favorable for US government
securities. In March 1995, we also reduced the Fund's foreign holdings--
primarily US dollar-denominated Latin American debt--from 41% in November
1994 to 26% of portfolio assets at the end of March 1995. Towards the end of
the period, we began rebuilding the Fund's foreign holdings with European
non-dollar bonds.
Q What was your investment strategy?
A Throughout the period, we continued to make changes in the interest of
lowering the Fund's potential for price fluctuations. In the high yield
portion we continued to upgrade the portfolio with BB-rated bonds--the
highest quality bonds in the high yield category. BB-rated bonds typically
provide the best liquidity in the high yield universe. In addition, with the
economy slowing, BB-rated bonds tend to provide better price stability than
lower rated high yield bonds.
Fund Profile
Objective: Seeks generous income from high yield, foreign and US government
or agency obligations.
Commencement of investment operations: April 14, 1987
Average maturity: 8 years
Net assets: $281 million
3
<PAGE>
Asset Allocation as of July 31, 1995
U.S. Government and Agency (18.7%)
Other [2] (2.5%)
High Yield [1] (43.5%)
Foreign Bonds (35.3%)
(percentage of net assets)
(1)Includes common and preferred stocks and warrants.
(2)The balance of the portfolio was invested in repurchase agreements, US
Treasury bills, and other assets and liabilities.
Q As rates rose in the fall of 1994 and then declined in the spring of 1995,
how did you manage the high grade portion?
A In the fall we pursued a "barbelled" maturity strategy for the Fund's high
grade, or US government holdings. This barbelled maturity strategy included
an emphasis on short- and long-term bonds, specifically, adjustable-rate
mortgage securities (ARMS) and 30-year US Treasury bonds. We barbelled the
portfolio because we expected intermediate term bonds would be adversely
affected by an increase in interest rates. By February 1995, it appeared that
the Federal Reserve Board had achieved its goal of controlling inflation. So,
we returned to the intermediate term maturity range which appeared
attractively valued after the rate increases in the fall of 1994.
Q Investors were riveted by the volatility of the emerging markets and the
financial crisis in Mexico. How did you manage the Fund's foreign bond
holdings during this difficult period?
A First of all, we did not hold any Mexican bonds during the twelve-month
period. Secondly, the Fund's diversification in high yield and US government
securities helped to dampen the price declines of the Fund's emerging markets
holdings. As rates rose in the US, the relative attractiveness of emerging
markets debt decreased. At the beginning of 1994, investors could earn an
7.70% yield on a long-term US Treasury bond, without the political or
economic risk of the emerging markets. This contributed to sharp price
declines in emerging markets debt including Latin America.
We pursued a conservative strategy aimed at protecting the Fund's foreign
investments from currency fluctuations. Since the Fund adopted a more
diversified strategy in 1993, we have largely emphasized US dollar-
denominated Latin American bonds for the Fund's foreign holdings. However, US
dollar-denominated bonds are somewhat leveraged to changes in US interest
rates and the US bond market. Between December 1994 and March 9, 1995, these
bonds experienced sharp declines. Nevertheless, they have rebounded sharply,
rising by more than 10% through July 31.
Q What is your outlook?
A Although US economic growth has slowed to the "soft landing" we expected,
we believe the economy should grow moderately through the end of the year.
Positive growth should provide support for the Fund's high yield holdings.
While interest rates may move up slightly in the short-term, we believe that
the longer term trend is for lower interest rates in the US. Inflation is
still under control, affording an attractive environment for real (inflation
adjusted) returns for bonds. Overseas, we anticipate the potential for strong
returns from the Fund's holdings of US dollar-denominated Latin American debt
and steady income from the Fund's European government bond holdings.
4
<PAGE>
Your Fund's Performance
Growth of an investment in
Keystone Strategic Income Fund
Class A
[mountain chart]
Initial Reinvested
Investment Distributions
7/87 9,649 9,735
7/89 8,677 11,084
7/91 5,867 10,195
7/93 7,486 16,290
7/95 6,563 17,091
A $10,000 investment in Keystone Strategic Income Fund Class A made on
April 14, 1987 with all distributions reinvested was worth $17,091 on
July, 31, 1995. Past performance is no guarantee of future results.
Twelve-Month Performance as of July 31, 1995
- ----------------------------------------------------------------
Class A Class B Class C
Total returns* 3.00% 2.12% 2.27%
Net asset value 7/31/94 $7.35 $7.38 $7.37
7/31/95 $6.89 $6.92 $6.92
Dividends $.650 $.590 $.590
Capital Gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC)
Historical Record as of July 31, 1995
- ----------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 3.00% 2.12% 2.27%
1-year -1.89% -1.63% 2.27%
5-year 60.68% -- --
Life of Class 70.91% 17.60% 20.56%
Average Annual Returns
1-year w/o sales charge 3.00% 2.12% 2.27%
1-year -1.89% -1.63% 2.27%
5-year 9.95% -- --
Life of Class 6.67% 6.70% 7.77%
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 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 February 1, 1993. Performance reflects
the return you would have received for holding shares for one year and
redeeming after the end of the period.
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 to another Keystone fund for a $10 fee by
contacting Keystone directly. 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.
5
<PAGE>
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone
Strategic Income Fund Class A, the Lehman Aggregate Bond Index,
and the Consumer Price Index.
In Thousands April 14, 1987 through July 31, 1995
Average Annual Total Return
Life of
1 Year 5 Year Class
Class A -1.89% 9.95% 6.67%
Class B -1.63% _ 6.70%
Class C 2.27% _ 7.77%
[line chart]
Class A LABI CPI
4/87 9,534 10,000 10,000
7/87 9,535 9,802 10,152
7/89 11,084 12,147 11,097
7/91 10,195 14,392 12,150
7/93 16,290 18,202 12,881
7/95 17,091 20,058 13,604
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
Consumer Price Index and Lehman Aggregate Bond Index are from March 31, 1987.
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 Strategic Income Fund
The Fund seeks generous income from high yield, foreign, and US government or
agency obligations. The return is quoted after deducting sales charges (if
applicable), fund expenses, and transaction costs and assumes reinvestment of
all distributions.
2. Lehman Aggregate Bond Index (LABI)
The LABI is a broad-based, unmanaged fixed-income market index of US
government, corporate, and mortgage-backed securities. It represents the
price change and coupon income of several thousand securities with various
maturities and qualities. Securities are selected and compiled by Lehman
Brothers, Inc. according to criteria that may be unrelated to your Fund's
investment objective. It would be difficult for most individual investors to
duplicate this index.
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
6
<PAGE>
in the market. Your financial adviser can help you evaluate fund performance
in conjunction with the other important financial considerations such as
safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. 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 indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
7
<PAGE>
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.
8
<PAGE>
SCHEDULE OF INVESTMENTS--July 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (94.5%)
INDUSTRIAL BONDS & NOTES (40.5%)
ADVERTISING (0.7%)
Lamar Advertising Co. Sr. Secd. Notes 11.000% 2003 $1,000,000 $ 1,010,000
Lifestyle Brands Gtd. Deb. (Subord.) 10.000 1997 1,050,000 1,050,000
- ---------------------------------------------------------------------------------------------------------------------------
2,060,000
- ---------------------------------------------------------------------------------------------------------------------------
AEROSPACE (1.2%)
SabreLiner Inc. Sr. Notes 12.500 2003 2,500,000 2,200,000
Transdigm Inc. Sr. Notes (Subord.) 13.000 2000 1,250,000 1,143,750
- ---------------------------------------------------------------------------------------------------------------------------
3,343,750
- ---------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION (0.1%)
US Africa Airways (6/2/94-$750,000)(a)(b)(c) Sr. Secd. Notes 12.000 1999 750,000 345,000
- ---------------------------------------------------------------------------------------------------------------------------
AMUSEMENTS (2.4%)
El Comandante Capital Corp. 1st Mtge. Notes 11.750 2003 1,750,000 1,645,000
Grand Palais Casinos, Inc. (8/15/94-
$2,542,000)(b) Sr. Secd. PIK Notes 18.250 1997 2,250,000 2,250,000
Hemmeter Enterprises, Inc. (12/14/93- Unit (Sr. Secd. PIK
$4,992,674)(b) Notes/Wts.) 12.000 2000 6,597,710 2,837,015
Starcraft Corp. (2/11/88-$178,833)(a)(b)(c) Notes (Subord.) 16.500 1998 750,000 15,000
- ---------------------------------------------------------------------------------------------------------------------------
6,747,015
- ---------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (4.3%)
Alpine Group, Inc. (e) Sr. Notes 12.250 2003 2,000,000 1,840,000
Associated Materials, Inc. Sr. Notes (Subord.) 11.500 2003 1,500,000 1,380,000
HMH Properties, Inc. Sr. Secd. Notes 9.500 2005 3,000,000 2,947,500
Koppers Industries, Inc. Sr. Notes 8.500 2004 2,050,000 1,988,500
Schuller International Group, Inc. Sr. Notes 10.875 2004 1,400,000 1,529,500
USG Corp. Deb. 8.750 2017 2,500,000 2,425,000
- ---------------------------------------------------------------------------------------------------------------------------
12,110,500
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS (0.2%)
Lanesborough Corp. Sr. Secd. Notes (Subord.) 10.000 2000 575,000 402,500
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS (0.8%)
Key Plastics, Inc. Sr. Notes 14.000 1999 250,000 252,500
Sherritt Gordon Ltd. Sr. Notes 9.750 2003 2,000,000 2,000,000
- ---------------------------------------------------------------------------------------------------------------------------
2,252,500
- ---------------------------------------------------------------------------------------------------------------------------
(continued on next page)
9
<PAGE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER GOODS (2.2%)
American Safety Razor Co. (e) Sr. Notes 9.875% 2005 $ 750,000 $ 754,688
Drypers Corp. Sr. Notes 12.500 2002 2,000,000 1,880,000
International Semi-Tech Electronics, Inc.
(Eff. Yield 11.98%)(d) Sr. Secd. Disc. Notes 0.000 2003 3,000,000 1,597,500
Revlon Consumer Products Corp. Sr. Notes (Subord.) 10.500 2003 2,000,000 2,010,000
- ---------------------------------------------------------------------------------------------------------------------------
6,242,188
- ---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.4%)
Jordan Industries, Inc. Sr. Notes 10.375 2003 1,300,000 1,225,250
- ---------------------------------------------------------------------------------------------------------------------------
FOODS (4.9%)
Cott Corporation Sr. Notes 9.375 2005 1,650,000 1,658,250
Iowa Select Farms (1/21/94-$6,182,225)
(Eff. Yield 13.716%)(b)(d) Sr. Disc. Notes/Wts. 0.000 2004 12,828,000 6,184,507
Iowa Select Farms (8/2/94-$3,833,241)
(Eff. Yield 16.62%)(b)(d) Sr. Disc. Notes/Wts. 0.000 2004 7,954,000 3,834,703
Specialty Foods Corp. Sr. Notes (Subord.) 11.250 2003 2,000,000 1,960,000
- ---------------------------------------------------------------------------------------------------------------------------
13,637,460
- ---------------------------------------------------------------------------------------------------------------------------
HEALTHCARE (0.4%)
Community Health Systems Inc. Sr. Deb. (Subord.) 10.250 2003 1,000,000 1,065,000
- ---------------------------------------------------------------------------------------------------------------------------
INSURANCE (1.4%)
CCP Insurance, Inc. Sr. Note 10.500 2004 2,000,000 2,100,000
Reliance Group Holdings, Inc. Sr. Deb. (Subord.) 9.750 2003 2,000,000 1,960,000
- ---------------------------------------------------------------------------------------------------------------------------
4,060,000
- ---------------------------------------------------------------------------------------------------------------------------
METALS & MINING (2.1%)
Algoma Steel Inc. 1st Mtge. 12.375 2005 2,000,000 1,880,000
Inland Steel Co. Unsecd. Notes 12.750 2002 1,910,000 2,134,425
Republic Engineered Steels, Inc. 1st Mtge. Notes 9.875 2001 2,000,000 1,890,000
- ---------------------------------------------------------------------------------------------------------------------------
5,904,425
- ---------------------------------------------------------------------------------------------------------------------------
NATURAL GAS (1.5%)
TransTexas Gas Corp. Sr. Secd. Note 11.500 2002 4,000,000 4,160,000
- ---------------------------------------------------------------------------------------------------------------------------
OIL (2.3%)
Chatwins Group, Inc. Sr. Notes 13.000 2003 1,250,000 1,037,500
Gulf Canada Resources Ltd. Sr. Notes (Subord.) 9.625 2005 1,475,000 1,489,750
Kelley Oil & Gas Corporation Sr. Notes 13.500 1999 2,000,000 1,960,000
Plains Resources, Inc. Sr. Notes (Subord.) 12.000 1999 1,900,000 1,976,000
- ---------------------------------------------------------------------------------------------------------------------------
6,463,250
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
10
<PAGE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER & PACKAGING (2.3%)
Container Corp. of America Sr. Notes 10.750% 2002 $2,000,000 $ 2,130,000
Owens-Illinois, Inc. Deb. 11.000 2003 2,000,000 2,205,000
Rainy River Forest Products, Inc. Sr. Notes 10.750 2001 2,000,000 2,120,000
- ---------------------------------------------------------------------------------------------------------------------------
6,455,000
- ---------------------------------------------------------------------------------------------------------------------------
RESTAURANTS (1.3%)
Great American Cookie Co., Inc. Sr. Secd. Notes 10.875 2001 2,000,000 1,720,000
Pantry, Inc. Sr. Notes 12.000 2000 2,000,000 1,980,000
- ---------------------------------------------------------------------------------------------------------------------------
3,700,000
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL (4.7%)
Big 5 Holdings, Inc. Sr. Notes (Subord.) 13.625 2002 125,000 128,125
Cole National Group, Inc. Sr. Notes 11.250 2001 1,750,000 1,706,250
Finlay Fine Jewelry Corp. Sr. Notes 10.625 2003 1,000,000 970,000
Hills Stores Co. Sr. Notes 10.250 2003 2,000,000 1,912,500
Pamida, Inc. Sr. Notes (Subord.) 11.750 2003 775,000 689,750
Pathmark Stores, Inc. Sr. Notes (Subord.) 9.625 2003 2,000,000 1,980,000
Penn Traffic Co. Sr. Notes (Subord.) 9.625 2005 2,000,000 1,795,000
Service Merchandise Co. Sr. Deb. (Subord.) 9.000 2004 2,000,000 1,690,000
Southland Corp. 1st Priority Sr. Deb.
(Subord.) 5.000 2003 3,000,000 2,310,000
- ---------------------------------------------------------------------------------------------------------------------------
13,181,625
- ---------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (0.5%)
Ampex Corp. (Eff. Yield 10.125%)(d) Disc. Conv. Bonds,
Series C 0.000 1997 958,000 1,331,620
- ---------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (5.0%)
Adelphia Communications Corp. Sr. Notes 12.500 2002 1,400,000 1,442,000
Bell Cablemedia PLC (Eff. Yield 10.67%)(d) Sr. Disc. Notes 0.000 2004 2,000,000 1,330,000
Cablevision Systems Corp. Sr. Deb. (Subord.) 9.875 2013 2,000,000 2,180,000
Centennial Cellular Corp. Sr. Notes 10.125 2005 500,000 501,875
Continental Cablevision, Inc. Sr. Deb. 9.500 2013 2,525,000 2,651,250
Pagemart, Inc. (Eff. Yield 12.25%)(d) Sr. Disc. Notes 0.000 2003 2,900,000 1,885,000
Paging Network, Inc. Sr. Notes (Subord.) 10.125 2007 1,000,000 1,020,000
Rogers Cablesystems Ltd. Sr. Notes 10.000 2005 3,000,000 3,142,500
- ---------------------------------------------------------------------------------------------------------------------------
14,152,625
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION (1.2%)
Eletson Holdings, Inc. 1st Mtge. Notes 9.250 2003 2,000,000 1,920,000
Viking Star Shipping, Inc. Notes 9.625 2003 1,500,000 1,530,000
- ---------------------------------------------------------------------------------------------------------------------------
3,450,000
- ---------------------------------------------------------------------------------------------------------------------------
(continued on next page)
11
<PAGE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES (0.6%)
Consolidated Hydro, Inc.
(Eff. Yield 14.76%)(6/15/93-
$2,208,791)(b)(d) Sr. Disc. Notes 0.000% 2003 $ 3,100,000 $ 1,720,500
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$117,249,685) 114,010,208
- ---------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES (1.8%)
FNMA # 124289, Cap. 13.431%, Margin
2.00% + CMT (Cost $5,139,575) 7.632 2021 4,967,570 5,095,634
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) (27.3%)
Argentina Republic Unsecd. Deb. 8.375 2003 3,250,000 2,478,125
Brazil (Republic of) Secd. Bonds
("Brady" par Bonds) 4.000 2024 20,000,000 8,725,000
Celulose Nipo Brasileiras Unsecd. Deb. 9.375 2003 3,750,000 3,496,875
Fomento Economico Mexico, S.A. Unsecd. Deb. 9.500 1997 2,000,000 1,955,000
Grupo Televisa, S. A. de C.V. Unsecd. Med.
Term Notes 10.000 1997 3,000,000 2,925,000
Indah Kiat International Finance Co. Gtd. Sr. Secd. Notes 11.375 1999 2,000,000 2,020,000
Indah Kiat International Finance Co. Gtd. Sr. Secd. Notes 11.875 2002 3,000,000 3,030,000
Ispat Mexicana S. A. Sr. Unsecd. Deb. 10.375 2001 2,000,000 1,750,000
Klabin Fabricadora Papel Unsecd. Deb. 11.000 1998 2,000,000 1,980,000
Klabin Fabricadora Papel Unsecd. Deb. 10.000 2001 5,000,000 4,550,000
Metalurgica Gerdau, S.A. Unsecd. Deb. 10.250 2001 660,000 620,400
Telecom Argentina Unsecd. Deb. 8.375 2000 9,000,000 8,100,000
Telecom Argentina (e) Unsecd. Deb. 8.375 2000 1,440,000 1,310,400
Telecomunicacoes Brasileiras S. A. Unsecd. Deb. 10.000 1997 13,892,000 13,913,815
Telecomunicacoes Brasileiras S. A. Unsecd. Deb. 10.375 1997 800,000 809,000
Telefonica de Argentina Unsecd. Deb. 8.375 2000 7,400,000 6,660,000
Telefonica de Argentina Unsecd. Deb. 11.875 2004 6,000,000 5,970,000
Vencemos Financing Unsecd. Deb. 9.250 1996 1,900,000 1,738,500
Yacimientos Petroliferos Fiscales S. A.
(YPF) Unsecd. Notes 8.000 2004 5,400,000 4,698,324
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$79,911,392) 76,730,439
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (NON U.S. DOLLARS) (8.0%)
Denmark (Kingdom of) Deb. 8.000 2003 49,000,000 8,997,958
Danish Krone
France (Government of) Sr. Unsecd. Notes 7.500 2005 37,000,000 7,772,201
French Franc
Sweden (Kingdom of) Deb. 10.250 2003 41,000,000 5,797,342
Swedish Krona
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (Cost--$21,755,460) 22,567,501
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
12
<PAGE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (16.9%)
U.S. Treasury Bonds 7.875% 2021 $9,600,000 $ 10,656,000
U.S. Treasury Bonds 7.625 2025 1,000,000 1,096,720
U.S. Treasury Notes 8.250 1998 6,600,000 6,986,694
U.S. Treasury Notes 7.875 2004 5,925,000 6,495,281
U.S. Treasury Notes 6.500 2005 1,000,000 1,004,530
U.S. Treasury Notes 5.875 2000 500,000 493,670
U.S. Treasury Notes 8.875 1997 6,925,000 7,350,264
U.S. Treasury Notes (g) 8.875 1998 8,000,000 8,654,960
U.S. Treasury Notes 8.750 2000 4,250,000 4,713,505
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$46,343,477) 47,451,624
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$270,399,589) 265,855,406
- ---------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS/WARRANTS (2.6%)
Ampex Corp.(a) 589 2,558
Ampex Corp., Class A (a) 19,247 81,800
Ampex Corp., Class C (a) 318,648 1,354,254
Ampex Corp., wts. (a) 90,665 385,326
Chatwins Group, Inc., wts. (a) 1,250 625
CHC Helicopter Corp., wts. (a) 2,400 2,400
Cookies USA, Inc., wts. (a) 360 14,400
Dial Page, Inc., wts. (a) 4,820 9,640
Dimac Corp. (a) 17,833 283,099
Finlay Enterprises, Inc. (a) 667 10,339
Grand Palais Casinos, Inc., Ltd. Liab. Int. (8/15/94-$-0-) (a)(b) 160,136 1,602
Grand Palais Casinos, Inc., wts. (8/15/94-$57) (a)(b) 87,342 660,306
Grand Palais Casinos, Inc., Series A, wts. (8/15/94-$727) (a)(b) 72,794 550,324
Grand Palais Casinos, Inc., Series B, wts. (8/15/94-$397) (a)(b) 39,706 300,177
Grand Palais Casinos, Inc., Series C, wts. (8/15/94-$3,507) (a)(b) 350,735 3,508
HDA Management Corp., wts. (a) 1,750 9,275
Hemmeter Enterprises, Inc., wts. (12/15/93-$0-) (a)(b) 87,342 88
Hemmeter Enterprises, Inc., wts. (12/22/93-$225,000) (a)(b) 98,568 99
Lanesborough Corp. (a) 790 8
Pagemart, Inc., wts. (a) 13,340 80,040
Specialty Equipment Cos., Inc. (a) 265,800 3,372,338
Transdigm Inc., wts. (a) 9,973 99,730
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/WARRANTS (Cost--$2,155,681) 7,221,936
- ---------------------------------------------------------------------------------------------------------------------------
(continued on next page)
13
<PAGE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREFERRED STOCKS (0.4%)
Ampex Corp. (11/20/92-$2,106,054) (a)(b) $ 2,156 $ 970,200
US Africa Airways (6/2/94-$2,500,000) (a)(b) 2,500 3
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (Cost--$4,606,054) 970,203
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (1.0%)
U.S. GOVERNMENT (AND AGENCY) ISSUES (0.4%)
U.S. Treasury Bills 1995 1,255,000 1,240,040
- ---------------------------------------------------------------------------------------------------------------------------
Maturity
Value
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.6%)
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, dated 7/31/95)(f) 5.830 08/01/95 $1,740,282 1,740,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT TERM INVESTMENTS (Cost--$2,980,059) 2,980,040
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$280,141,383)(h) 277,027,585
OTHER ASSETS AND LIABILITIES--NET (1.5%) 4,254,555
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $281,282,140
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
(a) Non-income producing security.
(b) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933) and are valued using market quotations where
available. In the absence of such quotations, these securities are valued at
fair value in the opinion of management--in the case of bonds, at estimated
value considering quality, coupon, term, call feature, yield to maturity of
the security and similar issues which are actively traded, sinking fund,
marketability, plus adjustment, if any, for equity features or other special
factors. The Fund may make investments in an amount up to 15% of the value of
the Fund's net assets in such securities. The date of acquisition and cost
are set forth in parentheses after the title of each restricted security. On
the date of acquisition there was no market quotation or similar securities
and the above securities were valued at acquisition costs. At July 31, 1995,
the fair value of these restricted securities was $14,586,017 (5.00% of net
assets). The Fund will not pay the costs of disposition of the above
restricted securities other than ordinary brokerage fees, if any.
(c) Securities which have defaulted on payment of interest and/or
principal. The Fund has ceased accruing income on these securities.
(d) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(e) Securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at July 31, 1995.
(g) $2,275,000 principal amount of this security is used as collateral for
a reverse repurchase agreement at July 31, 1995.
(h) The cost of investments for federal income tax purposes is
$280,708,880. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at July 31, 1995 are as follows:
Gross unrealized appreciation $ 9,785,923
Gross unrealized depreciation (13,467,218)
------------
Net unrealized depreciation ($ 3,681,295)
============
Legend of Portfolio Abbreviations:
FNMA--Federal National Mortgage Association
See Notes to Financial Statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended July 31,
1995 1994(d) 1993 1992 1991
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of period $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17
- ---------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.64 0.61 0.69 0.78 0.89
Net gain (loss) on
investments, closed
futures contracts and
foreign currency related
transactions (0.45) (0.44) 0.89 0.89 (1.01)
- ---------------------------------------------------------------------------------------------
Total from investment
operations 0.19 0.17 1.58 1.67 (0.12)
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.61) (0.72) (0.75) (0.89)
In excess of net investment
income (0.03) (0.03) (0.02) 0 (0.06)
Tax basis return of capital (0.02) (0.04) 0 0 0
Net realized gains 0 0 0 0 0
- ---------------------------------------------------------------------------------------------
Total distributions (0.65) (0.68) (0.74) (0.75) (0.95)
- ---------------------------------------------------------------------------------------------
Net asset value end of
period $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10
=============================================================================================
Total return(a) 3.00% 1.86% 24.13% 28.73% 0.54%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(b) 1.33% 1.32% 1.80% 2.09% 2.00%
Net investment income 9.31% 7.79% 9.50% 11.73% 15.23%
Portfolio turnover rate 95% 92% 151% 95% 82%
- ---------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $85,970 $105,181 $85,793 $70,459 $70,246
=============================================================================================
<CAPTION>
February 13, 1987
(Commencement of
Year Ended July 31, Operations) to
1990 1989 1988 July 31, 1987
=============================================================================================
<S> <C> <C> <C>
Net asset value beginning
of period $ 9.02 $ 9.36 $ 10.04 $10.00
- ---------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 1.03 1.10 1.05 0.22
Net gain (loss) on
investments, closed
futures contracts and
foreign currency related
transactions (1.79) (0.31) (0.65) 0.00
- ---------------------------------------------------------------------------------------------
Total from investment
operations (0.76) 0.79 0.40 0.22
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (1.04) (1.11) (1.08) (0.18)
In excess of net investment
income (0.05) 0 0 0
Tax basis return of capital 0 0 0 0
Net realized gains 0 (0.02) 0 0
- ---------------------------------------------------------------------------------------------
Total distributions (1.09) (1.13) (1.08) (0.18)
- ---------------------------------------------------------------------------------------------
Net asset value end of
period $ 7.17 $9.02 $ 9.36 $10.04
=============================================================================================
Total return(a) (8.55%) 9.00% 4.49% 2.20%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(b) 2.00% 1.81% 1.28% 1.00%(c)
Net investment income 12.91% 12.06% 10.98% 10.12%(c)
Portfolio turnover rate 36% 73% 46% 13%
- ---------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $83,106 $138,499 $114,310 $ 8,191
=============================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. The "Ratio of total expenses to average net
assets" would have been 2.12%, 2.25%, 2.01%, 1.90%, 2.08% and 6.08% for the
years ended July 31, 1992, 1991, 1990, 1989, 1988 and the period from April
14, 1987 (Commencement of Investment Operations) to July 31, 1987,
respectively.
(c) Annualized for the period from April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering) to
1995 1994(c) July 31, 1993
<S> <C> <C> <C>
=============================================================================================
Net asset value beginning of period $ 7.38 $ 7.89 $ 7.07
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net Investment income 0.60 0.55 0.24
Net gain (loss) on investments, closed
futures contracts and foreign currency
related transactions (0.47) (0.44) 0.92
- ---------------------------------------------------------------------------------------------
Total from investment operations 0.13 0.11 1.16
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.55) (0.55) (0.24)
In excess of net investment income (0.03) (0.03) (0.10)
Tax basis return of capital (0.01) (0.04) 0
- ---------------------------------------------------------------------------------------------
Total distributions (0.59) (0.62) (0.34)
- ---------------------------------------------------------------------------------------------
Net asset value end of period $ 6.92 $ 7.38 $ 7.89
=============================================================================================
Total return(a) 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.06% 2.07% 2.37%(b)
Net investment income 8.58% 7.11% 7.18%(b)
Portfolio turnover rate 95% 92% 151%
- ---------------------------------------------------------------------------------------------
Net assets end of period (thousands) $149,091 $162,866 $35,415
=============================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering) to
1995 1994(c) July 31, 1993
<S> <C> <C> <C>
==========================================================================================
Net asset value beginning of period $ 7.37 $ 7.88 $ 7.07
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.59 0.55 0.24
Net gain (loss) on investments, closed
futures contracts and foreign currency
related transactions (0.45) (0.44) 0.91
- ------------------------------------------------------------------------------------------
Total from investment operations 0.14 0.11 1.15
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.55) (0.55) (0.24)
In excess of net investment income (0.03) (0.03) (0.10)
Tax basis return of capital (0.01) (0.04) 0
- ------------------------------------------------------------------------------------------
Total distributions (0.59) (0.62) (0.34)
- ------------------------------------------------------------------------------------------
Net asset value end of period $ 6.92 $ 7.37 $ 7.88
==========================================================================================
Total return(a) 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.08% 2.07% 2.25%(b)
Net investment income 8.56% 7.09% 7.35%(b)
Portfolio turnover rate 95% 92% 151%
- ------------------------------------------------------------------------------------------
Net assets end of period (thousands) $46,221 $59,228 $19,706
==========================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
See Notes to Financial Statements.
17
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995
============================================================
Assets (Notes 1 and 7):
Investments at market value (identified
cost--$280,141,383) $277,027,585
Cash 2,335
Receivable for:
Investments sold 2,418,781
Fund shares sold 1,106,584
Interest 5,620,433
Forward foreign currency exchange
contracts 36,856,232
Prepaid expenses 7,247
Other assets 215,068
- ------------------------------------------------------------
Total assets 323,254,265
- ------------------------------------------------------------
Liabilities (Notes 1, 4 and 7):
Payable for:
Investments purchased 750,000
Reverse repurchase agreement 2,501,630
Fund shares redeemed 391,381
Income distribution 850,214
Forward foreign currency exchange
contracts 37,349,697
Due to related parties 35,429
Other accrued expenses 93,774
- ------------------------------------------------------------
Total liabilities 41,972,125
- ------------------------------------------------------------
Net assets $281,282,140
============================================================
Net assets represented by (Notes 1 and 7):
Paid-in capital $352,816,575
Accumulated distributions in excess of net
investment income (1,023,303)
Accumulated net realized gain (loss) on
investments, closed futures contracts and
foreign currency related transactions (66,912,635)
Net unrealized appreciation (depreciation)
on:
Investments (3,113,798)
Foreign currency related transactions (484,699)
- ------------------------------------------------------------
Total net assets $281,282,140
============================================================
Net Asset Value (Note 2):
Class A Shares
Net assets of $85,969,868/12,482,994
shares outstanding $6.89
Offering price per share
($6.89/0.9525)(based on a sales charge of
4.75% of the offering price July 31, 1995) $7.23
Class B Shares
Net assets of $149,090,949/21,533,256
shares outstanding $6.92
Class C Shares
Net assets of $46,221,323/6,683,142 shares
outstanding $6.92
============================================================
STATEMENT OF OPERATIONS
Year Ended July 31, 1995
==========================================================================
Investment income (Note 1):
Interest (net of foreign withholding taxes of $20,741) $ 31,125,349
Other income 140,543
- --------------------------------------------------------------------------
31,265,892
- --------------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fees $ 1,954,412
Transfer agent fees 783,249
Accounting, auditing and legal fees 107,763
Custodian fees 136,937
Printing 35,162
Trustees' fees and expenses 30,894
Distribution Plan expenses 2,225,309
Registration fees 116,594
Miscellaneous 19,322
- --------------------------------------------------------------------------
Total expenses 5,409,642
- --------------------------------------------------------------------------
Net investment income (Note 1) 25,856,250
- --------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
foreign currency related transactions
(Notes 1, 3 and 7):
Net realized gain (loss) on:
Investments (37,601,948)
Closed futures contracts (212,014)
Foreign currency related transactions (208,034)
- --------------------------------------------------------------------------
Net realized gain (loss) on investments,
closed futures contracts and foreign
currency related transactions (38,021,996)
- --------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments 17,538,640
Foreign currency related transactions (334,948)
- --------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments and foreign
currency related transactions 17,203,692
- --------------------------------------------------------------------------
Net gain (loss) on investments, closed
futures contracts and foreign currency
related transactions (20,818,304)
- --------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 5,037,946
==========================================================================
See Notes to Financial Statements.
18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended July 31,
1995 1994
============================================================================
Operations:
Net investment income $ 25,856,250 $ 20,003,498
Net realized gain (loss) on investments,
closed futures contracts and foreign
currency related transactions (38,021,996) (2,647,174)
Net change in unrealized appreciation
(depreciation) 17,203,692 (22,719,049)
- ----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,037,946 (5,362,725)
- ----------------------------------------------------------------------------
Distributions to shareholders from (Notes 1
and 6):
Net investment income:
Class A Shares (8,015,693) (8,180,776)
Class B Shares (12,000,626) (8,336,957)
Class C Shares (3,983,775) (3,485,765)
In excess of net investment income:
Class A Shares (385,252) (297,073)
Class B Shares (576,777) (170,776)
Class C Shares (191,469) (111,966)
Tax basis return of capital:
Class A Shares (199,090) (557,304)
Class B Shares (298,065) (862,946)
Class C Shares (98,947) (313,820)
- ----------------------------------------------------------------------------
Total distributions to shareholders (25,749,694) (22,317,383)
- ----------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 10,254,533 56,687,657
Class B Shares 34,092,723 157,431,744
Class C Shares 12,856,402 59,770,321
Payment for shares redeemed:
Class A Shares (27,229,543) (33,988,212)
Class B Shares (44,185,075) (20,279,764)
Class C Shares (24,956,159) (17,427,275)
Net asset value of shares issued in
reinvestment of dividends and
distributions:
Class A Shares 4,322,219 4,552,241
Class B Shares 6,821,317 4,762,342
Class C Shares 2,742,673 2,531,228
- ----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share
transactions (25,280,910) 214,040,282
- ----------------------------------------------------------------------------
Total increase (decrease) in net assets (45,992,658) 186,360,174
- ----------------------------------------------------------------------------
Net assets:
Beginning of year 327,274,798 140,914,624
End of year [including accumulated
distributions in excess of net investment
income as follows: July 1995--($1,023,303)
and July 1994--($1,089,927)](Note 1) $281,282,140 $327,274,798
============================================================================
See Notes to Financial Statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Strategic Income Fund (formerly Keystone America Strategic Income
Fund) (the "Fund") is a Massachusetts business trust for which Keystone
Management, Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc. ("Keystone") is
the Investment Adviser. The Fund was organized on October 24, 1986 and had no
operations prior to February 13, 1987. It is registered under the Investment
Company Act of 1940 as a diversified open-end investment company.
The Fund currently offers three classes of shares. Class A shares are sold
subject to 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 which
varies depending on when shares were purchased and how long they have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year after purchase, and available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company ("KIDC") (formerly Keystone
Distributors, Inc.), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") formerly Keystone Group, Inc., a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former management of Keystone and its affiliates. KMI is a wholly-owned
subsidiary of Keystone. Keystone Investor Resource Center, Inc. ("KIRC") a
wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments are usually valued at the closing 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: (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. Market quotations are
not considered to be readily available for long-term bonds and notes; such
investments are stated at fair value on the basis of valuations furnished by
a pricing service, approved by the Board of Trustees, which determines
valuations for normal, institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. Short-term investments which are purchased with
maturities of sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount) which when combined with accrued interest approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased which
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount) which when combined with accrued interest approximates
market.
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 spe-
20
<PAGE>
cific amount of a commodity, security, financial instrument, or, in the case
of stock index, cash at 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.
B. 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
dividend income is recorded on the ex-dividend date. All discounts are
amortized for financial reporting and federal income tax purposes.
Distributions to shareholders are recorded by the Fund at the close of
business on the ex-dividend date.
C. The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of l986, as amended
("Internal Revenue Code"). Thus, the Fund expects to 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.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of the collateral
on a daily basis, and if the value of the collateral falls below required
levels, the Fund intends to seek additional collateral from the seller or
terminate the repurchase agreement. If the seller defaults, the Fund would
suffer a loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any 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.
21
<PAGE>
E. The Fund may enter into forward foreign currency contracts ("contracts")
to settle purchases and sales of securities denominated in a foreign currency
and to hedge certain foreign currency assets. Contracts are recorded at
market value and are marked-to-market daily. Realized gains and losses
arising from such transactions are included in net realized gain (loss) on
foreign currency related transactions. The Fund is subject to the credit risk
that the other party will not complete the obligations of the contract.
F. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income are determined in
accordance with income tax regulations. Distributions from taxable net
investment income and net capital gains can exceed book basis net investment
income and net capital gains.
The significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are due to the deferral of losses for income tax purposes that have been
recognized for financial statement purposes, and differences in the treatment
of certain foreign currency gains and losses.
G. The Fund enters into reverse repurchase agreements with qualified
third-party broker-dealers as determined by and under the direction of the
Fund's Board of Trustees. Interest on the value of reverse repurchase
agreements issued and outstanding is based upon competitive market rates at
the time of issuance. At the time the Fund enters into a reverse repurchased
agreement, it will establish and maintain a segregated account with the
lender containing securities having a value not less than the repurchase
price (including accrued interest). If the counterparty to the transaction is
rendered insolvent, the ultimate realization of the securities to be
repurchased by the Fund may be delayed of limited.
The average daily balance of reverse repurchase agreements outstanding during
the year ended July 31, 1995 was approximately $2,137,500, or $0.05 per share
based on average shares outstanding during the year at a weighted average
interest rate of 6.14%. The maximum amount of borrowings outstanding at any
week-end during the year was $5,003,056 (including accrued interest), at a
weighted average interest rate of 5.57%, and was 1.63% of total assets. The
rate on the July 31, 1995 borrowing was 5.95% and matures on August 1, 1995.
(2) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the Fund were as follows:
Class A Shares
- -----------------------------------------------------------------------
Year Ended July 31,
1995 1994
- -----------------------------------------------------------------------
Shares sold 1,476,748 7,102,946
Shares redeemed (3,933,229) (4,281,723)
Shares issued in reinvestment of dividends
and distributions 630,245 576,905
- -----------------------------------------------------------------------
Net increase (decrease) (1,826,236) 3,398,128
=======================================================================
22
<PAGE>
Class B Shares
- -----------------------------------------------------------------------
Year Ended July 31,
1995 1994
- -----------------------------------------------------------------------
Shares sold 4,868,980 19,549,754
Shares redeemed (6,393,919) (2,576,838)
Shares issued in reinvestment of dividends
and distributions 989,682 606,379
- -----------------------------------------------------------------------
Net increase (decrease) (535,257) 17,579,295
=======================================================================
Class C Shares
- -----------------------------------------------------------------------
Year Ended July 31,
1995 1994
- -----------------------------------------------------------------------
Shares sold 1,847,558 7,433,632
Shares redeemed (3,594,976) (2,223,361)
Shares issued in reinvestment of dividends
and distributions 397,992 321,340
- -----------------------------------------------------------------------
Net increase (decrease) (1,349,426) 5,531,611
=======================================================================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940
Act").
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of 0.25% of the
average net asset value of Class A shares maintained by the such others
outstanding on the Fund's books for specified periods.
The Class B Distribution Plan provides for payment at an annual rate of
1.00% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by the Fund under the
Class B Distribution Plan are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 4.00% of the price paid
for each Class B share sold plus the first year's service fee in advance in
the amount of 0.25% of the price paid for each Class B share sold. Beginning
approximately 12 months after the purchase of a Class B share, the dealer or
other party will receive service fees at an annual rate of 0.25% of the
average daily net asset value of such Class B shares maintained by such
others outstanding on the Fund's books for specified periods. A contingent
deferred sales charge will be imposed, if applicable, on Class B shares
purchased after June 1, 1995 at rates ranging from a maximum of 5.00% of
amounts redeemed during the first twelve months following the date of
purchase to 1.00% of amounts redeemed during the sixth twelve month period
following the date of purchase. Class B shares purchased on or after June 1,
1995 that have been outstanding for eight years following the month of
purchase will automatically convert to Class A shares without a front end
sales charge or exchange fee. Class B shares purchased prior to June 1, 1995
will retain their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to .75% of the
price paid for each share sold plus the first year's service fee in advance
in the amount of 0.25% of the price paid
23
<PAGE>
for each Class C share. Beginning approximately 15 months after purchase, the
dealer or other party will receive a commission at an annual rate of 0.75%
(subject to applicable limitations imposed by the rules of National
Association of Securities Dealers, Inc. ("NASD rule") plus service fees at an
annual rate of 0.25%, respectively, of the average daily net asset value of
each Class C shares maintained by such others outstanding on the Fund's books
for specified periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, payments to KIDC may continue as compensation for its
services which had been earned while the Distribution Plan was in effect.
During the year ended July 31, 1995, the Fund paid or accrued to KIDC
$228,520, $1,490,077 and $506,712 for Class A, Class B and Class C
Distribution Plans, respectively. These amounts represent 0.25%, 0.98% and
1.00%, respectively, of the net asset value of Class A, Class B and Class C
at July 31, 1995. Under the NASD Rule, the maximum uncollected amounts for
which KIDC may seek payment from the Fund under its Distribution Plans are
$11,098,815 and $4,539,048 or 7.44% and 9.82% of net assets for Classes B and
C, respectively, as of July 31, 1995.
(3.) Securities Transactions
As of July 31, 1995, the Fund had a capital loss carryover for federal
income tax purposes of approximately $30,845,000 which expires as follows:
1998--$1,843,000, 1999--$11,547,000, 2000--$12,167,000 and 2002--$5,288,000.
For the year ended July 31, 1995, purchases and sales of investment
securities (including proceeds received at maturity) were as follows:
Cost of Proceeds
Purchases from Sales
===========================================================
Portfolio securities $ 270,706,365 $ 289,938,510
Short-term investments 1,462,350,162 1,470,029,162
- -----------------------------------------------------------
$1,733,056,527 $1,759,967,672
===========================================================
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, dated December 29, 1989, KMI provides investment management and
administrative services to the Fund. In return, KMI is paid a management fee
computed and payable daily at a rate of 2.0% of the Fund's gross investment
income plus an amount determined by applying percentage rates, which start at
0.50% and decline, as net assets increase, to 0.25% to the net asset value of
the Fund. KMI has entered into an Investment Advisory Agreement with Keystone,
dated December 30, 1989, under which Keystone provides investment advisory and
management services to the Fund and receives for its services an annual fee
representing 85% of the management fee received by KMI. During the year ended
July 31, 1995, the Fund paid or accrued to KMI investment management and
administrative services fees of $1,954,412 which represented 0.66% of the Fund's
average net assets. Of such amount paid to KMI, $1,661,250 was paid to Keystone
for its services to the Fund.
During the year ended July 31, 1995 the Fund paid or accrued to KIRC
$783,249 for transfer agent services and $17,770 to KII as reimbursement for
certain accounting services.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees received
no compensation directly from the Fund.
24
<PAGE>
(5.) Class Level Expenses
Presently, the Fund's class-specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
For the year ended July 31, 1995, the total amount of expenses incurred by
each class' Distribution Plan is set forth in Note (2.) "Capital Share
Transactions."
(6.) Distributions to Shareholders
Distributions of $0.049 per share for Class A, $0.045 for Class B, and
$0.045 for Class C from net investment income were declared payable on
September 26, 1995 to shareholders of record September 25, 1995. These
distributions are not reflected in the accompanying financial statements.
The Fund intends to distribute to its shareholders dividends from net
investment income monthly and all net realized long-term capital gains, if
any, annually. Any taxable distribution which is declared in December and
paid before the next February 1 will be taxable to shareholders in the year
declared.
(7.) Forward Foreign Currency Exchange Contracts
At July 31, 1995, the Fund had entered into the following foreign currency
exchange contracts which obligate the Fund to receive or deliver currencies
at specified future dates. The unrealized depreciation of $493,465 on these
contracts is included in the accompanying financial statements. The terms of
these contracts are as follows:
Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered as of 7/31/95 be received as of 7/31/95
- ----------------------------------------------------------------------------
8/03/95 9,961,200 $ 2,078,850 2,000,000 $2,000,000
Fr Franc U.S. $
8/23/95 2,705,052 2,705,052 3,812,080 2,813,017
U.S. $ Aust. $
8/23/95 3,812,080 2,813,017 2,715,344 2,715,344
Aust. $ U.S. $
8/23/95 2,889,060 2,889,060 15,634,150 2,900,613
U.S. $ Danish Krone
8/23/95 15,634,150 2,900,613 2,765,491 2,765,491
Danish Krone U.S. $
8/23/95 2,522,704 2,522,704 12,500,000 2,607,999
U.S. $ Fr. Franc
8/23/95 346,569 346,569 1,664,500 347,281
U.S $ Fr. Franc
8/23/95 14,164,500 2,955,281 2,761,003 2,761,003
Fr. Franc U.S $
8/23/95 2,868,326 2,868,326 20,408,143 2,882,091
U.S. $ Swedish Krona
25
<PAGE>
Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered as of 7/31/95 be received as of 7/31/95
- ----------------------------------------------------------------------------
8/23/95 20,408,143 2,882,091 2,743,768 2,743,768
Swedish
Krona U.S. $
10/12/95 4,542,905 4,542,905 24,563,485 4,553,819
U.S $ Danish Krone
10/12/95 15,708,048 2,912,111 2,868,264 2,868,264
Danish Krone U.S. $
10/12/95 8,855,438 1,641,707 1,625,000 1,625,000
Danish Krone U.S. $
10/12/95 1,643,869 1,643,869 7,899,450 1,647,542
U.S.$ Fr. Franc
10/12/95 7,899,450 1,647,542 1,625,000 1,625,000
Fr. Franc U.S. $
- ----------------------------------------------------------------------------
$37,349,697 $36,856,232
============================================================================
FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS (Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares Class B Shares Class C Shares
Income Return of Income Return of Income Return of
Dividends Capital Dividends Capital Dividends Capital
$0.63 $0.02 $0.58 $0.01 $0.58 $0.01
In January 1996 complete information on calendar year 1995 distributions will
be forwarded to you to assist in completing your 1995 federal income tax
return.
26
<PAGE>
Keystone Strategic Income Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Strategic Income Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Strategic Income Fund (formerly Keystone America Strategic Income
Fund), including the schedule of investments, as of July 31, 1995, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the eight-year
period ended July 31, 1995 and the period from February 13, 1987
(commencement of operations) to July 31, 1987 for Class A shares and for each
of the years in the two year period ended July 31, 1995 and the period from
February 1, 1993 to July 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 July 31, 1995 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Keystone Strategic Income Fund as of July 31, 1995, 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
September 1, 1995
27
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
[Diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial advisor or call Keystone at 1-800-343-2898.
[Keystone Logo]
KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
SIF-AR-9/95
20 M
[Recycle Logo]
KEYSTONE
[Picture of Sailboats]
STRATEGIC
INCOME FUND
[Keystone Logo]
Annual Report
JULY 31, 1995
