KEYSTONE AMERICA
FAMILY OF FUNDS
(diamond)
Balanced Fund II
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources & Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
World Bond Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
[Evergreen Keystone
FUNDS
Logo]
P.O. Box 2121
Boston, Massachusetts 02106-2121
SIF-R-3/97
17.8M Recycle logo
K E Y S T O N E
[photo of sail boat]
STRATEGIC
INCOME FUND
[Evergreen Keystone
FUNDS
Logo]
SEMIANNUAL REPORT
JANUARY 31, 1997
<PAGE>
PAGE 1
- ------------------------------
Keystone Strategic Income Fund
Seeks generous income from high yield,
foreign and U.S. government or agency obligations.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Strategic
Income Fund for the six-month period which ended January 31, 1997.
Performance:
For the periods which ended January 31, 1997, your Fund produced the
following investment results:
Class A shares returned 7.34% for the six month period and 9.87% for the
twelve-month period.
Class B shares returned 6.78% for the six month period and 8.91% for the
twelve-month period.
Class C shares returned 6.79% for the six month period and 8.92% for the
twelve-month period.
During the same time span, the average total returns of the benchmark
indexes representing the three asset classes in which your Fund invests were
4.40% for the six months and 5.10% for the 12 months.1 The benchmark indexes
include the Lehman Aggregate Bond Index, the Salomon World Government Bond
Index and the Merrill Lynch High Yield Index.
We were pleased with your Fund's progress during this six-month period. We
believe two important objectives were achieved. First, the Fund outperformed
the average return of its index benchmarks. Second, the Fund's price
stability was improved, despite volatility in the overall market.
New strategies worked as designed
We think the long-term strategies implemented during the past fiscal year
were successful. Our primary objective was to increase the quality and
liquidity of your Fund's holdings to lay the foundation for stronger and more
consistent performance. To that end, we focused on the high-yield portion of
the portfolio. We increased the number of high-yield securities to broaden
diversification and upgraded the quality of large holdings. At the end of
January 1997, we moved 10% of total net assets out of the international
portion and invested the assets equally in U.S. high-yield bonds and U.S.
Treasuries. This decision was motivated by our concern that the high-yielding
European bonds of Italy, Sweden and Spain, which had outperformed our
expectations in 1996, were vulnerable to investors' doubts about the
successful debut of European Monetary Union.
Favorable market environment
Throughout the six-month period, about 65% of the portfolio was invested in
two asset classes that were performance leaders: foreign bonds and U.S.
high-yield bonds. In the foreign arena, your Fund targeted Brazil, Argentina
and Mexico in Latin America, and the so called "high-yield" countries of
Denmark, Sweden and Italy in Europe. These positions offered significant
yield advantage over comparable U.S. issues, while also generating attractive
price appreciation. Your Fund took profits from these "high-yield" European
holdings after the close of the fiscal year, and began shifting assets to the
high-grade industrialized countries, such as Germany, the United Kingdom and
Canada.
- ------------
1 The Lehman Aggregate Bond Index--a broad index of U.S. corporate,
government and mortgage securities--returned 4.94% for the six months and
3.25% for the 12 months which ended on January 31, 1997. The total returns
of the Salomon World Government Bond Index--a U.S. dollar index of foreign
government bonds--were 0.44% for the six months and 2.12% for the 12
months. The Merrill Lynch High Yield Index returned 7.82% and 9.92% for the
same six- and twelve-month periods.
-continued-
<PAGE>
PAGE 2
- ------------------------------
Keystone Strategic Income Fund
The U.S. portion of the portfolio benefited from its high-yield holdings.
High-yield bonds were the bright spot in the generally lackluster bond market
during 1996. The stronger-than-expected economic growth, which hurt
investment-grade corporate bonds and Treasuries, had a positive impact on the
ability of the issuers of high-yield bonds to pay their debt. Bond investors,
hungry for higher yields, flocked to the high-yield issues. The brisk demand
drove the prices up and the yields, which move in the opposite direction,
lower. Although the average difference in yield between high-yield bonds and
Treasuries had narrowed during the year, we think the spread, which was 3.42
percentage points on December 26, 1996,2 was still high enough to adequately
compensate the investors for the additional risk.
Strategic diversification benefited the Fund
Your Fund's asset allocation performed exactly as it was designed to do
during the six months. Individually, each of the asset classes in the
portfolio--the foreign bonds, the U.S. government and agency securities, and
the high-yield securities--reflected the market forces of its own class.
Together, they produced an attractive total return for the 12-month period
which ended January 31, 1997, with less volatility than each class would be
likely to generate alone. The Fund's asset allocation remained largely
unchanged since our last report in July 1996. At the close of this reporting
period, 40.4% of net assets was invested in foreign bonds; 29.1% in
mortgage-backed securities and U.S. government issues; 24.7% in high-yield
securities; and 5.8% in other assets and liabilities.
Prescott B. Crocker to take over the Fund's management
We are pleased to inform you that Senior Vice President and group leader of
the High Yield Bond Team Prescott B. Crocker took the Fund's helm effective
March 1, 1997. Richard Cryan, who successfully restructured the portfolio and
strengthened the Fund's performance during the past fiscal year, is moving on
to manage Evergreen Keystone's institutional assets.
The new portfolio manager brings more than 25 years' experience and an
impressive track record managing fixed-income assets of high yield and
strategic portfolios. More information about Mr. Crocker and a brief
interview about his investment philosophy and outlook follows this letter.
Keystone acquired by First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired
by First Union Corporation. First Union, based in Charlotte, N.C., is the
nation's sixth largest bank holding company with assets of approximately $130
billion. Keystone Investment Management Company will continue to be the
investment adviser, responsible for managing your Fund's portfolio. First
Union also owns another mutual fund management company, Evergreen Asset
Management Corp. Together, Evergreen and Keystone oversee approximately $30
billion in assets. Some services will now be provided under the "Evergreen
Keystone Funds" umbrella.
- -----------
2 Source: The Merrill Lynch Master II Index.
-continued-
<PAGE>
PAGE 3
- ------------------------------
We believe the partnership between Evergreen and Keystone will strengthen our
ability to offer you outstanding investment management services.
Thank you for your continued support of Keystone Strategic Income Fund. As
always, we welcome your questions and comments.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment
Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
March 1997
[Photo of Albert H. Elfner, III]
Albert H. Elfner, III
[Photo of George S. Bissell]
George S. Bissell
<PAGE>
PAGE
- ------------------------------
Keystone Strategic Income Fund
A Discussion With
Your Fund Manager
[Photo of Prescott Crocker]
Senior Vice President and head of the High Yield Bond Team
Prescott Crocker is portfolio manager of Keystone High Income
Bond Fund. A Chartered Financial Analyst, Mr. Crocker
has 25 years of senior-level investment experience. He is a
graduate of Harvard College and holds an M.B.A. in
international finance from Harvard Business School.
Q How would you describe your investment style and philosophy?
A I started my career in the financial industry as a banker. In that
environment I looked at companies not as a buyer but rather a lender. Having
come from that broader perspective, as a high yield manager, I always try to
understand how I am going to get my money back.
I value working with a team. I interact with the people by asking them the
"what ifs" of the future in their areas. What can happen in the future to
affect this credit? To what extent is the market understanding or even
perceiving these possibilities?
Q What are the key factors in your selection process?
A There are three elements that we consider of greatest value in selecting
securities. The first is the quality of the management. We believe the most
reliable indication of the management's commitment to the business is a high
equity stake in the company. The degree of the management's experience and
understanding of the business is also an important factor.
The second element of key importance in our analysis is the value of assets.
We closely follow stock valuations, so that when we analyze the quality and
the future potential of the issuers under consideration, we can derive our
own assessment of the level of risk in that debt. This process is similar to
that of a bank evaluating the value of a house in order to determine the
extent of the loan. If the loan is perceived to be risky, the amount of the
loan will be lower than it would be for a higher-quality loan.
The third element is cashflow. We try to be forward looking, to have an
understanding of how margins might change and how cashflows might develop.
Consequently, we generally invest in companies that have tangible assets and
real cashflows rather than in start-up companies.
- --------------------------------------------------------------------------------
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: $208 million
Newspaper listing: "StrInc"
- --------------------------------------------------------------------------------
<PAGE>
PAGE 5
- ------------------------------
Q What factors drive your asset allocation decisions?
A It's always a tradeoff between the need for broad diversification and the
expectations for return. We will never be less than 20% represented in any of
our three asset categories, which are U.S. high yield securities, U.S.
government obligations and foreign bonds. This is to ensure that we get the
benefits of diversification if any one of these very distinct markets
underperforms. However, we try to overweight those asset classes that we
think can offer the best risk-adjusted returns going forward. For instance
last year, we were overweighted in high-yield and emerging-market debt, as
well as the high-yielding bonds in Europe. That was a good call for the Fund,
because those asset classes turned out to be market leaders.
Q Do you intend to use a team of managers for the Fund's three asset
classes or will you manage the Fund alone?
A There is a great resource of expertise in the international and high-grade
fixed-income departments at Keystone. We will manage the Fund by drawing on
those resources and listening closely to the advice of these experts.
However, the overall management of the portfolio and the strategic decisions,
such as the investment allocations and portfolio weightings, is my
responsibility. As one of the founders of the strategic fund concept and a
manager of strategic funds since 1989, I am well prepared to manage that
responsibility.
Q What is your outlook for the U.S. fixed- income markets?
A We think the worldwide economy is characterized by excess capacity and low
price pressures, which are compounded by the weak Japanese and European
economies. That, combined with the strong U.S. dollar, is likely to keep
inflation subdued in the United States. We expect the U.S. economy will go
through brief periods of softness as well as strength, which will cause some
fluctuations in interest rates and prices of bonds. We see these fluctuations
as short-lived and relatively benign, given the strength of our economic and
corporate fundamentals. Beyond that, our country is becoming less of a
consumer and more of an asset saver, which makes it structurally less likely
that shortages of goods and services would occur. More likely we would see
shortages in investment opportunities which would lead to higher values of
securities.
What this means for the Fund is that we see very modest interest-rate
volatility and solid real returns above money market instruments.
Q What is your outlook for the foreign fixed- income markets?
A We've had impressive returns in Latin American bonds and the high-yielding
European bonds over the past two years. We continue to see real value in
those markets, although we think that volatility should be viewed as a
standard ingredient in the mix.
To illustrate what we view as real value, consider Argentina. It is a
BB-rated country but its government bonds yield 4 percentage points more than
U.S.
[Description of Pie Chart]
Asset Allocation
as of January 31, 1997
[graph]
U.S. Government and agency issues 29.1%
Common stocks and preferred stocks 1.2%
Other 4.6%
Foreign bonds (U.S.$) 16.3%
Foreign bonds (non-U.S.$) 24.1%
High yield corporate bonds (industrial bonds and notes) 24.7%
[end graph]
<PAGE>
PAGE 6
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Keystone Strategic Income Fund
Treasuries. In contrast BB-rated U.S. corporate bonds yield 1.7 percentage
points more that U.S. Treasuries. At the same time, if a BB-rated U.S.
corporate bond were to default on its debt, the International Monetary Fund
and the U.S. government would not come to the rescue, as they did when Mexico
devaluated its peso in 1994. So we believe there is real value in the
emerging-market sovereign debt. We also believe that given the policies of
growth, free enterprise and privatization in most Latin American countries,
the yield advantages of their bonds are going to narrow and their returns
will be better than the returns of U.S. high-yield bonds.
Emerging market corporate bonds are generally rated higher than most
American high yield corporate securities. The higher ratings point to less
potential risk, so it's reasonable to expect that this debt will be treated
well in the marketplace.
European economies are experiencing high levels of unemployment and very low
levels of inflation. The yields on European bonds haven't fully reflected the
low inflation and, as a result, have been offering the best real, or
inflation adjusted, rates of return of all the world's markets. A similar
situation exists in Canada, where inflation is virtually nonexistent and the
economy lags the U.S. economy. The Fund maintains positions in Canada as well
as in Germany, Denmark and the United Kingdom.
(diamond)
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 7
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Your Fund's Performance
[Description of Mountain Chart]
Growth of an investment in
Keystone Strategic Income Fund Class A
In Thousands
[graph]
4/87 9523.81 9523.81
8990.48 9593.42
1/89 8914.28 10678.2
7371.43 10047
1/91 4847.62 7756.32
6371.43 11729.6
1/93 6761.9 13888.4
7952.38 18073.5
1/95 6342.86 15747.5
6561.9 17835.1
1/97 6657.14 19599.2
[end graph]
Total Value: $19,599
A $10,000 investment in Keystone Strategic Income Fund Class A made on April 14,
1987 with all distributions reinvested was worth $19,599 on January 31, 1997.
Past performance is no guarantee of future results.
Six-Month Performance as of January 31, 1997
==================================================================
Class A Class B Class C
Total returns* 7.34% 6.78% 6.79%
Net asset value 7/31/96 $6.77 $6.81 $6.80
1/31/97 $6.99 $7.02 $7.01
Dividends $0.27 $0.25 $0.25
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of January 31, 1997
==================================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 9.87% 8.91% 8.92%
1-year 4.66% 4.91% 8.92%
5-year 59.13% -- --
Life of Class 95.99% 33.72% 36.55%
Average Annual Returns
1-year w/o sales charge 9.87% 8.91% 8.92%
1-year 4.66% 4.91% 8.92%
5-year 9.74% -- --
Life of Class 7.10% 7.54% 8.10%
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
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 for another Keystone fund by phone or in
writing. You may also exchange funds through Keystone's Automated Response
Line (KARL). The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 8
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Keystone Strategic Income Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 9
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Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
FIXED INCOME (94.2%)
INDUSTRIAL BONDS & NOTES (24.7%)
AEROSPACE (0.3%)
Airplanes Pass Thru Trust Bond (Subord.) 10.875% 2019 $ 500,000 $ 554,550
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING (2.9%)
Ackerly Communications,
Incorporated Sr. Notes 10.750 2003 775,000 821,500
EZ Communications,
Incorporated Sr. Notes (Subord.) 9.750 2005 1,000,000 1,035,000
K-III Communications
Corporation (e) Sr. Notes 8.500 2006 750,000 738,750
Park Broadcasting,
Incorporated (e) Sr. Notes 11.750 2004 263,000 318,230
Paxson Communications
Corporation Sr. Notes (Subord.) 11.625 2002 1,000,000 1,050,000
SFX Broadcasting, Incorporated
(e) Sr. Notes (Subord.) 10.750 2006 1,000,000 1,060,000
Sinclair Broadcast Group,
Incorporated Sr. Notes (Subord.) 10.000 2005 1,000,000 1,025,000
- ----------------------------------------------------------------------------------------------------------------
6,048,480
- ----------------------------------------------------------------------------------------------------------------
CABLE/OTHER VIDEO DISTRIBUTION (3.8%)
Adelphia Communications
Corporation Sr. Notes 12.500 2002 500,000 512,500
Cablevision Systems
Corporation Sr. Deb. (Subord.) 9.875 2013 425,000 416,500
Cablevision Systems
Corporation Sr. Deb. (Subord.) 10.500 2016 575,000 592,250
Comcast Corporation Sr. Deb. (Subord.) 10.625 2012 500,000 552,500
Diamond Cable Communications
Company
(Eff. Yield 11.09%)(d) Sr. Disc. Notes 0.000 2005 2,000,000 1,410,000
Frontiervision Sr. Notes (Subord.) 11.000 2006 250,000 257,500
Fundy Cable Limited Sr. Notes 11.000 2005 1,000,000 1,060,000
Rogers Cablesystems Limited Sr. Notes 10.000 2005 1,000,000 1,055,000
Telewest Communications PLC
(Eff. Yield 9.07%)(d) Sr. Disc. Deb. 0.000 2007 650,000 445,250
Videotron Holdings, PLC (Eff.
Yield 11.00%)(d) Sr. Disc. Notes 0.000 2005 2,000,000 1,580,000
- ----------------------------------------------------------------------------------------------------------------
7,881,500
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS (1.4%)
Astor Corporation (e) Sr. Notes (Subord.) 10.500 2006 750,000 781,875
Freedom Chemicals,
Incorporated (e) Sr. Notes (Subord.) 10.625 2006 750,000 793,125
NL Industries, Incorporated Sr. Notes 11.750 2003 535,000 564,425
Rexene Corporation Sr. Notes 11.750 2004 675,000 757,688
- ----------------------------------------------------------------------------------------------------------------
2,897,113
- ----------------------------------------------------------------------------------------------------------------
CONSUMER (1.0%)
Exide Corporation Sr. Notes 10.000 2005 1,000,000 1,033,750
Harvard Industries,
Incorporated Sr. Notes 11.125 2005 550,000 418,000
International Semi-Tech
Electronics, Incorporated
(Eff. Yield 11.98%)(d) Sr. Disc. Notes 0.000 2003 1,025,000 604,750
- ----------------------------------------------------------------------------------------------------------------
2,056,500
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<PAGE>
PAGE 10
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Keystone Strategic Income Fund
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
DIVERSIFIED MEDIA (0.9%)
Cinemark USA, Incorporated Sr. Notes (Subord.) 9.625% 2008 $ 500,000 $ 508,750
Lamar Advertising Company Sr. Secd. Notes 9.625 2006 450,000 460,125
Lifestyle Brands Gtd. Deb. (Subord.) 10.000 1997 350,000 350,000
Deb. (Subord.)
Viacom, Incorporated Exchangeable 8.000 2006 500,000 485,000
- ----------------------------------------------------------------------------------------------------------------
1,803,875
- ----------------------------------------------------------------------------------------------------------------
ENERGY (2.9%)
Clark USA, Incorporated Sr. Notes 10.875 2005 1,000,000 1,010,000
Ferrellgas Partners Limited
Partnership (e) Sr. Notes 9.375 2006 775,000 783,719
HS Resources, Incorporated
(b)(e) Sr. Notes (Subord.) 9.250 2006 450,000 459,000
Nuevo Energy Company Sr. Notes (Subord.) 9.500 2006 1,000,000 1,055,000
Parker Drilling Corporation
(b)(e) Gtd. Deb. 9.750 2006 1,000,000 1,055,000
Plains Resources, Incorporated
(e) Sr. Notes (Subord.) 10.250 2006 500,000 540,000
TransTexas Gas Corporation Sr. Notes 11.500 2002 500,000 548,750
Vintage Petroleum,
Incorporated Sr. Notes (Subord.) 9.000 2005 500,000 513,750
- ----------------------------------------------------------------------------------------------------------------
5,965,219
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL (0.5%)
Reliance Group Holdings,
Incorporated Sr. Deb. (Subord.) 9.750 2003 1,000,000 1,050,000
- ----------------------------------------------------------------------------------------------------------------
FOODS/TOBACCO/BEVERAGES (1.6%)
Chiquita Brands International,
Incorporated Sr. Notes 10.250 2006 500,000 525,000
Iowa Select Farms
(8/2/94-$2,243,310)
(Eff. Yield 16.62%)(b)(d) Sr. Disc. Notes 0.000 2004 4,336,000 2,793,685
- ----------------------------------------------------------------------------------------------------------------
3,318,685
- ----------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS/CONTAINERS (2.8%)
Buckeye Cellulose Corporation Sr. Notes (Subord.) 8.500 2005 1,000,000 1,005,000
Container Corporation of
America Sr. Notes 11.250 2004 1,000,000 1,090,000
Four M Corporation (e) Sr. Notes 12.000 2006 375,000 393,750
Owens-Illinois, Incorporated Sr. Notes (Subord.) 10.500 2002 934,000 987,705
Printpack, Incorporated (b)(e) Sr. Notes (Subord.) 10.625 2006 350,000 367,500
Rainy River Forest Products,
Incorporated Sr. Notes 10.750 2001 1,000,000 1,082,500
Tembec Finance Corporation Sr. Notes 9.875 2005 1,000,000 952,500
- ----------------------------------------------------------------------------------------------------------------
5,878,955
- ----------------------------------------------------------------------------------------------------------------
GAMING (2.2%)
Casino America, Incorporated Sr. Notes 12.500 2003 1,000,000 985,000
Grand Palais Casino,
Incorporated (8/15/94-
$2,488,391)(a)(b)(c) Sr. Secd. PIK Notes 18.250 1997 2,488,391 25
Lodgenet Entertainment
Corporation (e)(b) Sr. Notes 10.250 2006 1,000,000 998,750
Prime Hospitality Corporation 1st Mtge. Notes 9.250 2006 500,000 505,000
</TABLE>
<PAGE>
PAGE 11
- ------------------------------
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
GAMING (CONTINUED)
Showboat, Incorporated Sr. Notes (Subord.) 13.000% 2009 $ 1,000,000 $ 1,147,500
Starcraft Corporation
(a)(b)(c) Notes (Subord.) 16.500 1998 750,000 15,000
Trump Atlantic City Associates 1st Mtge. Notes 11.250 2006 1,000,000 965,000
- ----------------------------------------------------------------------------------------------------------------
4,616,275
- ----------------------------------------------------------------------------------------------------------------
HOUSING (0.9%)
Continental Homes Holding
Corporation Sr. Notes 10.000 2006 1,000,000 1,032,500
Schuller International Group,
Incorporated Sr. Notes 10.875 2004 750,000 828,750
- ----------------------------------------------------------------------------------------------------------------
1,861,250
- ----------------------------------------------------------------------------------------------------------------
METALS/MINERALS (0.5%)
Jorgensen Earle Sr. Notes 10.750 2000 1,000,000 1,015,000
- ----------------------------------------------------------------------------------------------------------------
RETAIL (1.2%)
Cole National Group,
Incorporated Sr. Notes 11.250 2001 800,000 884,000
Finlay Fine Jewelry
Corporation Sr. Notes 10.625 2003 1,000,000 1,060,000
Michaels Stores, Incorporated Sr. Notes 10.875 2006 475,000 467,875
- ----------------------------------------------------------------------------------------------------------------
2,411,875
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.8%)
Dial Call Communications,
Incorporated
(Eff. Yield 11.24%)(d) Sr. Disc. Notes 0.000 2005 1,000,000 715,000
MFS Communications (Eff. Yield
8.87%)(d) Sr. Disc. Notes 0.000 2004 500,000 436,250
Teleport Communications Group Sr. Notes 9.875 2006 525,000 555,188
- ----------------------------------------------------------------------------------------------------------------
1,706,438
- ----------------------------------------------------------------------------------------------------------------
TRANSPORTATION (0.2%)
Eletson Holdings, Incorporated 1st Pfd. Mtge. Notes 9.250 2003 500,000 501,250
- ----------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS (0.8%)
Mobile Telecommunication
Technology Sr. Notes 13.500 2002 100,000 98,000
Rogers Cantel Sr. Deb. 9.375 2008 500,000 520,000
Vanguard Cellular Systems,
Incorporated Deb. 9.375 2006 1,000,000 1,007,500
- ----------------------------------------------------------------------------------------------------------------
1,625,500
- ----------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$51,973,075) 51,192,465
- ----------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (19.3%)
FHLMC Participation
Certificate Pool #607352 7.682 2022 7,809,335 8,166,847
FHLMC Participation
Certificate Pool #846298 7.190 2022 2,706,272 2,792,548
FNMA Grantor Trust 95-T5A 7.000 2035 1,211,607 1,178,288
FNMA Pool #322356 7.000 2025 4,465,438 4,370,547
FNMA Pool #324193 7.000 2025 5,933,684 5,807,593
GNMA Pool #354714 6.500 2023 10,123,066 9,718,143
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
- ------------------------------
Keystone Strategic Income Fund
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (CONTINUED)
GNMA Pool #780163 6.500% 2009 $ 8,188,857 $ 8,115,894
- ----------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $40,139,924) 40,149,860
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) (16.3%)
Argentina (Republic of) Deb. 11.375 2017 2,600,000 2,678,000
Argentina Global Deb. 11.000 2006 2,500,000 2,640,625
Comtel Brasileira (e) Notes 10.750 2004 5,500,000 5,768,125
Grupo Industrial Durango S.A. Notes 12.000 2001 2,500,000 2,700,000
Grupo Industrial Durango S.A. Notes 12.625 2003 400,000 442,000
Grupo Televisa S.A. Sr. Notes 11.875 2006 2,900,000 3,193,625
Indah Kiat International
Finance Co. Gtd. Sr. Secd. Notes 11.875 2002 3,000,000 3,210,000
Intermedia Capital Partners
(e) Sr. Notes 11.250 2006 500,000 527,500
Ispat Mexicana S.A. Sr. Unsecd. Deb. 10.375 2001 750,000 770,625
Klabin Fabricadora Papel Unsecd. Deb. 10.000 2001 5,000,000 5,062,500
Telefonica de Argentina Unsecd. Deb. 11.875 2004 6,000,000 6,862,500
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (COST--$31,571,261) 33,855,500
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (NON U.S. DOLLARS) (24.1%)
Denmark (Kingdom of) Deb. 8.000 2003 35,500,000 6,317,353
Danish Krone
Germany (Federal Republic of) Deb. 6.875 2005 9,400,000 6,216,481
Deutsche Mark
Italy (Republic of) Deb. 9.500 2006 13,250,000,000 9,411,183
Italian Lira
New Zealand Government Deb. 8.000 2001 9,500,000 6,714,807
New Zealand Dollar
Spain (Government of) Deb. 10.900 2003 870,000,000 7,824,001
Spanish Peseta
Sweden (Kingdom of) Deb. 10.250 2003 46,000,000 7,669,992
Swedish Krona
United Kingdom Treasury Govt. Gtd. 7.000 2001 3,710,000 5,916,692
Pound Sterling
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (COST--$48,616,270) 50,070,509
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT ISSUES (9.8%)
U.S. Treasury Bonds 7.875 2021 7,723,000 8,603,885
U.S. Treasury Bonds 6.500 2026 3,230,000 3,108,358
U.S. Treasury Notes 5.750 1998 350,000 349,069
U.S. Treasury Notes 6.125 1998 4,380,000 4,398,483
U.S. Treasury Notes 6.250 2000 500,000 501,250
U.S. Treasury Notes 6.125 2001 3,500,000 3,478,685
- ----------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT ISSUES (COST--$19,983,408) 20,439,730
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 13
- ------------------------------
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Market
Value
===============================================================================================
<S> <C> <C> <C> <C>
TOTAL FIXED INCOME (COST--$192,283,938) $195,708,064
- -----------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------
COMMON STOCKS/WARRANTS (0.6%)
Casino America, Incorporated (a) 104,514 290,680
Casino America, Incorporated, wts. (a) 19,582 196
Colorado Gaming and Entertainment Company (a) 170,042 765,189
Grand Palais Casinos, Inc., Series A,
wts.(8/15/94-$727)(a)(b)(c) 72,794 73
Grand Palais Casinos, Inc., Series B,
wts.(8/15/94-$397)(a)(b)(c) 39,706 40
Grand Palais Casinos, Inc., Series C,
wts.(8/15/94-$3,507)(a)(b)(c) 350,735 351
Grand Palais Casinos, Inc., Series D,
wts.(8/15/94-$-0-)(a)(b)(c) 160,136 160
Grand Palais Casinos, Inc., wts.(8/15/94-$57) (a)(b)(c) 87,342 87
Iowa Select Farms, wts. (2/4/94-$955,122) (a)(b) 117,800 117,800
Nextel Communications, Incorporated, wts. (a) 4,820 48
- -----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/WARRANTS (COST--$3,034,293) 1,174,624
===============================================================================================
PREFERRED STOCK (0.6%) (COST--$2,106,054)
Ampex Corp.(a)(b) 2,156 1,185,800
- -----------------------------------------------------------------------------------------------
Coupon Maturity Maturity
Rate Date Value
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.2%)
(COST--$4,655,000)
Keystone Joint Repurchase Agreement
(Investments in repurchase
agreements, in a joint trading
account, dated 1/31/97)(f) 5.580% 02/03/97 $4,657,165 4,655,000
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$202,079,285) 202,723,488
OTHER ASSETS AND LIABILITIES--NET (2.4%) 4,987,852
- -----------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $207,711,340
===============================================================================================
</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 available. 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 were no market quotations on
similar securities and the above securities were valued at acquisition
costs. At January 31, 1997, the fair value of these restricted securities
was $2,912,221 (1.40% of the Fund's net assets).
(c) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on these securities. At January 31,
1997, the face value of these securities was $15,736 (0.01% of the Fund's
net assets).
(d) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(e) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at January 31, 1997.
(continued on next page)
<PAGE>
PAGE 14
- ------------------------------
Keystone Strategic Income Fund
Schedule of Investments--January 31, 1997 (Unaudited)
Legend of Portfolio Abbreviations:
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
<TABLE>
<CAPTION>
Exchange U.S. Value at In Exchange Net Unrealized
Date January 31, 1997 for U.S.$ Appreciation
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
---------------------------------------------------
2/20/97 2,997,435 Deutsche Mark $1,834,685 2,005,000 $170,315
2/20/97 11,621,326 Danish Krone 1,863,303 2,023,000 159,697
3/13/97 7,414,942 New Zealand Dollar 5,093,352 5,139,000 45,648
4/28/97 3,710,000 Pound Sterling 5,933,873 6,027,006 93,133
----------------
Net Unrealized Appreciation on Forward Foreign Currency Exchange Contracts $468,793
================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended July 31,
Six Months Ended
January 31, 1997 1996 1995 1994(b) 1993 1992
==============================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
period $6.77 $6.89 $7.35 $7.86 $7.02 $6.10
- --------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.26 0.54 0.64 0.61 0.69 0.78
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.23 (0.09) (0.45) (0.44) 0.89 0.89
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 0.49 0.45 0.19 0.17 1.58 1.67
- --------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.52) (0.60) (0.61) (0.72) (0.75)
In excess of investment income 0 0 (0.03) (0.03) (0.02) 0
Tax basis return of capital 0 (0.05) (0.02) (0.04) 0 0
- --------------------------------------------------------------------------------------------------------------
Total distributions (0.27) (0.57) (0.65) (0.68) (0.74) (0.75)
- --------------------------------------------------------------------------------------------------------------
Net asset value end of period $6.99 $6.77 $6.89 $7.35 $7.86 $7.02
==============================================================================================================
Total return(a) 7.34% 6.84% 3.00% 1.86% 24.13% 28.73%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.30%(c)(d) 1.30%(c) 1.33% 1.32% 1.80% 2.09%
Total expenses excluding
reimbursement 1.30%(c)(d) 1.30%(c) 1.33% 1.32% 1.80% 2.12%
Net investment income 7.38%(d) 8.05% 9.31% 7.79% 9.50% 11.73%
Portfolio turnover rate 39% 101% 95% 92% 151% 95%
- --------------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $63,384 $68,118 $85,970 $105,181 $85,793 $70,459
==============================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 1.28% (annualized) for the six months ended January 31, 1997
and 1.28% for the year ended July 31, 1996.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ------------------------------
Keystone Strategic Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Six Months Ended Year Ended July 31, Public Offering)
January 31, 1997 1996 1995 1994(b) to July 31, 1993
=========================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
period $6.81 $6.92 $7.38 $7.89 $7.07
- ---------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.24 0.50 0.60 0.55 0.24
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.22 (0.09) (0.47) (0.44) 0.92
- ---------------------------------------------------------------------------------------------------------
Total from investment operations 0.46 0.41 0.13 0.11 1.16
- ---------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) (0.47) (0.55) (0.55) (0.24)
In excess of net investment
income 0 0 (0.03) (0.03) (0.10)
Tax basis return of capital 0 (0.05) (0.01) (0.04) 0
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.52) (0.59) (0.62) (0.34)
- ---------------------------------------------------------------------------------------------------------
Net asset value end of period $7.02 $6.81 $6.92 $7.38 $7.89
=========================================================================================================
Total return(a) 6.78% 6.21% 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.06%(c)(d) 2.07%(c) 2.06% 2.07% 2.37%(d)
Net investment income 6.62%(d) 7.28% 8.58% 7.11% 7.18%(d)
Portfolio turnover rate 39% 101% 95% 92% 151%
- ---------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $116,861 $123,389 $149,091 $162,866 $35,415
=========================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 2.05% (annualized) for the six months ended January 31, 1997
and 2.05% for the year ended July 31, 1996.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Six Months Ended Year Ended July 31, Public Offering)
January 31, 1997 1996 1995 1994(b) to July 31, 1993
=========================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
period $6.80 $6.92 $7.37 $7.88 $7.07
- ---------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.23 0.49 0.59 0.55 0.24
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.23 (0.09) (0.45) (0.44) 0.91
- ---------------------------------------------------------------------------------------------------------
Total from investment operations 0.46 0.40 0.14 0.11 1.15
- ---------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) (0.47) (0.55) (0.55) (0.24)
In excess of net investment
income 0 0 (0.03) (0.03) (0.10)
Tax basis return of capital 0 (0.05) (0.01) (0.04) 0
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.52) (0.59) (0.62) (0.34)
- ---------------------------------------------------------------------------------------------------------
Net asset value end of period $7.01 $6.80 $6.92 $7.37 $7.88
=========================================================================================================
Total return(a) 6.79% 6.07% 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.06%(c)(d) 2.07%(c) 2.08% 2.07% 2.25%(d)
Net investment income 6.62%(d) 7.29% 8.56% 7.09% 7.35%(d)
Portfolio turnover rate 39% 101% 95% 92% 151%
- ---------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $27,466 $31,816 $46,221 $59,228 $19,706
=========================================================================================================
</TABLE>
(a) Excluding applicable sales charges
(b) Calculation based on average shares outstanding.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 2.05% (annualized) for the six months ended January 31, 1997
and 2.05% for the year ended July 31, 1996.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ------------------------------
Keystone Strategic Income Fund
FINANCIAL HIGHLIGHTS--CLASS Y SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
January 2, 1997
(Date of Initial
Public Offering)
to January 31, 1997
- -------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Net asset value beginning of period $ 7.03
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.00
Net realized and unrealized loss on investments and foreign currency related
transactions (0.03)
- -------------------------------------------------------------------------------------------------------
Total from investment operations (0.03)
- -------------------------------------------------------------------------------------------------------
Distributions from net investment income (0.05)
- -------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.95
=======================================================================================================
Total return(a) 0.00%
Ratios/supplemental data
Ratios to average net assets (annualized)
Total expenses --
Net investment income --
Portfolio turnover rate 39%
- -------------------------------------------------------------------------------------------------------
Net assets end of period $ 7
=======================================================================================================
</TABLE>
(a) Excluding applicable sales charges
See Notes to Financial Statements.
<PAGE>
PAGE 19
- ------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997 (Unaudited)
Assets (Note 2)
Investments at market value
(identified cost--$202,079,285) $202,723,488
Receivable for:
Investments sold 247,624
Fund shares sold 937,354
Interest 4,840,604
Net unrealized appreciation on forward foreign currency
exchange contracts 468,793
Prepaid expenses and other assets 48,100
- ------------------------------------------------------------------------
Total assets 209,265,963
- ------------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5)
Payable for:
Fund shares redeemed 702,122
Distributions to shareholders 588,038
Distribution fee payable 113,175
Due to related parties 17,751
Other accrued expenses 133,537
- ------------------------------------------------------------------------
Total liabilities 1,554,623
- ------------------------------------------------------------------------
Net assets $207,711,340
========================================================================
Net assets represented by
Paid-in capital $275,046,381
Accumulated distributions in excess of net investment
income (1,428,141)
Accumulated net realized loss on investments, closed
futures contracts and forward foreign currency
related transactions (66,895,983)
Net unrealized appreciation on investments, forward
foreign currency exchange contracts and related
transactions 989,083
- ------------------------------------------------------------------------
Total net assets $207,711,340
========================================================================
Net Asset Value Per Share (Note 2)
Class A Shares
Net assets of $63,384,114 / 9,073,720 shares
outstanding $ 6.99
Offering price per share ($6.99 / 0.9525)
(based on a sales charge of 4.75% of the offering
price on January 31, 1997) $ 7.34
Class B Shares
Net assets of $116,861,219 / 16,650,892 shares
outstanding $ 7.02
Class C Shares
Net assets of $27,466,000 / 3,918,336 shares
outstanding $ 7.01
Class Y Shares
Net assets of $7 / 1.007 shares outstanding $ 6.95
========================================================================
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1997 (Unaudited)
Investment income
Interest (net of foreign withholding
taxes of $53,306) $ 9,581,565
Other income 23,475
- -------------------------------------------------------------------
9,605,040
- -------------------------------------------------------------------
Expenses (Notes 4, 5 and 6)
Management fee $ 709,713
Distribution Plan expenses 848,831
Transfer agent fees 294,152
Custodian fees 80,188
Accounting, auditing and legal fees 32,684
Trustees' fees and expenses 18,011
Other 43,870
- -------------------------------------------------------------------
Total expenses 2,027,449
Less: Expenses paid indirectly (13,510)
- -------------------------------------------------------------------
Net expenses 2,013,939
- -------------------------------------------------------------------
Net investment income 7,591,101
- -------------------------------------------------------------------
Net realized and unrealized gain on
investments and forward foreign
currency related transactions
(Note 3)
Net realized gain on:
Investments 2,468,026
Forward foreign currency related
transactions 336,763
- -------------------------------------------------------------------
Net realized gain on investments and
forward foreign currency related
transactions 2,804,789
- -------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on:
Investments 3,806,178
Forward foreign currency related
transactions 534,157
- -------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments and
forward foreign currency related
transactions 4,340,335
- -------------------------------------------------------------------
Net realized and unrealized gain on
investments and forward foreign
currency related transactions 7,145,124
- -------------------------------------------------------------------
Net increase in net assets resulting
from operations $14,736,225
===================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 20
- ------------------------------
Keystone Strategic Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
=======================================================================================================
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 7,591,101 $ 19,336,690
Net realized gain (loss) on investments and foreign currency
related transactions 2,804,789 (3,931,838)
Net change in unrealized appreciation (depreciation) on investments
and foreign currency related transactions 4,340,335 247,245
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,736,225 15,652,097
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (2,542,747) (5,945,153)
Class B Shares (4,249,560) (9,706,657)
Class C Shares (1,056,939) (2,690,979)
Class Y Shares 0 0
Tax basis return of capital:
Class A Shares 0 (564,217)
Class B Shares 0 (921,197)
Class C Shares 0 (255,384)
Class Y Shares 0 0
- -------------------------------------------------------------------------------------------------------
Total distributions to shareholders (7,849,246) (20,083,587)
- -------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 2,372,142 5,908,665
Class B Shares 9,153,950 18,284,154
Class C Shares 1,868,759 3,935,676
Class Y Shares 7 0
Payment for shares redeemed:
Class A Shares (10,521,212) (25,781,907)
Class B Shares (21,597,202) (46,918,273)
Class C Shares (7,871,440) (19,524,124)
Class Y Shares 0 0
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 1,314,675 3,365,004
Class B Shares 2,112,165 5,354,257
Class C Shares 669,755 1,848,660
Class Y Shares 0 0
- -------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share
transactions (22,498,401) (53,527,888)
- -------------------------------------------------------------------------------------------------------
Total decrease in net assets (15,611,422) (57,959,378)
- -------------------------------------------------------------------------------------------------------
Net assets
Beginning of period 223,322,762 281,282,140
- -------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of
net investment income as follows: 1997--($1,428,141) and
1996--($1,169,996)] (Note 1) $207,711,340 $223,322,762
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 21
- ------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Strategic Income Fund (the "Fund") is a Massachusetts business trust
for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone was formerly a wholly- owned
subsidiary of Keystone Investments, Inc. ("KII") and is currently a
subsidiary of First Union Keystone, Inc. First Union Keystone, Inc. is a
wholly-owned subsidiary of First Union National Bank of North Carolina which
in turn is a wholly-owned subsidiary of First Union Corporation ("First
Union"). The Fund is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a diversified, open-end investment company. The
Fund offers several classes of shares. The Fund's investment objective is to
seek high current income from high yield, foreign and U.S. Government or
agency obligations.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
U.S. Government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent
pricing service. Listed corporate bonds, other fixed income securities,
mortgage and other asset-backed securities, and other related securities are
valued at prices provided by an independent pricing service. In determining
value for normal institutional-size transactions, the pricing service uses
methods based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders. Securities for which valuations are not available from
an independent pricing service (including restricted securities) are valued
at fair value as determined in good faith according to procedures established
by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the
collateral daily and will require the seller to provide additional collateral
in the event the market value of the securities pledged falls below the
carrying value of the repurchase agreement.
C. Reverse Repurchase Agreements
The Fund enters into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is
based upon competitive market rates at the time of issuance. At the time the
Fund enters into a reverse repurchase 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
<PAGE>
PAGE 22
- ------------------------------
Keystone Strategic Income Fund
transaction is rendered insolvent, the ultimate realization of the securities
to be repurchased by the Fund may be delayed or limited.
D. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States dollars
as follows: market value of investments, assets and liabilities at the daily
rate of exchange; purchases and sales of investments, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gain (loss) resulting from changes in foreign
currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement
date on investment securities transactions, foreign currency transactions and
the difference between the amounts of interest and dividends recorded on the
books of the Fund and the amount actually received. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between
the initial purchase trade date and subsequent sale trade date is included in
realized gain (loss) on foreign currency transactions
E. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the
value of the contract changes. Such changes are recorded as unrealized gains
or losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other
party will not fulfill their obligations under the contract. Futures
contracts also involve elements of market risk in excess of the amount
reflected in the statement of assets and liabilities.
F. Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated
in a foreign currency and to hedge certain foreign currency assets or
liabilities. Forward contracts are recorded at the forward rate and
marked-to-market daily. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. The Fund bears the risk of an unfavorable change in the
foreign currency exchange rate underlying the forward contract and is subject
to the credit risk that the other party will not fulfill their obligations
under the contract. Forward contracts involve elements of market risk in
excess of the amount reflected in the statement of assets and liabilities.
G. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the
identified cost basis. Interest income is recorded on the accrual basis and
includes amortization of discounts. Dividend income is recorded on the
ex-dividend date.
H. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the
<PAGE>
PAGE 23
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Internal Revenue Code of 1986, as amended (the "Code"). Thus, the Fund is
relieved of any federal income tax liability by distributing all of its net
taxable investment income and net taxable capital gains, if any, to its
shareholders. The Fund also intends to avoid excise tax liability by making
the required distributions under the Code. Accordingly, no provision for
federal income taxes is required.
I. Distributions
The Fund distributes net investment income monthly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the
close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment for paydown gains (losses) and foreign security
transactions for income tax purposes that have been recognized for financial
statement purposes.
J. Class Allocations
Class A shares are offered at a public offering price which includes a
maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge that
is payable upon redemption and decreases depending on how long the shares
have been held. Class B shares purchased after January 1, 1997 will
automatically convert to Class A shares after seven years. Class B shares
purchased prior to January 1, 1997 will retain their existing conversion
features.
Class C shares are sold subject to a contingent deferred sales charge
payable on shares redeemed within one year after the month of purchase.
Class Y shares are sold without a front-end or contingent deferred sales
charge and pay no distribution or shareholder servicing expenses.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the
relative net assets of each class. Currently, class specific expenses are
limited to expenses incurred under the Distribution Plans for each class,
except Class Y.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Shares of
beneficial interest of the Fund are currently divided into Class A, Class B,
Class C and Class Y. Transactions in shares of the Fund were as follows:
Six months ended Year ended
Class A January 31, 1997 July 31, 1996
- -----------------------------------------------------
Shares sold 339,922 862,737
Shares redeemed (1,516,027) (3,779,494)
Shares issued in
reinvestment of
dividends and
distributions 189,663 493,925
- -----------------------------------------------------
Net decrease (986,442) (2,422,832)
=====================================================
Class B
Shares sold 1,308,994 2,657,436
Shares redeemed (3,093,253) (6,840,568)
Shares issued in
reinvestment of
dividends and
distributions 303,147 781,880
- -----------------------------------------------------
Net decrease (1,481,112) (3,401,252)
=====================================================
<PAGE>
PAGE 24
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Keystone Strategic Income Fund
Six months ended Year ended
Class C January 31, 1997 July 31, 1996
- -----------------------------------------------------
Shares sold 270,016 573,201
Shares redeemed (1,128,932) (2,845,554)
Shares issued in
reinvestment of
dividends and
distributions 96,279 270,184
- -----------------------------------------------------
Net decrease (762,637) (2,002,169)
=====================================================
January 2, 1997
(Date of Initial Public
Offering) to
Class Y January 31, 1997
- -----------------------------------------------------
Shares sold 1
Shares redeemed 0
Shares issued in
reinvestment of
dividends and
distributions 0
- -----------------------------------------------------
Net increase 1
=====================================================
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the six months ended January 31,
1997:
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------
Non-U.S.Government $44,287,898 $101,107,448
U.S. Government $18,522,734 $ 12,926,552
The average daily balance of reverse repurchase agreements outstanding
during the six months ended January 31, 1997 was approximately $3,431,700 at
a weighted average interest rate of 5.19%. The maximum amount of borrowing
during the year was $8,654,137 (including accrued interest).
As of July 31, 1996, the Fund had a capital loss carryover for federal
income tax purposes of approximately $65,917,000 which expires as follows:
$1,843,000--1998, $11,547,000--1999, $12,167,000--2000, $5,288,000--2002 and
$35,072,000--2004.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted for its Class A, B and C shares pursuant to Rule 12b-1 under
the 1940 Act. Under the Distribution Plans, the Fund pays its principal
underwriter amounts which are calculated and paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting
agreement with Evergreen Keystone Distributor, Inc. (formerly, Evergreen
Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group
Inc. Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter.
The Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average daily net assets of the
Class A shares, to pay expenses related to the distribution of Class A
shares.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund
pays a distribution fee which may not exceed 1.00% annually of the average
daily net assets of Class B and Class C shares, respectively. Of that amount,
0.75% is used to pay distribution expenses and 0.25% is used to pay service
fees.
During the six months ended January 31, 1997, amounts paid to EKD or EKIS
pursuant to the Fund's Class A, Class B and Class C Distribution Plans were
as follows:
Paid to Paid to
EKD EKIS
- -----------------------------------------
Class A -- $ 77,989
Class B prior
to June 1, 1995 -- 531,397
Class B on or
after June 1, 1995 $2,287 83,080
Class C 82 153,996
<PAGE>
PAGE 25
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Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, and subject to the discretion of the Independent Trustees,
payments to EKIS and/or EKD may continue as compensation for services which
had been earned while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek
full payment of such distribution costs from the Fund at such time in the
future as, and to the extent that, payment thereof by the Class B or Class C
shares would be within permitted limits.
At January 31, 1997 total unpaid distribution costs were $9,780,243 for
Class B shares purchased before June 1, 1995 and $1,253,913 for Class B
shares purchased on or after June 1, 1995. Unpaid distribution costs for
Class C were $4,914,792 at January 31, 1997.
Contingent deferred sales charges paid by redeeming shareholders are paid
to EKD or its predecessor.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone
serves as the Investment Adviser and Manager to the Fund. Keystone provides
the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed at an annual rate of 2.00% of the
Fund's gross investment income plus an amount determined by applying
percentage rates starting at 0.50% and declining as net assets increase to
0.25% per annum, to the average daily net asset value of the Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as Investment Manager to the Fund
and provided investment management and administrative services. Under an
investment advisory agreement between KMI and Keystone, Keystone served as
the Investment Adviser and provided investment advisory and management
services to the Fund. In return for its services, Keystone received an annual
fee equal to 85% of the management fee received by KMI.
During the six months ended January 31, 1997, the Fund paid or accrued
$12,137 to Keystone for certain accounting services. The Fund paid or accrued
$294,152 to Evergreen Keystone Service Company (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, for services
rendered as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended January 31, 1997, the Fund incurred total custody
fees of $80,188 and received a credit of $13,510 pursuant to this expense
offset arrangement, resulting in a net custody expense of $66,678. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
(7.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.045 for Class A, $0.041 for
Class B, $0.041 for Class C and $0.045 for Class Y were declared payable by
March 6, 1997 to shareholders of record on February 25, 1997. These
distributions are not reflected in the accompanying financial statements.
<PAGE>
PAGE 26
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Keystone Strategic Income Fund
Additional Information (Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday, December 9, 1996. In
addition, beside each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
------------- -----------
Frederick Amling 22,218,403 518,215
Laurence B. Ashkin 22,212,306 524,312
Charles A. Austin III 22,209,589 527,029
Foster Bam 22,210,042 526,577
George S. Bissell 22,213,540 523,078
Edwin D. Campbell 22,210,802 525,816
Charles F. Chapin 22,204,292 532,326
K. Dun Gifford 22,222,965 513,654
James S. Howell 22,211,652 524,966
Leroy Keith, Jr. 22,219,553 517,065
F. Ray Keyser, Jr. 22,216,675 519,943
Gerald M. McDonell 22,217,430 519,189
Thomas L. McVerry 22,221,616 515,002
William Walt Pettit 22,222,965 513,654
David M Richardson 22,222,821 513,797
Russell A. Salton, III M.D. 22,221,290 515,328
Michael S. Scofield 22,222,821 513,797
Richard J. Shima 22,209,416 527,203
Andrew J. Simons 22,220,346 516,272
2. To approve an Investment Advisory and Management Agreement between the
Fund and Keystone Investment Management Company.
Affirmative Against Abstain
------------- --------- ---------
21,667,114 278,428 791,076
<PAGE>
PAGE 27
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Keystone Strategic Income Fund
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 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.
