PAGE 1
- -----------------------------------------------
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 your Fund's performance
and review market events for the six-month period which ended January 31,
1996.
Performance
Your Fund provided the following total returns, including income and price
changes:
Class A shares returned 4.37% for the six-month and 13.26% for the
twelve-month periods.
Class B shares returned 4.13% for the six-month and 12.49% for the
twelve-month periods.
Class C shares returned 3.99% for the six-month and 12.34% for the
twelve-month periods.
The Lehman Aggregate Bond Index--an index of investment grade U.S.
bonds--returned 7.25% and 16.94% for the same six- and twelve-month periods.
In addition, Morningstar, an independent mutual fund rating service, assigned
your Fund **** (four stars)--the second highest rating--out of 1404 taxable
bond funds as of January 31, 1996.
While the performance of your Fund was positive, the results for the
six-month period did not meet our expectations, especially considering the
strategic changes made during the past year which we expected to result in
more consistent performance.
During the period, we maintained the basic asset allocation of your Fund at
approximately 43% high yield, 34% foreign and 20% U.S. government
obligations, with the remainder in cash. Within each of these categories, we
made significant changes with the goal of reducing price variability.
The primary reason your Fund did not perform better was due to several major
holdings in the high yield portion of the portfolio which suffered
significant price losses. Our strategy for the Fund's high yield holdings was
to improve diversification by reducing reliance on major holdings,
particularly lower-rated or unrated holdings. However, implementation of this
strategy was not accomplished fast enough to avoid disappointments in some
holdings.
We believe the long-term strategies which we implemented during the
six-month period should help your Fund achieve more consistent performance in
the months ahead.
A conservative strategy
For the balance of your Fund's high yield bond holdings, we pursued a
conservative approach, which focused on lower risk investments. Our strategy
included upgrading quality, increasing liquidity and improving portfolio
diversification. We continued to upgrade the portfolio's high yield bond
holdings with higher quality bonds, a program we began about two years ago.
We emphasized BB-rated bonds, which have historically provided better
performance in a slow growth environment and good trading liquidity.
--continued--
- ----------
(1)Source: Morningstar, Inc. Morningstar's proprietary ratings reflect
historical risk-adjusted performance as of January 31, 1996. Ratings are
subject to change monthly. They are calculated based on the Fund's 3- and
5-year average annual return in excess or below the 90-day Treasury bill
return. Ratings are not adjusted for sales charges, but are adjusted for
other fees. The top 10% of the funds in an investment category receive 5
stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next
22.5% receive 2 stars and the bottom 10% receive 1 star. In the taxable bond
category, the Fund received a 2-star rating for the 3-year and a 5-star
rating for the 5-year periods. There is no 10-year rating because the Fund
was founded less than 10 years ago. There were 806 funds in the 3-year, 411
funds in the 5-year, and 513 funds in the 10-year taxable bond category. Past
performance is no guarantee of future results.
<PAGE>
PAGE 2
- -----------------------------------------------
Keystone Strategic Income Fund
In the foreign bond portion of the portfolio, our holdings of Latin American
U.S. dollar-denominated bonds rebounded strongly during the period. As these
bonds recovered, we moved about half of your Fund's foreign holdings into
Canadian, Danish and Swedish government bonds. We made this change because
these bond markets have a history of lower price fluctuations than the
emerging markets. These foreign bonds offered the potential for price
increases if interest rates declined as we expected.
In the U.S. government portion of the portfolio, we emphasized securities
with better price stability. Here, we reduced holdings of U.S. Treasury
securities and increased holdings of mortgage-backed securities. Mortgage-
backed securities typically have provided better price stability and higher
yields than U.S. Treasury securities.
Our outlook
We have a neutral outlook for the U.S. bond market in 1996. Economic growth
should be positive but slow and inflation should be under control. In the
short-term interest rates may rise, but we expect the long-term fundamentals
to support interest rates close to current levels. In this environment, we
believe most of your Fund's U.S. returns should come from income rather than
price appreciation. Overseas, we anticipate further declines in European
interest rates, providing the potential for price appreciation.
A final note
The difficulties experienced by your Fund have taught us some important
lessons. We believe we have learned from this and have taken appropriate
actions. While these changes offer no guarantees, we will attempt to make
every effort to manage your Fund in an effective manner which provides the
potential for attractive income and consistent performance over the long
term.
Thank you for your continued support of Keystone Strategic Income Fund. As
always, we welcome your comments and letters.
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
March 1996
<PAGE>
PAGE 3
- -----------------------------------------------
A Discussion With
Your Fund's Manager
Richard Cryan is a portfolio manager of the Fund and heads Keystone's high
yield bond team. Mr. Cryan has more than 16 years of investment experience,
and served as president of Wasserstein Perella Asset Management and also as
portfolio manager at Fidelity Investments. Dick received his BS from the
University of Colorado and his MBA from Columbia University. In managing the
Fund, he is supported by Gilman Gunn, head of Keystone's international bond
group and Chris Conkey head of Keystone's domestic high grade bond group.
Q How would you characterize the investment climate over the past six
months?
A For most of the six-month period, the market environment was generally
positive for U.S. high grade bonds, but less so for high yield corporate
issues. Nevertheless, both high grade and high yield bonds provided
attractive returns. In the U.S., declining interest rates resulted in price
increases especially for long-term and U.S. government issues.
Lower U.S. interest rates also had a positive effect on foreign bonds in
countries where the currency is linked to the U.S. dollar. This benefited our
holdings of U.S. dollar-denominated Latin American debt. In Europe, most
countries continued to struggle to emerge from recessions. To stimulate
economic growth, the governments of Germany and France lowered interest
rates, which again was positive for bond prices.
Q What effect did the budget discussions have on the bond market?
A The federal budget negotiations were an important influence on the bond
market during the six-month period. If a balanced budget agreement is
reached, it should result in a smaller deficit. This would mean that the U.S.
Treasury would borrow less, resulting in potentially higher bond prices.
Federal budget negotiations put some downward pressure on bond prices in the
short run because the outcome of those talks was unknown. However, we think
there is a concerted effort to shrink the federal budget deficit, which could
have a positive impact on bond prices over the long term.
Q How did the Fund perform?
A Overall, the Fund's high yield, foreign, and high grade investments
provided positive returns. However, a few of the Fund's high yield bond
holdings were disappointing, which held back overall Fund performance. In
September, AMPEX lost about 25% of its value when the company's stock
experienced a significant price decline. Since the end of the period, the
Fund's holding of AMPEX has rebounded. The following month, Drypers was hit
with unanticipated credit problems. Although it was very thinly traded, we
were able to sell it and limit our exposure to further losses. A third issue,
Grand Palais, provided an unpleasant surprise to many experienced investors.
The bonds were part of a high profile partnership to build the world's
largest casino in downtown New Orleans. In
- --------------------------------------------------------------------------------
Fund Profile
Objective: Seeks generous income from high yield, foreign and
U.S. government or agency obligations.
Commencement of investment operations: April 14, 1987
Average maturity: 10 years
Net assets: $259 million
- --------------------------------------------------------------------------------
<PAGE>
PAGE 4
- -----------------------------------------------
Keystone Strategic Income Fund
- --------------------------------------------------------------------------------
[Pie Chart]
Asset Allocation
as of January 31, 1996
High yield corporate bonds (industrial notes & bonds) (43%)
Foreign bonds (U.S.$) (21%)
Foreign bonds (Non-$) (13%)
U.S. government and agency issues (20%)
Other(1) (3%)
- ----------
(1)Includes other assets and liabilities, common stocks/warrants, and
preferred stock.
- --------------------------------------------------------------------------------
November, senior management of one of the partners filed comments with the
Securities and Exchange Commission indicating that the project was on track.
Four days later, the bank pulled the project's construction loan and Grand
Palais bonds essentially lost their value.
These events had a dampening effect on the Fund's performance during the
six-month period. An experience like this demonstrates that despite the most
thorough research and ongoing monitoring of Fund holdings, business and
credit problems do occasionally arise in the high yield segment of the bond
market.
Q What was your strategy in this environment?
A Overall, our strategy has focused on reducing price volatility. We
basically maintained the Fund's asset allocations at 43% U.S. high yield, 34%
foreign and 20% U.S. high grade bonds as a percentage of net assets. However,
we made significant changes within each asset class.
Q What changes did you make in the high yield sector?
A With prospects of slower growth on the horizon, we used a three-part
strategy in managing the Fund's high yield bond holdings. First, we continued
upgrading the portfolio with higher quality bonds to increase liquidity and
reduce exposure to default risk, a defensive strategy we initiated about two
years ago. Lower quality bonds are less liquid than higher quality issues,
requiring more lead time to buy and sell them.
Second, we decreased our equity exposure. These stocks, warrants or rights
had contributed excellent performance to the Fund a few years ago. They were
originally acquired at no cost as part of our purchase of bonds issued by the
same company. During the six- month period, selected issues had disappointing
performance, and we continued to eliminate or reduce our exposure to these
issues. By the end of the period, the Fund's holdings of equity securities
amounted to less than 1% of net assets.
Third, we increased diversification, both by adding to holdings and reducing
large positions. The total number of issues rose over the six-month period
and we reduced the size of some of our larger individual holdings. We believe
that greater diversification should help reduce the effect of any one holding
on performance in the high yield portion of the portfolio.
Q ... And in the foreign bond component?
A Our holdings in U.S. dollar-denominated Latin American debt provided
excellent performance in reaction to declines in U.S. interest rates. As
these holdings rebounded, we reduced our holdings by half, reinvesting the
proceeds into non-dollar Canadian, Danish and Swedish government bonds. We
partially hedged these bonds into U.S. dollars to provide some protection
from currency fluctuations. These countries have well established, liquid
markets, and historically have had lower volatility than the emerging
markets. We added government bonds because they have virtually no credit
risk, and we expected them to benefit from anticipated interest rate
declines.
Q What was your strategy for U.S. high grade bonds?
A We reduced holdings of U.S. Treasuries in favor of Government National
Mortgage Association ("Ginnie Mae") and Federal National Mortgage Association
<PAGE>
PAGE 5
- -----------------------------------------------
("Fannie Mae") obligations. We made these changes to reduce volatility.
Agency securities have historically provided better price stability and more
attractive yields than Treasuries.
Q What is your outlook?
A In the U.S., we expect there may be some market volatility in the short
term. But, we expect interest rates to remain at or close to current levels
over the next six months. An environment of slowing U.S. economic growth will
likely be more difficult for high yield bonds, but we think our higher
quality emphasis in this area should help limit possible price declines.
Overseas, we expect the trend towards lower interest rates in Europe should
continue to benefit bond prices. In this environment, we expect that the
Fund's returns will come from income rather than appreciation.
Top 10 Holdings
as of January 31, 1996 Percentage of
Security/Coupon Rate/Maturity date net assets
- -----------------------------------------------------------------
Kingdom of Sweden, 10.25%, 2003 5.6
- -----------------------------------------------------------------
Kingdom of Denmark, 8%, 2003 5.1
- -----------------------------------------------------------------
U.S. Treasury bonds, 7.875%, 2021 4.8
- -----------------------------------------------------------------
Telecom Brasil, 10%, 1997 3.8
- -----------------------------------------------------------------
GNMA Pool, 6.5%, 2009 3.7
- -----------------------------------------------------------------
Telecom Argentina, 8.375%, 2000 3.4
- -----------------------------------------------------------------
Government of Canada, 7.5%, 2000 2.5
- -----------------------------------------------------------------
Telefonica de Argentina S.A., 11.875%, 2004 2.5
- -----------------------------------------------------------------
FNMA Pool, 7%, 2025 2.4
- -----------------------------------------------------------------
FNMA Pool, 8.5%, 2025 1.9
- -----------------------------------------------------------------
[diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
- -----------------------------------------------
Keystone Strategic Income Fund
Your Fund's Performance
- --------------------------------------------------------------------------------
[Mountain Chart]
Growth of an investment in
Keystone Strategic Income Fund
Class A
In Thousands
Total Value: $17,837
Initial Investment Reinvested Distributions
9534 9534
1/88 8991 9594
8915 10679
1/90 7372 10048
4848 7757
1/92 6372 11731
6763 13890
1/94 7953 18075
6343 15749
1/96 6563 17837
A $10,000 investment in Keystone Strategic Income Fund Class A made on April 14,
1987 with all distributions reinvested was worth $17,837 on January 31, 1996.
Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Six-Month Performance as of January 31, 1996
- --------------------------------------------------------------------------------
Class A Class B Class C
Total returns* 4.37% 4.13% 3.99%
Net asset value 7/31/95 $ 6.89 $ 6.92 $ 6.92
1/31/96 $ 6.89 $ 6.93 $ 6.92
Dividends $ 0.29 $ 0.27 $ 0.27
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of January 31, 1996
- --------------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 13.26% 12.49% 12.34%
1-year 7.88% 8.49% 12.34%
5-year 119.02% -- --
Life of Class 78.37% 22.58% 25.37%
Average Annual Returns
1-year w/o sales charge 13.26% 12.49% 12.34%
1-year 7.88% 8.49% 12.34%
5-year 16.89% -- --
Life of Class 6.80% 7.02% 7.83%
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 share performance is reported from the commencement of investment
operations on February 1, 1993. Performance reflects the return you would
have received after holding shares for one year and redeeming at 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.
<PAGE>
PAGE 7
- -----------------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (96.9%)
INDUSTRIAL BONDS & NOTES (42.5%)
ADVERTISING (2.2%)
EZ Communications, Inc. Sr. Notes (Subord.) 9.750% 2005 $2,000,000 $ 2,040,000
K III Communications Corp. (e) Sr. Notes 8.500 2006 1,000,000 1,003,750
Lifestyle Brands Gtd. Deb. (Subord.) 10.000 1997 700,000 700,000
Sinclair Broadcast Group Sr. Notes (Subord.) 10.000 2005 1,900,000 1,966,500
- ----------------------------------------------------------------------------------------------------------------
5,710,250
- ----------------------------------------------------------------------------------------------------------------
AEROSPACE (0.7%)
SabreLiner Inc. Sr. Notes 12.500 2003 1,900,000 1,748,000
- ----------------------------------------------------------------------------------------------------------------
AMUSEMENTS (2.5%)
Boyd Gaming Corp. Sr. Notes (Subord.) 10.750 2003 2,000,000 2,125,000
Sr. Secd. PIK
Hemmeter Enterprises, Inc. (c)(e) Notes 12.000 2000 6,597,710 2,309,199
Resorts International Hotel Finance Mtge. Notes 11.000 2003 2,000,000 1,940,000
Starcraft Corp. (2/11/88-$178,833)(b)(c) Notes (Subord.) 16.500 1998 750,000 15,000
- ----------------------------------------------------------------------------------------------------------------
6,389,199
- ----------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (2.3%)
Alpine Group, Inc. (e) Sr. Notes 12.250 2003 1,000,000 980,000
HMH Properties, Inc. Sr. Secd. Notes 9.500 2005 1,500,000 1,545,000
Koppers Industries, Inc. Sr. Notes 8.500 2004 2,050,000 2,009,000
Schuller International Group, Inc. Sr. Notes 10.875 2004 1,400,000 1,575,000
- ----------------------------------------------------------------------------------------------------------------
6,109,000
- ----------------------------------------------------------------------------------------------------------------
CABLE (4.3%)
Adelphia Communications Corp. Sr. Notes 12.500 2002 2,000,000 2,015,000
Bell Cablemedia PLC (Eff. Yield
10.67%)(d) Sr. Disc. Notes 0.000 2005 2,000,000 1,317,500
Cablevision Systems Corp. Sr. Deb. (Subord.) 9.875 2013 2,000,000 2,140,000
Comcast Corp. Sr. Deb. (Subord.) 10.625 2012 2,000,000 2,280,000
Continental Cablevision, Inc. Sr. Deb. 9.500 2013 1,525,000 1,650,813
Marcus Cable Operating Co. (Eff. Yield
10.54%)(d) Sr. Disc. Notes 0.000 2004 1,000,000 752,500
Rogers Cablesystems Ltd. Sr. Notes 10.000 2005 1,000,000 1,095,000
- ----------------------------------------------------------------------------------------------------------------
11,250,813
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS (2.0%)
Arcadian Partners, LP Sr. Notes 10.750 2005 1,000,000 1,110,000
G-I Holdings Inc. (Eff. Yield 8.72%)(d) Sr. Notes 0.000 1998 1,000,000 802,500
Sherritt Inc. Notes 9.750 2003 2,000,000 2,167,500
Sifto Canada Inc. Sr. Notes 8.500 2000 1,000,000 992,500
- ----------------------------------------------------------------------------------------------------------------
5,072,500
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<PAGE>
PAGE 8
- -----------------------------------------------
Keystone Strategic Income Fund
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER GOODS (2.3%)
American Safety Razor Co. Sr. Notes 9.875% 2005 $2,000,000 $ 2,080,000
International Semi-Tech Electronics,
Inc.
(Eff. Yield 11.98%)(d) Sr. Disc. Notes 0.000 2003 3,000,000 1,755,000
Revlon Consumer Products Corp. Sr. Notes (Subord.) 10.500 2003 2,000,000 2,070,000
- ----------------------------------------------------------------------------------------------------------------
5,905,000
- ----------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.5%)
Jordan Industries, Inc. Sr. Notes 10.375 2003 1,300,000 1,171,625
- ----------------------------------------------------------------------------------------------------------------
FOODS (4.3%)
American Rice Inc. Mtge. Notes 13.000 2002 2,000,000 1,880,000
Iowa Select Farms (1/21/94-$2,272,552)
(Eff. Yield 13.72%)(b)(c)(d) Sr. Disc. Notes 0.000 2004 7,211,000 3,587,112
Iowa Select Farms (8/2/94-$2,696,506)
(Eff. Yield 16.62%)(b)(c)(d) Sr. Disc. Notes 0.000 2004 7,954,000 3,956,717
Specialty Foods Corp. Sr. Notes (Subord.) 11.250 2003 2,000,000 1,680,000
- ----------------------------------------------------------------------------------------------------------------
11,103,829
- ----------------------------------------------------------------------------------------------------------------
HEALTHCARE (1.4%)
Quorum Health Group Inc. Sr. Notes 8.750 2005 2,000,000 2,125,000
Tenet Healthcare Corp. Sr. Notes 8.625 2003 1,400,000 1,501,500
- ----------------------------------------------------------------------------------------------------------------
3,626,500
- ----------------------------------------------------------------------------------------------------------------
INSURANCE (1.6%)
CCP Insurance, Inc. Sr. Notes (Subord.) 10.500 2004 2,000,000 2,205,000
Reliance Group Holdings, Inc. Sr. Deb. (Subord.) 9.750 2003 2,000,000 2,070,000
- ----------------------------------------------------------------------------------------------------------------
4,275,000
- ----------------------------------------------------------------------------------------------------------------
METALS & MINING (1.5%)
Algoma Steel Inc. 1st Mtge. 12.375 2005 1,500,000 1,380,000
Inland Steel Co. Unsecd. Notes 12.750 2002 1,910,000 2,177,400
NS Group, Inc. Units 13.500 2003 550,000 500,500
- ----------------------------------------------------------------------------------------------------------------
4,057,900
- ----------------------------------------------------------------------------------------------------------------
NATURAL GAS (0.6%)
TransTexas Gas Corp. Sr. Secd. Note 11.500 2002 1,500,000 1,537,500
- ----------------------------------------------------------------------------------------------------------------
OIL (1.4%)
Gulf Canada Resources Ltd. Sr. Notes (Subord.) 9.625 2005 1,475,000 1,574,563
Vintage Petroleum, Inc. Sr. Notes (Subord.) 9.000 2005 2,000,000 2,060,000
- ----------------------------------------------------------------------------------------------------------------
3,634,563
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 9
- -----------------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER & PACKAGING (5.0%)
Buckeye Cellulose Corp. Sr. Notes (Subord.) 8.500% 2005 $1,000,000 $ 1,045,000
Calmar Inc. (e) Sr. Notes (Subord.) 11.500 2005 2,000,000 2,025,000
Container Corp. of America Sr. Notes 10.750 2002 1,425,000 1,464,188
Owens-Illinois, Inc. Deb. 11.000 2003 2,000,000 2,265,000
Rainy River Forest Products, Inc. Sr. Notes 10.750 2001 2,000,000 2,205,000
Repap New Brunswick Inc. Sr. Notes 10.625 2005 1,500,000 1,455,000
Tembec Finance Corp. Sr. Notes 9.875 2005 2,500,000 2,412,500
- ----------------------------------------------------------------------------------------------------------------
12,871,688
- ----------------------------------------------------------------------------------------------------------------
RESTAURANTS (1.4%)
Great American Cookie Co., Inc.
(12/01/93-$1,990,000)(b) Sr. Secd. Notes 10.875 2001 2,000,000 1,650,000
Pantry, Inc. Sr. Notes 12.000 2000 2,000,000 1,965,000
- ----------------------------------------------------------------------------------------------------------------
3,615,000
- ----------------------------------------------------------------------------------------------------------------
RETAIL (2.4%)
Bruno's, Inc Sr. Notes (Subord.) 10.500 2005 1,500,000 1,477,500
Cole National Group, Inc. Sr. Notes 11.250 2001 1,750,000 1,771,897
Finlay Fine Jewelry Corp. Sr. Notes 10.625 2003 1,000,000 965,000
Ralphs Grocery Co. Sr. Notes 10.450 2004 2,000,000 1,990,000
- ----------------------------------------------------------------------------------------------------------------
6,204,397
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY (0.4%)
Ampex Corp. (3/22/94-$875,140) Disc. Conv. Bonds,
(Eff. Yield 10.125%)(b)(d) Series C 0.000 1997 958,000 1,118,944
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (2.6%)
Centennial Cellular Corp. Sr. Notes 8.875 2001 2,300,000 2,282,750
Diamond Cable Communications Co.
(Eff. Yield 11.09%)(d) Sr. Disc. Notes 0.000 2005 2,425,000 1,479,250
Fundy Cable Ltd. Sr. Notes 11.000 2005 1,000,000 1,052,500
Gtd. Sr. Notes
Rogers Cantel Mobile Inc. (Subord.) 11.125 2002 500,000 540,625
Videotron Holdings, PLC (Eff. Yield
9.69%)(d) Sr. Disc. Notes 0.000 2005 2,000,000 1,300,000
- ----------------------------------------------------------------------------------------------------------------
6,655,125
- ----------------------------------------------------------------------------------------------------------------
TRANSPORTATION (2.6%)
1st Pfd. Mtge.
Eletson Holdings, Inc. Notes 9.250 2003 2,000,000 2,010,000
Exide Corp. Sr. Notes 10.000 2005 1,500,000 1,612,500
Gearbulk Holding Ltd. Sr. Notes 11.250 2004 1,000,000 1,082,500
Viking Star Shipping, Inc. Notes 9.625 2003 2,000,000 2,095,000
- ----------------------------------------------------------------------------------------------------------------
6,800,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<PAGE>
PAGE 10
- -----------------------------------------------
Keystone Strategic Income Fund
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES (0.5%)
Consolidated Hydro, Inc.
(Eff. Yield
14.76%)(6/15/93-$1,879,373)(b)(d) Sr. Disc. Notes 0.000% 2003 $ 3,100,000 $ 1,240,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$114,926,209) 110,096,833
- ----------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (15.1%)
FHLMC PC Pool #61466 7.500 2009 3,369,145 3,460,752
FNMA Grantor Trust 95-T5A 7.000 2035 1,500,000 1,487,813
FNMA #124289, Cap. 13.428%, Margin 2.00% + CMT 7.746 2021 4,537,233 4,687,552
FNMA Pool #315776 8.500 2025 3,928,775 4,084,533
FNMA Pool #322356 7.000 2025 4,582,711 4,624,231
FNMA Pool #322760 8.500 2025 4,747,541 4,959,662
FNMA Pool #324193 7.000 2025 6,229,198 6,285,635
GNMA Pool #780163 6.500 2009 9,378,456 9,495,686
- ----------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities (Cost--$38,480,459) 39,085,864
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U. S. DOLLARS) (21.1%)
Celulose Nipo Brasileiras Unsecd. Deb. 9.375 2003 3,750,000 3,693,750
Fomento Economico Mexico, S.A. Unsecd. Deb. 9.500 1997 2,000,000 2,020,000
Indah Kiat International Finance Co. Gtd. Sr. Secd.
Notes 11.375 1999 2,000,000 2,040,000
Indah Kiat International Finance Co. Gtd. Sr. Secd.
Notes 11.875 2002 3,000,000 3,060,000
Ispat Mexicana S. A. Sr. Unsecd. Deb. 10.375 2001 2,000,000 1,850,000
Klabin Fabricadora Papel Unsecd. Deb. 11.000 1998 2,000,000 2,020,000
Klabin Fabricadora Papel Unsecd. Deb. 10.000 2001 5,000,000 4,900,000
Metalurgica Gerdau, S.A. Unsecd. Deb. 10.250 2001 660,000 636,900
Telecom Argentina Unsecd. Deb. 8.375 2000 9,000,000 8,707,500
Telecom Argentina (e) Unsecd. Deb. 8.375 2000 1,440,000 1,411,200
Telecomunicacoes Brasileiras S. A. Unsecd. Deb. 10.000 1997 9,852,000 9,987,465
Telecomunicacoes Brasileiras S. A. (e) Unsecd. Deb. 10.000 1997 2,050,000 2,080,750
Telecomunicacoes Brasileiras S. A. Unsecd. Deb. 10.375 1997 800,000 814,000
Telefonica de Argentina Unsecd. Deb. 8.375 2000 1,000,000 987,500
Telefonica de Argentina Unsecd. Deb. 11.875 2004 6,000,000 6,450,000
Vencemos Financing (e) Unsecd. Deb. 9.250 1996 1,900,000 1,871,500
Yacimientos Petroliferos Fiscales S. A.
(YPF) Unsecd. Notes 8.000 2004 2,300,000 2,190,750
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$53,737,992) 54,721,315
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (NON U. S. DOLLARS) (13.2%)
Canada (Government of) Deb. 7.500 2000 8,500,000 6,481,845
Canadian Dollars
Denmark (Kingdom of) Deb. 8.000 2003 70,500,000 13,203,617
Danish Krone
</TABLE>
<PAGE>
PAGE 11
- -----------------------------------------------
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sweden (Kingdom of) Deb. 10.250% 2003 91,000,000 $ 14,655,217
Swedish Krona
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (NON U. S. DOLLARS)(Cost--$31,856,831) 34,340,679
- ----------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT ISSUES (5.0%)
U.S. Treasury Bonds (f) 7.875 2021 $10,248,000 12,536,173
U.S. Treasury Notes 6.250 2000 500,000 520,155
- ----------------------------------------------------------------------------------------------------------------
TOTAL U. S. GOVERNMENT ISSUES (Cost--$11,563,223) 13,056,328
- ----------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$250,564,714) 251,301,019
- ----------------------------------------------------------------------------------------------------------------
Shares
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS/WARRANTS (0.4%)
Ampex Corp., Class A (a) 75,765 284,119
Cookies USA, Inc., wts. (a) 360 4,500
Dial Page, Inc., wts. (a) 4,820 48
Dimac Corp.(10/29/93-$-0-)(a)(b) 17,833 490,412
Finlay Enterprises, Inc. (a) 667 7,337
Grand Palais Casinos, Inc., Ltd. Liab. Int. (8/15/94-$-0-)(a)(b) 160,136 160
Grand Palais Casinos, Inc., wts. (8/15/94-$57)(a)(b) 87,342 87
Grand Palais Casinos, Inc., Series A, wts. (8/15/94-$727)(a)(b) 72,794 73
Grand Palais Casinos, Inc., Series B, wts. (8/15/94-$397)(a)(b) 39,706 40
Grand Palais Casinos, Inc., Series C, wts. (8/15/94-$3,507)(a)(b) 350,735 351
HDA Management Corp., wts. (a) 875 2,734
Hemmeter Enterprises, Inc., wts. (a)(e) 87,342 87
Hemmeter Enterprises, Inc., wts. (a)(e) 98,568 99
Iowa Select Farms, wts. (8/2/94-$1,229,578)(a)(b) 151,650 151,650
Pagemart, Inc., wts. (a)(e) 13,340 53,360
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/WARRANTS (Cost--$4,169,680) 995,057
- ----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK (0.5%)
Ampex Corp. (11/20/92-$2,106,054)(a)(b) 2,156 1,317,047
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$256,840,448) 253,613,123
OTHER ASSETS AND LIABILITIES--NET (2.2%) 5,836,886
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $259,450,009
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing.
(b) All or a portion of these securities are either (1) restricted securities
(i.e., securities which may not be publicly sold without registration
under the Federal Securities Act of 1933) or (2) illiquid securities, and
are valued using market quotations where readily availble. In the absence
of market quotations, the securities are valued based upon their fair
value determined under procedures approved by the Board of Trustees. 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
securitiy. On the date of acquisition there was no market quotation or
similar securities and the above securities were valued at acquisition
costs. At January 31, 1996, the fair value of these restricted securities
was $13,527,593 (5.21% of net assets).
(c) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on these securities.
(continued on next page)
<PAGE>
PAGE 12
- -----------------------------------------------
Keystone Strategic Income Fund
SCHEDULE OF INVESTMENTS--January 31, 1996
(Unaudited)
(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 pursant 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) $2,460,000 principal amount of this security is used as collateral for a
reverse repurchase agreement at January 31, 1996.
Legend of Portfolio Abbreviations:
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
SCHEDULE OF FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
U.S. Value at In Net Unrealized
Exchange January 31, Exchange Appreciation/
Date 1996 for U.S.$ (Depreciation)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
----------------------------------------------------
French
2/05/96 6,254,703 Francs $1,222,810 $1,262,268 ($ 39,458)
------------
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
----------------------------------------------------
French
2/05/96 6,254,703 Francs 1,222,810 1,274,000 51,190
Danish
2/20/96 18,027,600 Krone 3,128,893 3,316,000 187,107
Swedish
2/20/96 24,054,536 Krona 3,456,026 3,608,000 151,974
------------
390,271
------------
Net Unrealized Appreciation on Forward Foreign Currency Exchange Contracts $350,813
============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 13
- -----------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months
Ended
January 31, Year Ended July 31,
1996 1995 1994(c) 1993 1992 1991
=======================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
period $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.28 0.64 0.61 0.69 0.78 0.89
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.01 (0.45) (0.44) 0.89 0.89 (1.01)
- -------------------------------------------------------------------------------------------------------
Total from investment operations 0.29 0.19 0.17 1.58 1.67 (0.12)
- -------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.29) (0.60) (0.61) (0.72) (0.75) (0.89)
In excess of investment income 0 (0.03) (0.03) (0.02) 0 (0.06)
Tax basis return of capital 0 (0.02) (0.04) 0 0 0
- -------------------------------------------------------------------------------------------------------
Total distributions (0.29) (0.65) (0.68) (0.74) (0.75) (0.95)
- -------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.89 $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10
=======================================================================================================
Total return(a) 4.37% 3.00% 1.86% 24.13% 28.73% 0.54%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.30%(b)(d) 1.33% 1.32% 1.80% 2.09% 2.00%
Total expenses excluding
reimbursement 1.30%(b) 1.33% 1.32% 1.80% 2.12% 2.25%
Net investment income 8.23%(b) 9.31% 7.79% 9.50% 11.73% 15.23%
Portfolio turnover rate 57% 95% 92% 151% 95% 82%
- -------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $78,723 $85,970 $105,181 $85,793 $70,459 $70,246
=======================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
(d) "Ratio of total expenses to average net assets" for the six months ended
January 31, 1996 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 1.29%.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- -----------------------------------------------
Keystone Strategic Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months February 1, 1993
Ended (Date of Initial
January 31, Year Ended July 31, Public Offering)
1996 1995 1994(c) to July 31, 1993
=================================================================================================================
<S> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $ 6.92 $ 7.38 $ 7.89 $ 7.07
- -----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.26 0.60 0.55 0.24
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
forward foreign currency related
transactions 0.02 (0.47) (0.44) 0.92
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.28 0.13 0.11 1.16
- -----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital 0 (0.01) (0.04) 0
- -----------------------------------------------------------------------------------------------------------------
Total distributions (0.27) (0.59) (0.62) (0.34)
- -----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.93 $ 6.92 $ 7.38 $ 7.89
=================================================================================================================
Total return(a) 4.13% 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.07%(b)(d) 2.06% 2.07% 2.37%(b)
Net investment income 7.46%(b) 8.58% 7.11% 7.18%(b)
Portfolio turnover rate 57% 95% 92% 151%
- -----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $142,191 $149,091 $162,866 $35,415
=================================================================================================================
</TABLE>
(a) Excluding applicable sales charges
(b) Annualized.
(c) Calculation based on average shares outstanding.
(d) "Ratio of total expenses to average net assets" for the six months ended
January 31, 1996 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 2.06%.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- -----------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months February 1, 1993
Ended (Date of Initial
January 31, Year Ended July 31, Public Offering)
1996 1995 1994(c) to July 31, 1993
===================================================================================================================
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 6.92 $ 7.37 $ 7.88 $ 7.07
===================================================================================================================
Income from investment operations:
Net investment income 0.26 0.59 0.55 0.24
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
forward foreign currency related transactions 0.01 (0.45) (0.44) 0.91
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.27 0.14 0.11 1.15
- -----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital 0 (0.01) (0.04) 0
- -----------------------------------------------------------------------------------------------------------------
Total distributions (0.27) (0.59) (0.62) (0.34)
- -----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.92 $ 6.92 $ 7.37 $ 7.88
===================================================================================================================
Total return(a) 3.99% 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.07%(b)(d) 2.08% 2.07% 2.25%(b)
Net investment income 7.46%(b) 8.56% 7.09% 7.35%(b)
Portfolio turnover rate 57% 95% 92% 151%
- -----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $38,536 $46,221 $59,228 $19,706
===================================================================================================================
</TABLE>
(a) Excluding applicable sales charges
(b) Annualized.
(c) Calculation based on average shares outstanding.
(d) "Ratio of total expenses to average net assets" for the six months ended
January 31, 1996 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 2.06%.
See Notes to Financial Statements.
<PAGE>
PAGE 16
- -----------------------------------------------
Keystone Strategic Income Fund
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
=====================================================================================
<S> <C>
Assets (Note 1)
Investments at market value (identified
cost--$256,840,448) $253,613,123
Cash 468,091
Receivable for:
Investments sold 5,307,090
Fund shares sold 222,720
Interest 6,080,323
Net unrealized appreciation on forward foreign currency exchange
contracts 350,813
Other assets 164,153
- -------------------------------------------------------------------------------------
Total assets 266,206,313
- -------------------------------------------------------------------------------------
Liabilities (Notes 1 and 4)
Payable for:
Investments purchased 2,163,238
Reverse repurchase agreement 3,011,901
Fund shares redeemed 619,711
Income distribution 805,196
Due to related parties 50,440
Other accrued expenses 105,818
- -------------------------------------------------------------------------------------
Total liabilities 6,756,304
- -------------------------------------------------------------------------------------
Net assets $259,450,009
=====================================================================================
Net assets represented by (Note 1)
Paid-in capital $330,833,971
Accumulated distributions in excess of net investment income (1,360,778)
Accumulated net realized loss on investments, closed futures
contracts and forward foreign currency related transactions. (67,117,015)
Net unrealized depreciation on investments, forward foreign
currency exchange contracts and related transactions (2,906,169)
- -------------------------------------------------------------------------------------
Total net assets $259,450,009
=====================================================================================
Net Asset Value Per Share (Note 2)
Class A Shares
Net assets of $78,723,466/11,422,969 shares outstanding $6.89
Offering price per share ($6.89/0.9525)(based on a sales
charge of 4.75% of the offering price on January 31, 1996) $7.23
Class B Shares
Net assets of $142,190,947/20,526,554 shares outstanding $6.93
Class C Shares
Net assets of $38,535,596/5,569,341 shares outstanding $6.92
=====================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
=====================================================================================
<S> <C> <C>
Investment income (Note 1)
Interest $12,892,383
Other income 133,017
- -------------------------------------------------------------------------------------
13,025,400
- -------------------------------------------------------------------------------------
Expenses (Notes 2 and 4)
Management fee $ 887,311
Transfer agent fees 365,529
Accounting, auditing and legal fees 29,607
Custodian fees 95,251
Printing 13,594
Trustees' fees and expenses 16,363
Distribution Plan expenses 1,053,663
Registration fees 49,596
Miscellaneous 8,383
- -------------------------------------------------------------------------------------
Total expenses 2,519,297
Less: Expenses paid indirectly (Note 4) (20,633)
- -------------------------------------------------------------------------------------
Net expenses 2,498,664
- -------------------------------------------------------------------------------------
Net investment income 10,526,736
- -------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
forward foreign currency related transactions (Notes
1 and 3)
Net realized gain (loss) on:
Investments 1,046,269
Forward foreign currency related transactions (1,250,649)
- -------------------------------------------------------------------------------------
Net realized loss on investments and forward
foreign currency related transactions (204,380)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments (113,527)
Forward foreign currency related transactions 805,855
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation on
investments and forward foreign currency related
transactions 692,328
- -------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
forward foreign currency related transactions 487,948
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $11,014,684
=====================================================================================
</TABLE>
<PAGE>
PAGE 17
- -----------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
January 1, 1996 July 31, 1995
==========================================================================================================
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 10,526,736 $ 25,856,250
Net realized loss on investments, closed futures contracts and
forward foreign currency related transactions (204,380) (38,021,996)
Net change in unrealized appreciation (depreciation) on investments
and forward foreign currency related transactions 692,328 17,203,692
- -----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 11,014,684 5,037,946
- -----------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (3,485,237) (8,015,693)
Class B Shares (5,727,826) (12,000,626)
Class C Shares (1,651,148) (3,983,775)
In excess of net investment income:
Class A Shares 0 (385,252)
Class B Shares 0 (576,777)
Class C Shares 0 (191,469)
Tax basis return of capital:
Class A Shares 0 (199,090)
Class B Shares 0 (298,065)
Class C Shares 0 (98,947)
- -----------------------------------------------------------------------------------------------------------
Total distributions to shareholders (10,864,211) (25,749,694)
- -----------------------------------------------------------------------------------------------------------
Net decrease in capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 2,771,970 10,254,533
Class B Shares 11,313,171 34,092,723
Class C Shares 1,856,500 12,856,402
Payment for shares redeemed:
Class A Shares (11,873,826) (27,229,543)
Class B Shares (21,206,921) (44,185,075)
Class C Shares (10,598,176) (24,956,159)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 1,796,821 4,322,219
Class B Shares 2,914,604 6,821,317
Class C Shares 1,043,253 2,742,673
- -----------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share
transactions (21,982,604) (25,280,910)
- -----------------------------------------------------------------------------------------------------------
Total decrease in net assets (21,832,131) (45,992,658)
- -----------------------------------------------------------------------------------------------------------
Net assets
Beginning of period 281,282,140 327,274,798
- -----------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of net
investment income as follows: 1996--($1,360,778) and
1995--($1,023,303)](Note 1) $259,450,009 $281,282,140
==========================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
- -----------------------------------------------
Keystone Strategic Income fund
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Strategic Income Fund (formerly Keystone America Strategic Income
Fund) (the "Fund") was formed as a Massachusetts business trust on October
24, 1986, and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a diversified open-end management investment
company. 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 had no operations
prior to February 13, 1987. The Fund seeks generous income from high yield,
foreign and U.S. Government or agency obligations.
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 are available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company (formerly Keystone Distributors,
Inc.)("KDIC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.)("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting predominately of members of
current and former management of Keystone and its affiliates. KMI is a
wholly-owned subsidiary of Keystone.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
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.
<PAGE>
PAGE 19
- -----------------------------------------------
B. 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.
C. 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
custodian containing liquid assets 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 or limited.
D. The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of
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.
E. The Fund may enter into forward foreign currency exchange 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 the forward rate and are marked-to-market daily. Realized gains
and losses arising from such transactions are included in net realized gain
(loss) on foreign
<PAGE>
PAGE 20
- -----------------------------------------------
Keystone Strategic Income fund
currency related transactions. The Fund is subject to the credit risk that
the other party will not complete the obligations of the contract.
F. 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.
G. 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 (the
"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.
H. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income and net capital
gains 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.
(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:
Six Months
Ended Year Ended
January 31, 1996 July 31, 1995
- ------------------------------------------------------------
Class A Shares
- --------------
Shares sold 402,208 1,476,748
Shares redeemed (1,724,419) (3,933,229)
Shares issued in
reinvestment of
dividends and
distributions 262,186 630,245
- ------------------------------------------------------------
Net decrease (1,060,025) (1,826,236)
- ------------------------------------------------------------
Class B Shares
- --------------
Shares sold 1,635,578 4,868,980
Shares redeemed (3,065,411) (6,393,919)
Shares issued in
reinvestment of
dividends and
distributions 423,131 989,682
- ------------------------------------------------------------
Net decrease (1,006,702) (535,257)
- ------------------------------------------------------------
Class C Shares
- --------------
Shares sold 268,402 1,847,558
Shares redeemed (1,533,838) (3,594,976)
Shares issued in
reinvestment of
dividends and
distributions 151,635 397,992
- ------------------------------------------------------------
Net decrease (1,113,801) (1,349,426)
- ------------------------------------------------------------
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares
pursuant to Rule 12b-1 under the 1940 Act.
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 for the distribution of Class A shares.
<PAGE>
PAGE 21
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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 daily net asset value of Class A shares maintained by
the such others.
The Class B Distribution Plans provide for payment at an annual rate of up
to 1.00% of the average daily net asset value of Class B shares to pay
expenses for the distribution of Class B shares. For Class B shares sold on
or after June 1, 1995, amounts paid by the Fund under the Class B
Distribution Plan are currently used to pay others (such as dealers) a
commission at the time of purchase normally equal to 4.00% of the price paid
for each Class B share sold plus the first year's service fee in advance in
the amount of 0.25% of the price paid for each Class B share sold. Beginning
approximately 12 months after the purchase of such Class B shares, 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. A contingent deferred sales charge will be imposed, if applicable, on
Class B shares purchased on or after June 1, 1995 at rates ranging from a
maximum of 5.00% of amounts redeemed during the first twelve month period of
purchase to 1.00% of amounts redeemed during the sixth twelve month period.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares without a front end sales charge or exchange fee.
Class B shares purchased prior to June 1, 1995 will retain their existing
conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others (such as
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 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 rules adopted by the National Association of
Securities Dealers, Inc. ("NASD")) plus service fees at an annual rate of
0.25%, respectively, of the average daily net asset value of Class C shares
sold by such others.
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, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
During the six months ended January 31, 1996, the Fund paid or accrued to
KIDC $96,124 under its Class A Distribution Plan. During the six months ended
January 31, 1996, the Fund paid or accrued to KIDC $650,776 for shares sold
prior to June 1, 1995 and $90,614 for Class B shares sold on or after June 1,
1995. During the six months ended January 31, 1996, the Fund paid or accrued
$216,149 under its Class C Distribution.
Under applicable NASD rules, the maximum uncollected amounts for which KIDC
may seek payment from the Fund under its Class B Distribution Plans at
January 31, 1996 are $10,305,787 for shares purchased prior to June 1, 1995
and $750,870 for shares purchased on or after June 1, 1995. The maximum
uncollected amounts for which KIDC may seek
<PAGE>
PAGE 22
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Keystone Strategic Income fund
payment from the Fund under its Class C Distribution Plan is $4,609,728 as of
January 31, 1996.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares pursuant to its respective
Distribution Plan.
(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.
Cost of purchases and proceeds from sales of investment securities,
excluding short-term securities, during the six months ended January 31, 1996
were $149,095,944 and $173,283,732, respectively.
The average daily balance of reverse repurchase agreements outstanding
during the six months ended January 31, 1996 was approximately $1,416,740, or
$0.04 per share based on average shares outstanding during the six months at
a weighted average interest rate of 5.72%. The maximum amount of borrowing
during the six month period was $3,011,900 (including accrued interest), at a
weighted average interest rate of 5.58% (1.16% of total net assets).
(4.) Investment Management Agreement and other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and payable daily 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 to 0.25% as
the net assets increase, to the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone, under
which Keystone provides investment advisory and management services to the
Fund and receives for its services an annual fee representing 85% of the
management fee received by KMI.
During the six months ended January 31, 1996, the Fund paid or accrued
investment management and administrative services fees of $887,311, which
represented 0.64% of the Fund's average net assets on an annualized basis. Of
such amount paid to KMI, $754,214 was paid to Keystone for its services to
the Fund.
Keystone Investors Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, serves as the Fund's transfer and dividend disbursing agent.
During the six months ended January 31, 1996 the Fund paid or accrued to KIRC
$365,529.
During the six months ended January 31, 1996, the Fund paid or accrued to
KII $10,373 for certain accounting services.
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended January 31, 1996, the Fund paid custody fees in the
amount of $74,618 and received a credit of $20,633 purusant to the expense
offset arrrangement, resulting in a total expense of $95,251. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees received
no compensation directly from the Fund.
(5.) 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 by March 6, 1996
to shareholders of record February 23, 1996. These distributions are not
reflected in the accompanying financial statements.
<PAGE>
PAGE 23
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Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)-- Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<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
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the
Fund's shareholders. It is authorized for distribution if
preceded or accompanied by the Fund's current prospectus. The
prospectus contains important information about the Fund
including fees and expenses. Read it carefully before you
invest or send money. For a free prospectus on other Keystone
funds, contact your financial adviser or call Keystone.
[Keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
SIF-SAR-3/96
18.1M [Recycle logo]
K E Y S T O N E
STRATEGIC
INCOME FUND
[Keystone logo]
SEMIANNUAL REPORT
JANUARY 31, 1996
