Keystone Intermediate Term Bond Fund
Seeks generous income from intermediate-term
investment grade bonds.
Dear Shareholder:
We would like to take this opportunity to report on the performance of
Keystone Intermediate Term Bond Fund for the twelve-month period which ended
July 31, 1995.
Performance
Class A shares returned 7.76% for the twelve-month period.
Class B shares returned 6.87% for the twelve-month period.
Class C shares returned 6.87% for the twelve-month period.
The Lehman Intermediate Government/Corporate Bond Index returned 8.81% for
the same period.
Your Fund's twelve-month returns reflect a significantly improved
investment environment. Investors witnessed better performance as US interest
rates fell and bond prices rose in the first half of 1995. This was a
reversal from the rising rate environment that characterized most of 1994.
Slowing economic growth and evidence of moderate inflation in the first half
of 1995 contributed to the favorable performance of your Fund's holdings.
Keystone Intermediate Term Bond Fund was designed to seek current income
by investing primarily in investment grade bonds with maturities between
three and ten years. Our analysis indicates that intermediate term investment
grade bonds have historically provided 80% of the total returns of long-term
bonds with half the return fluctuations.
We manage the Fund based on the changing economic and business cycles. As
a result, we made several adjustments to the portfolio in an attempt to
capitalize on attractive income and return opportunities. To take advantage
of rising interest rates during the last half of 1994, we invested in bonds
with zero- to three-year maturities and seven- to ten-year maturities. This
strategy helped to minimize price declines while yields were rising. As
interest rates declined in 1995, we concentrated on bonds with maturities in
the five- to seven-year range. This approach helped the Fund generate a
steady stream of income and some capital appreciation.
Our Outlook
The "soft landing" we expected for the US economy has arrived. We believe it
should give way to stable, non-inflationary growth. We think this should be
an environment of improved stability for bond investors, with most of the
returns coming from income rather than price appreciation.
Thank you for your continued support of Keystone Intermediate Term Bond Fund.
If you have questions or comments about your investment, we encourage you to
write to us.
Sincerely,
[Signature of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[Signature of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
September 1995
1
<PAGE>
Keystone Intermediate Term Bond Fund
A Discussion With
Your Fund Manager
Christopher P. Conkey is senior portfolio manager of Keystone Intermediate
Term Bond Fund. Mr. Conkey is a senior vice president and leads Keystone's
high grade bond group. A Chartered Financial Analyst, he has 11 years of
experience managing fixed-income investments. Mr. Conkey holds a BA in
economics from Clark University and an MBA in finance from Boston University.
Q What was the economic environment like during the twelve-month period?
A The economic environment improved significantly for bonds during the
twelve-month period. From August through December 1994, economic growth was
strong, and there were concerns that inflation might rise. The Federal
Reserve Board (the Fed) maintained its policy of raising interest rates in
order to keep inflation in check. At the beginning of 1995, economic growth
began to slow, inflation fears waned, and interest rates began to decline.
The Fed reacted to these events by decreasing short-term interest rates in
July 1995.
Q How did you manage the Fund in this environment?
A We employed two distinct investment strategies. During the first half of
the period, when interest rates rose, we structured the portfolio in a
barbelled configuration. That is, we emphasized shorter term (zero- to
three-year maturities) and longer term bonds (seven- to ten-year maturities).
We believed that intermediate term bonds, those with three- to seven-year
maturities, would underperform in a rising rate environment. The barbelled
strategy allowed the Fund to take advantage of rising interest rates.
When interest rates declined early in 1995, we changed this strategy to
focus on bonds in the three- to seven-year maturity range. We thought these
intermediate term bonds were attractively priced and believed they would
perform better in a declining interest rate environment.
Q Treasury securities comprised 25.1% of net assets at the end of the period.
How did these investments benefit the Fund?
A Because the interest and principal payments on Treasury securities are
guaranteed by the federal government or their agencies, they have no credit
risk and are almost entirely influenced by changes in interest rates. When
interest rates declined over the period, these government securities provided
your Fund with a reliable and consistent income stream as well as some price
appreciation.
Q You increased the Fund's investments in industrial bonds from 2.7% of net
assets last year to 19.3% on July 31, 1995. Why?
A As rates rose in 1995, we invested in noncallable, investment-grade
industrial bonds. Noncallable bonds benefitted the Fund, because we were able
to lock in higher yields. As interest rates declined, these bonds continued
to generate a relatively high level of income.
We concentrated our investments in areas that we believed were benefiting
from strong economic growth, a weaker US dollar, and an increase in the
productivity and competitiveness of US corporations. These included the
automotive, shipping, and energy sectors of the economy.
The appeal of industrial bonds was further enhanced by the low level of new
issuance. These bonds were attractive to investors seeking high quality
securities, and this boosted their prices. The industrial bonds in the
portfolio were an important source of total return for the Fund.
Fund Profile
Objective: Seeks generous income from intermediate-term, investment grade
bonds.
Commencement of investment operations: April 14, 1987
Average maturity: 5 years
Net assets: $43 million
2
<PAGE>
Asset Allocation as of July 31, 1995
[Pie chart]
Investment grade corporate bonds (41.7%)
US Treasury notes (25.1%)
Foreign government bonds (US dollar denominated) (10.8%)
Collateralized Mortgage Obligations (14.8%)
Fixed-rate mortgage securities (3.6%)
Cash(3) 4.0%
(percentage of net assets)
(3)Includes short-term investments, and other assets and liabilities.
Q You also increased the Fund's allocation in foreign bonds. Why were foreign
bonds attractive?
A We increased the Fund's position in Yankee bonds from 5.2% of net assets
last year to 10.8% on July 31, 1995. Yankee Bonds are issued by foreign
companies or governments but are denominated in US dollars. They have
virtually no currency risk and are not directly affected by the US economic
cycle. The Yankee bonds we added to the portfolio included those of highly
rated companies such as Northern Telecom, a Canadian telecommunications
company, and Wharf International Capital, a commercial real estate developer
in Hong Kong. We also added bonds of foreign governments such as the Province
of Manitoba, Canada.
Q What sectors did you cut back?
A We sold bonds in the financial sector because they had performed extremely
well. We also reduced the Fund's position in mortgage-backed securities
because of their exposure to prepayment risk in a declining interest rate
environment. When interest rates decline, mortgage holders tend to prepay
their existing loans and refinance their debt at the lower interest rates.
Prepayments reduce the expected rate of return on mortgage securities as
loans are paid off earlier than expected.
Q What is your outlook?
A We believe that the economy will continue to expand over the next several
months. However, we anticipate that economic growth will be more moderate
than the 4%-5% level we experienced in 1995. We expect interest rates to
continue to decline and inflation to remain relatively low. Going forward, we
expect most of the Fund's return to come from income rather than price
appreciation.
[diamond]
This column is intended to answer
questions about your Fund.
If you have a question you would like answered, please write to:
Manager, Shareholder Communications,
Keystone Investment Distributors Company, Inc.,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
3
<PAGE>
Keystone Intermediate Term Bond Fund
Your Fund's Performance
[Graph -- Mountain chart]
Growth of an investment in Keystone Intermediate Term Bond Fund Class A
In Thousands
$9,477 $ 9,477
4/87 9,220 9,286
8,677 9,552
7/89 8,744 10,444
8,248 10,715
7/91 8,296 11,738
8,839 13,555
7/93 9,010 14,894
8,420 14,852
7/95 8,458 16,004
Total Value: $16,004
Reinvested Distributions
Initial Investment
A $10,000 investment in Keystone Intermediate Term Bond Fund Class A made on
April 14, 1987 with all distributions reinvested was worth $16,004 on July
31, 1995. Past performance is no guarantee of future results.
Twelve-Month Performance as of July 31, 1995
===============================================================
Class A Class B Class C
Total returns* 7.76% 6.87% 6.87%
Net asset value 7/31/94 $8.84 $8.85 $8.85
7/31/95 $8.88 $8.89 $8.89
Dividends $ .61 $ .54 $ .54
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of July 31, 1995
===============================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 7.76% 6.87% 6.87%
1-year 2.64% 2.87% 6.87%
5-year 42.26% -- --
Life of Class 60.04% 7.57% 10.42%
Average Annual Returns
1-year w/o sales charge 7.76% 6.87% 6.87%
1-year 2.64% 2.87% 6.87%
5-year 7.30% -- --
Life of Class 5.83% 2.96% 4.04%
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received for holding shares for one year and
redeeming after the end of the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares to another Keystone fund for a $10 fee by
contacting Keystone directly. The exchange fee is waived for individual
investors who make an exchange using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
4
<PAGE>
Growth of an Investment
[Line chart] Comparison of change in value of a $10,000 investment
in Keystone Intermediate Term Bond Fund Class A,
the Lehman Intermediate Government/Corporate Bond
Index, and the Consumer Price Index.
In Thousands April 14, 1987 through July 31, 1995
Average Annual Total Returns
----------------------------
1 Year 5 Year Life of Class
Class A 2.64% 7.30% 5.83%
Class B 2.87% -- 2.96%
Class C 6.87% -- 4.04%
$ 9,477 $10,000 $10,000
4/87 9,286 9,936 10,152
9,552 10,650 10,571
7/89 10,444 12,006 11,097
10,715 12,862 11,632
7/91 11,738 14,178 12,150
13,555 16,183 12,533
7/93 14,894 17,574 12,881
14,852 17,738 13,238
7/95 16,004 19,301 13,604
Past performance is no guarantee of future results. The performance of Class
B or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the
different classes. Class B and Class C shares were introduced February 1,
1993. The Consumer Price Index and Lehman Intermediate Government/Corporate
Bond Index are from March 31, 1987.
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Intermediate Term Bond Fund
The Fund seeks generous income from intermediate-term investment grade bonds.
The return is quoted after deducting sales charges (if applicable), fund
expenses, and transaction costs and assumes reinvestment of all
distributions.
2. Lehman Intermediate Government/Corporate Bond Index (LIGCBI)
The LIGCBI is a broad-based, unmanaged fixed-income index of US corporate
bonds, mortgage, and US government and agency securities. It represents the
price change and coupon income of several hundred securities with
intermediate (1- to 10-year) maturities. Securities are selected and compiled
by Lehman Brothers, Inc. according to criteria that may be unrelated to your
Fund's investment objective. It would be difficult for most individual
investors to duplicate this index.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the US. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and
5
<PAGE>
Keystone Intermediate Term Bond Fund
over a long period. Long-term performance is a more reliable and useful
measure of performance than measurements of short-term returns or temporary
swings in the market. Your financial adviser can help you evaluate fund
performance in conjunction with the other important financial considerations
such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund
may be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges -- whether up-front or deferred -- pay for the cost
of the investment advice of your financial advisor. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor -- even an unmanaged index -- without incurring some charges
and expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial advisor, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
6
<PAGE>
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a
diversified portfolio of short-term securities, including commercial paper,
bankers' acceptances, certificates of deposit and other short-term
instruments. The fund pays income which can fluctuate daily. Liquidity and
safety of principal are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the
price at which the share is sold to the public.
7
<PAGE>
Keystone Intermediate Term Bond Fund
SCHEDULE OF INVESTMENTS--July 31, 1995
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===============================================================================================================
<S> <C> <C> <C> <C> <C>
FIXED INCOME (96.0%)
INDUSTRIAL BONDS & NOTES (19.3%)
AUTOMOTIVE (3.9%)
Ford Motor Co. Notes 9.000% 2001 $1,500,000 $1,648,275
- ---------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (2.7%)
Tenneco, Inc. Notes 10.375 2000 1,000,000 1,148,140
- ---------------------------------------------------------------------------------------------------------------
OIL (3.0%)
Occidental Petroleum Corp. Med. Term Notes 6.350 2000 1,300,000 1,274,572
- ---------------------------------------------------------------------------------------------------------------
RETAIL (2.3%)
Sears, Roebuck & Co. Med. Term Notes 7.880 1999 950,000 986,005
- ---------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (2.4%)
Ameritech Capital Funding Corp. Deb. 7.500 2005 1,000,000 1,042,500
- ---------------------------------------------------------------------------------------------------------------
UTILITIES (5.0%)
Missouri Pacific Railroad Co. Equip. Trust Cert. 15.000 1997 1,000,000 1,110,100
Montana Power Co. First Mtge. 7.700 1999 1,000,000 1,026,190
- ---------------------------------------------------------------------------------------------------------------
2,136,290
- ---------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$8,335,178) 8,235,782
===============================================================================================================
COLLATERALIZED MORTGAGE OBLIGATIONS (14.8%)
Debartolo Capital Partnership
(Est. Mat. 2001) (a) (b) Class B1 7.610 2004 1,000,000 1,026,250
FHLMC (Est. Mat. 1996) (a) Series 41 Class E 10.000 2019 412,727 417,631
FHLMC (Est. Mat. 1998) (a) Series 1684
Class JD 3.493 2020 912,186 56,727
FHLMC (Est. Mat. 1998) (a) Series 1684
Class JC 5.507 2020 890,748 879,057
Green Tree Financial Corp. (Est. Series 1994-A
Mat. 1998) (a) Class A 6.900 2004 363,958 360,202
Paine Webber Mortgage Acceptance Series 1993-5
Corp. IV (Est. Mat. 1997) (a) Class A3 6.875 2008 436,589 435,634
Residential Funding Corp. (Est. Series 1994-S15
Mat. 1997) (a) Class A1 7.750 2024 1,126,151 1,145,149
Resolution Trust Corp. (Est. Series 1995-1
Mat. 2000) (a) Class A2C 7.500 2028 1,250,000 1,251,563
U.S. Home Equity Loan (Est. Mat. Series 1991-2
1998) (a) Class B 9.125 2021 750,000 770,152
- ---------------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST--$6,278,054) 6,342,365
===============================================================================================================
FOREIGN BONDS (U.S. DOLLARS) (10.8%)
Manitoba Province, Canada Yankee Notes 9.625 1999 1,250,000 1,370,875
Northern Telecom Ltd. Yankee Notes 8.250 1996 1,000,000 1,017,850
Telecom Brasileiras Yankee Notes 10.375 1997 1,200,000 1,213,500
Wharf Capital International Yankee Notes 8.875 2004 1,000,000 1,021,830
- ---------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (COST--$4,524,285) 4,624,055
===============================================================================================================
See Notes to Schedule of Investments.
8
<PAGE>
Interest Maturity Par Market
Rate Date Value Value
===============================================================================================================
MORTGAGE PASS-THROUGH CERTIFICATES (3.6%)
FNMA Pool #002497 11.000% 2016 $ 686,162 $ 762,065
FNMA Pool #004534 10.750 2012 703,965 767,878
- ---------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (COST--$ 1,497,835) 1,529,943
===============================================================================================================
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (25.1%)
U.S. Treasury Notes 8.875 1998 3,100,000 3,353,797
U.S. Treasury Notes 8.500 2000 1,550,000 1,712,998
U.S. Treasury Notes 6.500 2005 500,000 502,265
U.S. Treasury Notes 7.500 2002 500,000 532,580
U.S. Treasury Notes 7.875 2004 4,200,000 4,604,250
- ---------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (COST--$10,750,748) 10,705,890
===============================================================================================================
BANK & FINANCE BONDS & NOTES (22.4%)
Banc One Credit Card Master Series 1994-A
Trust Class A 7.150 1998 1,000,000 1,012,500
Chase Manhattan Corp. Notes (Subord.) 9.375 2001 1,250,000 1,389,425
Commercial Credit Group, Inc. Deb. 10.000 1999 1,000,000 1,099,190
European Investment Bank Deb. 9.125 2002 1,250,000 1,413,900
MBNA Master Credit Card Trust II Series 1995-C
Class A 6.450 2008 1,000,000 968,120
Olympic Automobile Receivables Series 1995-C
Trust Class A2 6.200 2002 1,500,000 1,496,835
Paine Webber Group, Inc. Notes 8.250 2002 1,100,000 1,142,031
Standard Credit Card Trust Deb. 9.500 1998 1,000,000 1,051,250
- ---------------------------------------------------------------------------------------------------------------
TOTAL BANK & FINANCE BONDS & NOTES (COST--$9,634,398) 9,573,251
===============================================================================================================
TOTAL FIXED INCOME (COST--$41,020,498) 41,011,286
===============================================================================================================
Maturity
Value
===============================================================================================================
SHORT-TERM INVESTMENTS (5.9%)
REPURCHASE AGREEMENTS (5.9%)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements,
in a joint trading account, dated 7/31/95) (c) 5.833 08/01/95 $2,506,406 2,506,000
===============================================================================================================
TOTAL SHORT-TERM INVESTMENTS (COST--$2,506,000) 2,506,000
===============================================================================================================
TOTAL INVESTMENTS (COST--$43,526,498) (D) 43,517,286
OTHER ASSETS AND LIABILITIES--NET (-1.9%) (789,027)
===============================================================================================================
NET ASSETS (100.0%) $42,728,259
===============================================================================================================
</TABLE>
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
NOTES TO SCHEDULE OF INVESTMENTS
(a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected pre-payment rates. Changes in interest
rates can cause the estimated maturity to differ from the listed date.
These estimated maturity dates are unaudited.
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144a or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at July 31, 1995.
(d) The cost of investments for federal income tax purposes is identical to
book basis. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at July 31, 1995 are as
follows:
Gross unrealized appreciation ................................. $ 456,225
Gross unrealized depreciation ................................. (465,437)
----------
Net unrealized depreciation .................................... $ (9,212)
==========
Legend of Portfolio Abbreviations:
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
See Notes to Financial Statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------------------------
1995 1994(d) 1993 1992 1991
===============================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of period $ 8.84 $ 9.46 $ 9.23 $ 8.64 $ 8.60
- -----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.63 0.57 0.70 0.71 0.72
Net gain (loss) on
investments and
futures contracts 0.02 (0.59) 0.18 0.60 0.05
- -----------------------------------------------------------------------------------------------
Total from investment
operations 0.65 (0.02) 0.88 1.31 0.77
- -----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.57) (0.57) (0.65) (0.71) (0.72)
In excess of net
investment income (0.04) (0.02) 0 (0.01) (0.01)
Tax basis return of
capital 0 (0.01) 0 0 0
- -----------------------------------------------------------------------------------------------
Total distributions (0.61) (0.60) (0.65) (0.72) (0.73)
- -----------------------------------------------------------------------------------------------
Net asset value end of
period $ 8.88 $ 8.84 $ 9.46 $ 9.23 $ 8.64
===============================================================================================
Total return(b) 7.76% (0.29%) 9.88% 15.65% 9.42%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(c) 1.00% 1.00% 1.52% 1.88% 2.00%
Net investment income 7.13% 6.81% 7.48% 7.85% 8.42%
Portfolio turnover rate 149% 280% 160% 90% 76%
Net assets end of period
(thousands) $14,558 $16,036 $18,032 $19,288 $20,227
===============================================================================================
<CAPTION>
February 13, 1987
(Commencement of
Operations) to
1990 1989 1988 July 31, 1987
===============================================================================================
<S> <C> <C> <C> <C>
Net asset value
beginning of period $ 9.11 $ 9.05 $ 9.61 $10.00
- -----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.67 0.69 0.72 0.17
Net gain (loss) on
investments and
futures contracts (0.45) 0.10 (0.45) (0.42)
- -----------------------------------------------------------------------------------------------
Total from investment
operations 0.22 0.79 0.27 (0.25)
- -----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.70) (0.73) (0.83) (0.14)
In excess of net
investment income (0.03) 0 0 0
Tax basis return of
capital 0 0 0 0
- -----------------------------------------------------------------------------------------------
Total distributions (0.73) (0.73) (0.83) (0.14)
- -----------------------------------------------------------------------------------------------
Net asset value end of
period $ 8.60 $ 9.11 $ 9.05 $ 9.61
===============================================================================================
Total return(b) 2.71% 9.13% 2.95% (2.50%)
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(c) 2.00% 1.92% 1.30% 1.00%(a)
Net investment income 7.90% 7.88% 7.48% 6.86%(a)
Portfolio turnover rate 107% 148% 208% 14%
Net assets end of period
(thousands) $23,694 $30,337 $38,615 $1,679
===============================================================================================
</TABLE>
(a) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(b) Excluding applicable sales charges.
(c) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
"Ratio of expenses to average net assets" would have been 1.48%, 1.80%,
1.99%, 2.06%, 2.33%, 2.19%, 2.65% and 12.47% for the years ended July 31,
1995, 1994, 1993, 1991, 1990, 1989 and the period April 14, 1987
(Commencement of Investment Operations) to July 31, 1987, respectively.
(d) Calculations based on average shares outstanding.
See Notes to Financial Statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering)
----------------------- to
1995 1994(d) July 31, 1993
===========================================================================
Net asset value beginning
of period $ 8.85 $ 9.47 $ 9.35
- ---------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.56 0.49 0.29
Net gain (loss) on
investments and futures
contracts 0.02 (0.58) 0.12
- ---------------------------------------------------------------------------
Total from investment
operations 0.58 (0.09) 0.41
- ---------------------------------------------------------------------------
Less distributions from:
Net investment income (0.51) (0.49) (0.29)
In excess of net investment
income (0.03) (0.03) 0
Tax basis return of capital 0 (0.01) 0
- ---------------------------------------------------------------------------
Total distributions (0.54) (0.53) (0.29)
- ---------------------------------------------------------------------------
Net asset value end of
period $ 8.89 $ 8.85 $ 9.47
===========================================================================
Total return(b) 6.87% (1.05%) 4.42%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(c) 1.75% 1.75% 1.76%(a)
Net investment income 6.38% 5.48% 5.67%(a)
Portfolio turnover rate 149% 280% 160%
Net assets end of period
(thousands) $17,985 $17,819 $8,159
===========================================================================
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
"Ratio of expenses to average net assets" would have been 2.21%, 2.36%
and 2.71% for the years ended July 31, 1995, 1994 and the period February
1, 1993 (Date of Initial Public Offering) to July 31, 1993, respectively.
(d) Calculations based on average shares outstanding.
See Notes to Financial Statements.
12
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 1, 1993
Year Ended July 31, (Date of Initial
------------------------- Public Offering) to
1995 1994(d) July 31, 1993
===========================================================================
Net asset value beginning
of period $ 8.85 $ 9.46 $ 9.35
- ---------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.55 0.49 0.29
Net gain (loss) on
investments and futures
contracts 0.03 (0.57) 0.11
- ---------------------------------------------------------------------------
Total from investment
operations 0.58 (0.08) 0.40
- ---------------------------------------------------------------------------
Less distributions from:
Net investment income (0.51) (0.49) (0.29)
In excess of net investment
income (0.03) (0.03) 0
Tax basis return of capital 0 (0.01) 0
- ---------------------------------------------------------------------------
Total distributions (0.54) (0.53) (0.29)
- ---------------------------------------------------------------------------
Net asset value end of
period $ 8.89 $ 8.85 $ 9.46
===========================================================================
Total return(b) 6.87% (0.95%) 4.31%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(c) 1.75% 1.75% 1.77%(a)
Net investment income 6.37% 5.44% 5.61%(a)
Portfolio turnover rate 149% 280% 160%
Net assets end of period
(thousands) $10,185 $13,086 $7,522
===========================================================================
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
"Ratio of expenses to average net assets" would have been 2.23%, 2.37%
and 2.61% for the years ended July 31, 1995, 1994 and the period February
1, 1993 (Date of Initial Public Offering) to July 31, 1993, respectively.
(d) Calculations based on average shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
Keystone Intermediate Term Bond Fund
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995
===================================================================
Assets:
Investments at market value (identified
cost--$43,526,498 ) (Note 1) $43,517,286
Cash 991
Receivable for:
Interest 633,978
Fund shares sold 65,101
Receivable from investment adviser (Note 4) 17,674
Prepaid expenses 4,403
- -------------------------------------------------------------------
Total assets 44,239,433
- -------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5):
Payable for:
Investments purchased 1,273,987
Fund shares redeemed 80,474
Income distribution 97,270
Due to related parties 6,259
Other accrued expenses 53,184
- -------------------------------------------------------------------
Total liabilities 1,511,174
- -------------------------------------------------------------------
Net assets $42,728,259
===================================================================
Net assets represented by (Note 1):
Paid-in capital $46,756,090
Accumulated distributions in excess of net
investment income (94,328)
Accumulated net realized gain (loss) on investments
and closed futures contracts (3,924,291)
Net unrealized appreciation (depreciation) on
investments (9,212)
- -------------------------------------------------------------------
Total net assets $42,728,259
- -------------------------------------------------------------------
Net asset value (Note 1):
Class A Shares
Net assets of $14,558,143/1,639,106 shares
outstanding $8.88
Offering price per share ($8.88/0.9525) (based on
a sales charge of 4.75% of the offering price at
July 31, 1995) $9.32
Class B Shares
Net assets of $17,985,453/2,022,636 shares
outstanding $8.89
Class C Shares
Net assets of $10,184,663/1,145,600 shares
outstanding $8.89
===================================================================
STATEMENT OF OPERATIONS
Year Ended July 31, 1995
======================================================================
Investment income (Note 1):
Interest (Net of foreign withholding taxes of
$1,684) $3,564,848
- ----------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fees $ 291,834
Transfer Agent fees 107,061
Accounting, auditing and legal fees 40,577
Custodian fees 39,407
Printing 21,619
Distribution Plan expenses 320,307
Registration fees 35,987
Miscellaneous 3,713
Total expenses 860,505
Less: Reimbursement from
investment adviser (Note 4) (207,571)
- ----------------------------------------------------------------------
Net expenses 652,934
- ----------------------------------------------------------------------
Net investment income 2,911,914
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and futures contracts
(Notes 1 and 3):
Net realized gain (loss) on:
Investments (541,265)
Closed futures contracts (42,377)
- ----------------------------------------------------------------------
Net realized gain (loss) on
investments and closed futures
contracts (583,642)
- ----------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) on
investments 628,176
- ----------------------------------------------------------------------
Net gain (loss) on investments and
closed futures contracts 44,534
- ----------------------------------------------------------------------
Net increase (decrease) in net $2,956,448
assets resulting from operations
======================================================================
See Notes to Financial Statements.
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Year ended July 31,
--------------------------
1995 1994
============================================================================
Operations:
Net investment income $ 2,911,914 $ 2,604,837
Net realized gain (loss) on investments and
closed futures contracts (583,642) (2,338,021)
Net change in unrealized appreciation
(depreciation) on investments 628,176 (956,550)
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,956,448 (689,734)
- -----------------------------------------------------------------------------
Distributions to shareholders from (Notes 1 and 6):
Net investment income:
Class A Shares (1,002,996) (1,086,016)
Class B Shares (1,010,554) (818,527)
Class C Shares (654,159) (662,822)
In excess of net investment income:
Class A Shares (61,783) (42,240)
Class B Shares (62,249) (51,023)
Class C Shares (40,296) (41,601)
Tax basis return of capital:
Class A Shares 0 (17,452)
Class B Shares 0 (19,394)
Class C Shares 0 (14,242)
- -----------------------------------------------------------------------------
Total distributions to shareholders (2,832,037) (2,753,317)
- -----------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 1,875,188 5,170,693
Class B Shares 4,978,695 16,443,930
Class C Shares 2,124,333 10,872,127
Payments for shares redeemed:
Class A Shares (3,937,486) (6,579,374)
Class B Shares (5,447,096) (5,983,113)
Class C Shares (5,505,917) (4,799,652)
Net asset value of shares issued in
reinvestment of dividends and distributions:
Class A Shares 533,202 585,180
Class B Shares 576,332 448,780
Class C Shares 465,630 512,125
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital
share transactions (4,337,119) 16,670,696
- -----------------------------------------------------------------------------
Total increase (decrease) in net assets (4,212,708) 13,227,645
- -----------------------------------------------------------------------------
Net assets:
Beginning of year 46,940,967 33,713,322
- -----------------------------------------------------------------------------
End of year [Including accumulated
distributions in excess of net investment
income as follows: 1995--($94,328) and
1994--($144,032)] (Note 1) $42,728,259 $46,940,967
============================================================================
See Notes to Financial Statements.
15
<PAGE>
Keystone Intermediate Term Bond Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Intermediate Term Bond Fund (the "Fund") (formerly Keystone America
Intermediate Term Bond Fund) is a Massachusetts business trust for which
Keystone Management, Inc. ("KMI") is the Investment Manager and Keystone
Investment Management Company (formerly Keystone Custodian Funds, Inc.)
("Keystone") is the Investment Adviser. The Fund was organized on October 24,
1986 and had no operations prior to April 14, 1987. It is registered under
the Investment Company Act of 1940 as a diversified open-end investment
company.
The Fund currently issues 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 payable
upon redemption 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 of purchase.
Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors Company
("KIDC") (formerly Keystone Distributors, Inc.), the Fund's principal
underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII")
(formerly Keystone Group, Inc.), a Delaware corporation. KII is privately
owned by an investor group consisting of members of current and former
management of Keystone and its affiliates. Keystone Investor Resource Center,
Inc., ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments are usually valued at the closing sales price, or in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair: (a) securities (including restricted
securities) for which complete quotations are not readily available and (b)
listed securities if, in the opinion of management, the last sales price does
not reflect a current value or if no sale occurred.
Short-term investments that 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 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. Market quotations are
not considered to be readily available for long-term corporate bonds and
notes; such investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the 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. Investments denominated in a foreign currency are
adjusted daily to reflect changes in exchange rates.
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or, in the
case of a stock index, cash at a set price on a future date. The Fund enters
into currency and other financial futures
16
<PAGE>
contracts as a hedge against changes in interest or currency exchange rates.
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 the market risk, the Fund is subject to the
credit risk that the other party will not be able to complete the obligations
of the contract.
B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis. All
discounts are amortized for both financial reporting and federal income tax
purposes. Distributions to shareholders are recorded at the close of business
on the ex-dividend date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of 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.
17
<PAGE>
E. The Fund may enter into forward foreign currency exchange contracts
("contracts") to settle portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain foreign currency
assets. Contracts are recorded at market value. Realized gains and losses
arising from such transactions are included in net realized gain (loss) on
foreign currency related transactions. The Fund is subject to the credit risk
that the other party will not complete the obligations of the contract.
F. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions 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 paydown gains and losses.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value.
Transactions in shares of the Fund were as follows:
Class A Shares
----------------------
Year Ended July 31,
1995 1994
- -------------------------------------------------------
Shares sold 214,382 553,134
Shares redeemed (449,814) (709,827)
Shares issued in reinvestment
of dividends and
distributions 61,155 63,405
- -------------------------------------------------------
Net increase (decrease) (174,277) (93,288)
=======================================================
Class B Shares
----------------------
Year Ended July 31,
1995 1994
- -------------------------------------------------------
Shares sold 566,892 1,756,381
Share redeemed (624,636) (652,813)
Shares issued in reinvestment
of dividends and
distributions 66,016 48,971
- -------------------------------------------------------
Net increase (decrease) 8,272 1,152,539
=======================================================
Class C Shares
----------------------
Year Ended July 31,
1995 1994
- -------------------------------------------------------
Shares sold 243,954 1,152,720
Share redeemed (630,936) (524,090)
Shares issued in reinvestment
of dividends and
distributions 53,388 55,794
- -------------------------------------------------------
Net increase (decrease) (333,594) 684,424
=======================================================
18
<PAGE>
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act").
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of 0.25% of the
average net asset value of shares sold by such others and remaining
outstanding on the books of the Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class B shares to pay
expenses of the distribution of Class B shares. Amounts paid by the Fund
under the Class B Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to 4.00% of the
price paid for each share sold plus the first year's service fee in advance
of 0.25% of the price paid for each Class B share sold. Beginning
approximately 12 months after the purchase of a Class B share, the dealer or
other party will receive service fees at an annual rate of 0.25% of the
average daily net asset value of such Class B shares maintained by such
others and remaining outstanding on the Fund's books for specified periods. A
contingent deferred sales charge will be imposed, if applicable, on Class B
shares purchased after June 1, 1995 at rates ranging from a maximum of 5% of
amounts redeemed during the first 12 months following the date of purchase to
1% of amounts redeemed during the sixth twelve month period following the
date of purchase. Class B shares purchased on or after June 1, 1995 that have
been outstanding for eight years following the month of purchase will
automatically convert to class A shares without a front end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 will retain
their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses of distribution of Class C shares. Amounts paid by the Fund under
the Class C Distribution Plan are currently used to pay others (dealers) a
commission at the time of purchase in the amount of 0.75% of the price paid
for each Class C 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 the rules of the National Association of Securities
Dealers, Inc.) ("NASD Rule") plus service fees at an annual rate of 0.25%,
respectively, of the average net asset value of each Class C share maintained
by such others and remaining outstanding on the Fund's books for specified
periods.
Each of the Distribution Plans may be terminated at any time by a 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 year ended July 31, 1995, the Fund paid or accrued to KIDC
$37,252, $170,129 and $112,926 under its Class A, Class B and Class C
Distribution Plans, respectively. These amounts represent
19
<PAGE>
0.24%, 0.98% and 1.00%, respectively of the average net asset value of Class
A, B and C for the year ended July 31, 1995.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may seek
payment from the Fund under its Distribution Plans are $1,197,784 and
$1,087,783, for Classes B and C, respectively, as of July 31, 1995. These
amounts represent 6.66% and 10.68%, respectively, of the net asset value of
Class B and C at July 31, 1995.
(3.) Securities Transactions
As of July 31, 1995, the Fund had a capital loss carryover for federal income
tax purposes of approximately $3,658,000 which expires in as follows: 1999--
$970,000; 2003--$2,688,000. Purchases and sales of investment securities
(including proceeds received at maturity) for the year ended July 31, 1995
were as follows:
Cost of Proceeds
Purchases From Sales
- -------------------------------------------------------
Portfolio securities $ 61,778,750 $ 64,349,535
Short-term
investments 454,357,742 454,747,000
- -------------------------------------------------------
$516,136,492 $519,096,535
=======================================================
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, dated December 29, 1989, KMI provides investment management and
administrative services to the Fund. In return, KMI is paid a management fee
computed and paid daily calculated at a rate of 2.0% of the Fund's gross
investment income plus an amount determined by applying percentage rates,
which start at 0.50% and decline, as net assets increase, to 0.25% per annum,
to the net asset value of the Fund. KMI has entered into an Investment
Advisory Agreement with Keystone, dated December 30, 1989 under which
Keystone provides investment advisory and management services to the Fund and
receives for its services an annual fee representing 85% of the management
fee received by KMI. During the year ended July 31, 1995, the Fund paid or
accrued to KMI investment management and administrative services fees of
$291,834 which represented 0.67% of the Fund's average net assets. Of such
amount paid to KMI, $248,059 was paid to Keystone for its services to the
Fund.
During the year ended July 31, 1995 the Fund paid or accrued to KIRC
$107,061 for transfer agent fees and $17,790 to KII as reimbursement for
certain accounting services.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of Fund
assets, 2.0% of the next $70 million of Fund assets, and 1.5% of Fund assets
over $100 million.
Keystone has voluntarily agreed to reimburse all expenses including the
management fee incurred by the Fund in excess of 1.0% on Class A shares, and
1.75% on Class B and Class C shares beginning February 1, 1993. Keystone
would not be required to make such reimbursement to an extent which would
result in the Fund's inability to qualify as a regulated investment company
under the provisions of the Internal Revenue Code. In accordance with these
voluntary expense limitations, Keystone reimbursed the Fund during the year
ended July 31, 1995, $72,687, $80,297, and $54,587 for Class A, Class B, and
Class C shares, respectively. Keystone does not intend to seek repayment of
these amounts.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently, the Indepen-
20
<PAGE>
dent Trustees of the Fund receive no compensation for their services.
(5.) Class Level Expenses
Presently, the Fund's class-specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
For the year ended July 31, 1995, the total amount of expenses incurred by
each class' Distribution Plan is set forth in Note (2). "Capital Share
Transactions."
(6.) Distributions to Shareholders
Distributions of $0.052 per share for Class A, $0.046 for Class B, and $0.046
for Class C from net investment income were declared payable by September 7,
1995 to shareholders of record August 25, 1995. These distributions are not
reflected in the accompanying financial statements.
The Fund intends to distribute to its shareholders dividends from net
investment income monthly and all net realized long-term capital gains, if
any, annually. Any taxable distribution which is declared in December and
paid before the next February 1 will be taxable to shareholders in the year
declared.
21
<PAGE>
Keystone Intermediate Term Bond Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Intermediate Term Bond Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Intermediate Term Bond Fund (formerly Keystone America Intermediate
Term Bond Fund), including the schedule of investments, as of July 31, 1995,
and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
eight-year period ended July 31, 1995 and the period from February 13, 1987
(commencement of operations) to July 31, 1987 for Class A shares and for each
of the years in the two year period ended July 31, 1995 and the period from
February 1, 1993 to July 31, 1993 for Class B and Class C shares. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1995 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Keystone Intermediate Term Bond Fund as of July 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 1, 1995
22
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions (Unaudited)
The per share distributions paid to you for the fiscal year 1995, whether
taken in shares or cash, are as follows for Class A shares:
Income
Dividends
---------
$0.61
========
The per share distributions paid to you for the fiscal year 1995, whether
taken in shares or cash, are as follows for Class B shares:
Income
Dividends
---------
$0.54
========
The per share distributions paid to you for the fiscal year 1995, whether
taken in shares or cash, are as follows for Class C shares:
Income
Dividends
---------
$0.54
========
In January 1996, we will forward to you information on the distributions
paid during the calendar year 1995 to help you in completing your federal
income tax return.
23
<PAGE>
[BACK COVER]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund, Inc.
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information
of the Fund's shareholders. Its use for other purposes is
authorized only when it is preceded or accompanied by
the prospectus, describing all fees, charges and other
important facts about the Fund.
[Keystone Logo] KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
ITB-AR-9/95
5M ["Recycled" symbol]
[FRONT COVER]
KEYSTONE
[Photo: Autumn country scene -- Tree-lined rambling road, with white fence.]
INTERMEDIATE TERM
BOND FUND
[Keystone logo]
ANNUAL REPORT
JULY 31, 1995
