PAGE 1
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Keystone Capital Preservation and Income Fund
Seeks a high level of current income consistent
with low volatility of principal.
Dear Shareholder:
We are writing to report on the activities of Keystone Capital Preservation
and Income Fund for the twelve-month period which ended September 30, l995.
Class A shares commenced investment operations on December 30, 1994 with
the merger of Keystone Capital Preservation and Income Fund and Keystone
Capital Preservation and Income Fund-II. As a result, the performance of
Class A shares is for the nine-month life of the Class through the Fund's
fiscal period end on September 30, 1995.
Performance
Class A shares returned 6.36% for the nine-month period which ended September
30, l995.
Class B shares returned 5.81% for the twelve-month period which ended
September 30, l995.
Class C shares returned 5.93% for the twelve-month period which ended
September 30, l995.
The six-month U.S. Treasury bill, a benchmark for short-term
income-oriented obligations, returned 4.93% for the nine-month period and
6.17% for the twelve-month period which ended September 30, 1995.
We were pleased with the solid performance of Keystone Capital
Preservation and Income Fund during the period as it provided a steadily
higher income with minimal price changes. Your Fund's performance was
recently recognized by Morningstar which assigned your Fund ****--its second
highest rating--for your Fund's risk-adjusted performance among 1256 bond
funds as of September 30, 1995.(1)
Overall, interest rates and your Fund's yield rose during the fiscal year.
Within this period, rates rose sharply in the last three months of 1994 and
then trended down in 1995. This was a generally favorable environment for
your Fund and its investments in adjustable-rate mortgage securities (ARMS).
During this period, your Fund outperformed many short-term income-producing
investments.
Maintaining Our Conservative Stance
As part of our conservative strategy in managing the Fund, we consider a
number of factors when selecting securities for the portfolio. These include
the direction of interest rates, the timing of mortgage rate adjustments, and
the geographical diversification of the underlying mortgages. We believe our
careful analysis of each security is crucial to seeking the Fund's objective
of providing income and limited share price fluctuations.
High Quality and No Derivatives
Throughout the period, we remained committed to high quality investments. The
portfolio's U.S. government and agency holdings are considered the highest
quality, and equivalent to AAA-rated bonds. In addition, the portfolio
continued to be free of derivative securities.
- ---------------
(1) Source: Morningstar, Inc. Morningstar's proprietary ratings reflect
historical risk-adjusted performance as of September 30, 1995. Ratings are
subject to change monthly. They are calculated based on the Fund's 3-, 5- and
10-year average annual return in excess or below the 90-day Treasury bill
return. Ratings are not adjusted for sales charges, but are adjusted for
other fees. The top 10% of the funds in an investment category receive 5
stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next
22.5% receive 2 stars and the bottom 10% receive 1 star. In the bond
category, the Fund received a 4 star rating for the 3-year period. There is
no 5- or 10-year rating because the fund was founded less than 5 years ago.
There were 700 funds in the 3-year, 420 funds in the 5-year, and 136 funds
listed in the 10-year taxable bond category.
<PAGE>
PAGE 2
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
Our Outlook
Over the next several months we believe that economic growth will continue to
slow, giving way to flat or declining interest rates. We think this should be
a relatively stable environment for your Fund. Going forward, we expect ARMS
will continue to be the primary investment for your Fund. We believe their
attractive income, price stability and liquidity should be an important
component to your Fund's conservative income approach.
We appreciate your continued support of Keystone Capital Preservation and
Income Fund. If you have any questions or comments about your Fund, we
encourage you to write to us.
Sincerely,
/S/Albert H. Elfner, III /S/George S. Bissell
Albert H. Elfner, III George S. Bissell
Chairman and President Chairman of the Board
Keystone Investments, Inc. Keystone Funds
November 1995
<PAGE>
PAGE 3
- -------------------------------------------------------------------------------
A Discussion With
Your Fund Manager
Christopher P. Conkey is portfolio manager of Keystone
Capital Preservation and Income Fund. Mr. Conkey is a
senior vice president and leads Keystone's high grade bond
group. A Chartered Financial Analyst, he has 12 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 environment like during the twelve-month period?
A The market environment improved significantly during the period. In the
final quarter of l994, economic growth was strong and the Federal Reserve
Board (the Fed) maintained its policy of raising short-term interest rates
to keep inflation in check. In l995, the "soft landing" we had expected for
the U.S. economy arrived. Economic growth slowed, and interest rates
declined. The Fed reacted to these events by decreasing a key short-term
interest rate by .25% in July l995.
Q How did changes in interest rates affect income?
A As we anticipated, the Fund's yield increased overall. For example, the
yield on Class B shares rose from 3.93% on September 30, 1994 to 5.20% on
September 30, l995. When interest rates rise, the rate charged to homeowners
with adjustable-rate mortgages also increases. This results in more income
for investors who hold adjustable-rate mortgage securities (ARMS). Even when
interest rates declined slightly in 1995, the Fund benefited from our ARMS
holdings which had already reset to higher rates. ARMS adjust with a lag, and
the securities in the portfolio are diversified so that reset dates are
spread over the entire year. As a result, the Fund earned a steady stream of
income throughout the twelve-month period.
Q Did rising and moderating interest rates affect the Fund's share price?
A The Fund's share price demonstrated excellent price stability. A year ago,
the net asset value of Class B shares was $9.62 (9/30/94). At the close of
this fiscal year the net asset value was $9.68 (9/30/95). The rate adjusting
nature of ARMS can mean changes in income, but more price stability when
interest rates move up or down.
Q What was your investment strategy?
A We maintained a conservative approach in managing the Fund. Most of the
Fund's assets were invested in ARMS. We focused on nonconvertible one-year
ARMS indexed to U.S. Treasury securities. When rates rise, these securities
automatically adjust to the new rate, resulting in higher income. Of course,
when rates decline, ARMS also adjust to the new lower rate. The type of ARMS
we invested in contributed to the stability of the portfolio because they
cannot be converted to a fixed rate.
Because we use a forward-looking approach to managing the Fund, we
increased the number of fixed-rate securities from nearly 4% on March 31,
1995 to almost 6% of net assets on September 30, 1995. Should interest rates
decline over the next twelve months, as we expect, these securities should
provide protection from higher mortgage prepayment rates.
Fund Profile
Objective: Seeks a high level of current income consistent with low
volatility of principal primarily from adjustable-rate mortgage securities
(ARMS).
Commencement of investment operations: July 1, 1991
Average maturity: 4 years
Average quality: AAA
Net assets: $85 million
Newspaper listing: CapPre
<PAGE>
PAGE 4
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Keystone Capital Preservation and Income Fund
(Pie Chart)
Asset Allocation
as of September 30, 1995
Fixed-rate securities (5.7%)
Short-term and net other assets and liabilities (2.4%)
ARMS (91.9%)
(as a percent of net assets)
Q Did declining interest rates affect the supply of ARMS?
A New ARMS issuance trended downward. A year ago, adjustable-rate mortgages
accounted for between 40% and 50% of all mortgage originations. At the end of
the twelve months, only 20% of new mortgages were ARMS. When rates are high,
people are more likely to opt for ARMS, because they believe interest rates
will decline. When rates are lower, they usually prefer fixed-rate mortgages.
In addition, if the interest rate difference between adjustable-rate
mortgages and fixed-rate mortgages is small, people generally prefer
fixed-rate mortgages. This was the case during the twelve-month period. So,
the supply of ARMS was low. This was positive for your Fund. As demand for
new ARMS increased, and supply declined, the ARMS in the portfolio rose in
value.
Q Why are ARMS attractive for conservative income-oriented investors?
A ARMS have historically provided investors with three important benefits:
better price stability than fixed-rate bonds during periods of rising and
falling rates; greater income than comparable U.S. Treasury obligations; and
income that reflects current market rates. In addition, the ARMS we invest in
are high quality and issued by the U.S. government or one of its agencies. We
believe ARMS funds are suitable for investors who want a liquid investment
with price stability and generous income.
Q What is your outlook?
A We expect to see a continuation of the trend we have experienced over
the last six months: slow economic growth--but not a recession; moderate
inflation; and flat to slightly declining interest rates. We believe this
should be a favorable environment for the Fund. Because inflation is
relatively low, we believe the Fund's income adjusted for inflation is very
attractive.
(diamond)
This column is intended to answer
questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investments, Inc.
Attn: Manager, Shareholder Communications
200 Berkeley Street, 22nd Floor,
Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 5
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Your Fund's Performance
(Mountain Chart)
Growth of an investment in
Keystone Capital Preservation and Income Fund
Class B
In Thousands
Reinvested Distributions
Initial Investment
Total Value: $11,776
Initial Reinvested
Investment Distributions
7/91 10010 10068
10040 10161
10060 10243
10090 10332
10100 10400
10070 10428
10010 10418
10010 10469
9/92 9970 10474
9970 10519
9980 10571
10010 10644
9900 10568
9900 10608
9880 10623
9830 10605
9800 10608
9820 10665
9820 10701
9890 10813
9/93 9890 10848
9900 10893
9890 10916
9900 10961
9910
9920 11046
9910 11083
9870 11080
9870 11111
9860 11131
9850 11150
9/94 9800 11128
9770 11126
9710 11091
9690 11102
9680 11125
9650 11126
9620 11129
9600 11144
9520 11092
9510 11124
9570 11241
9640 11371
3/95 9660 11448
A $10,000 investment in Keystone Capital Preservation and
Income Fund Class B made on July 1, 1991 with all distributions
reinvested was worth $11,776 on September 30, 1995. Past performance
is no guarantee of future results.
<TABLE>
<CAPTION>
Twelve-Month Performance as of September 30, 1995
===============================================================================
Class A(2) Class B Class C
<S> <C> <C> <C> <C>
Total returns* 6.36% 5.81% 5.93%
Net asset value 9/30/94 -- $9.62 $9.60
12/30/94 $9.51 -- --
9/30/95 $9.68 $9.68 $9.67
Dividends $0.43 $0.49 $0.49
Capital gains None None None
</TABLE>
*Before deduction of sales charges.
<TABLE>
<CAPTION>
Historical Record as of September 30, 1995
===============================================================================
Cumulative total returns Class A(2) Class B Class C
<S> <C> <C> <C>
1-year
without sales charge -- 5.81% 5.93%
with sales charge -- 2.81% 5.93%
Since inception
without sales charge 6.36% 17.76% 9.93%
with sales charge 3.17% 17.76% 9.93%
Average Annual Returns
1-year
without sales charge -- 5.81% 5.93%
with sales charge -- 2.81% 5.93%
Since inception 3.17% 3.92% 3.61%
</TABLE>
Class A shares were introduced on December 30, 1994. Performance is reported
after deducting the maximum front-end sales charge of 3%.
Class B shares were introduced on July 1, 1991. Performance reflects the
deduction of the maximum contingent deferred sales charge of 3% assuming
shares were redeemed after the end of the period.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received after holding shares for one year or more
and redeeming after the end of that 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 may 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.
- ---------------
(2) Performance is from Class A share's commencement of investment operations
on December 30, 1994.
<PAGE>
PAGE 6
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Keystone Capital Preservation and Income Fund
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone
Capital Preservation and Income Fund Class B, 6-month Treasury Bills and the
Consumer Price Index.
(Line Chart)
In Thousands July 1, 1991 through September 30, 1995
Average Annual Total Return
- -----------------------------------
1 Year Life of Class
Class A N/A 3.17%*
Class B 2.81% 3.92%
Class C 5.93% 3.61%
6-month T-Bill $12,175
Class B $11,776
CPI $11,265
6-month Consumer
Class B Treasury Bills Price Index
(6mth-T-Bill) (CPI)
10000 10000 10000
9/91 10243 10295 10088
9/92 10623 10727 10390
9/93 11065 11080 10669
9/94 11129 11468 10985
9/95 11776 12175 11265
This chart graphically compares 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 Capital Preservation and Income
Fund Class B
The Fund seeks high income and stability of principal primarily from
adjustable-rate mortgage securities. The return is quoted after deducting
sales charges (if applicable), fund expenses, and transaction costs and
assumes reinvestment of all distributions.
2. 6-month U.S. Treasury bill (6-mo. T-bill)
The total return of 6-month Treasury bill is a recognized benchmark for the
performance of short-term obligations. U.S. Treasury securities are
guaranteed by the full faith and credit of the United States government and
may have different performance than the securities your Fund invests in.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
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
<PAGE>
PAGE 7
- -------------------------------------------------------------------------------
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 adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 8
- -------------------------------------------------------------------------------
Keystone Capital Preservation and 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--September 30, 1995
<TABLE>
<CAPTION>
Interest Maturity Face Market
Rate Date Amount Value
===============================================================================================================
<S> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (91.9%)
FHLMC (38.5%)
FHLMC Pool #605386, Cap 12.890%, Margin 2.114% + CMT,
Resets Annually 7.736% 09/01/17 $ 2,809,768 $ 2,886,587
FHLMC Pool #605343, Cap 13.604%, Margin 2.125% + CMT,
Resets Annually 7.782 03/01/19 3,547,819 3,645,384
FHLMC Pool #645062, Cap 14.110%, Margin 2.337% + CMT,
Resets Annually 7.788 05/01/19 252,823 257,326
FHLMC Pool #785114, Cap 13.280%, Margin 2.125% + CMT,
Resets Annually 8.204 07/01/19 209,845 215,976
FHLMC Pool #865220, Cap 15.060%, Margin 2.345% + CMT,
Resets Annually 7.785 04/01/20 1,062,056 1,080,217
FHLMC Pool #785147, Cap 12.783%, Margin 2.015% + CMT,
Resets Annually 7.988 05/01/20 93,813 95,000
FHLMC Pool #845039, Cap 12.463%, Margin 2.080% + CMT,
Resets Annually 7.612 10/01/21 5,479,396 5,623,230
FHLMC Pool #606679, Cap 12.052%, Margin 2.159% + CMT,
Resets Annually 7.566 10/01/21 2,098,487 2,154,222
FHLMC Pool #845049, Cap 12.678%, Margin 2.183% + CMT,
Resets Annually 7.767 11/01/21 1,590,569 1,637,292
FHLMC Pool #845063, Cap 12.050%, Margin 2.174% + CMT,
Resets Annually 7.750 11/01/21 4,974,545 5,120,673
FHLMC Pool #845070, Cap 11.924%, Margin 2.127% + CMT,
Resets Annually 7.691 01/01/22 7,088,968 7,323,791
FHLMC Pool #845082, Cap 12.350%, Margin 1.997% + CMT,
Resets Annually 7.687 03/01/22 2,615,112 2,677,221
- ---------------------------------------------------------------------------------------------------------------
TOTAL FHLMC 32,716,919
===============================================================================================================
FNMA (53.4%)
FNMA Pool #094564, Cap 15.859%, Margin 1.975% + CMT,
Resets Annually 7.551 01/01/16 3,200,836 3,283,866
FNMA Pool #092086, Cap 15.445%, Margin 2.075% + CMT,
Resets Annually 8.208 10/01/16 1,248,478 1,276,569
FNMA Pool #070033, Cap 14.352%, Margin 1.750% + CMT,
Resets Annually 7.335 10/01/17 1,016,146 1,033,929
FNMA Pool #070119, Cap 12.021%, Margin 2.000% + CMT,
Resets Annually 7.802 11/01/17 4,056,580 4,185,883
FNMA Pool #062610, Cap 12.750%, Margin 2.125% + CMT,
Resets Annually 8.125 06/01/18 481,151 497,991
FNMA Pool #090678, Cap 13.136%, Margin 2.177% + CMT,
Resets Annually 7.747 09/01/18 5,693,198 5,883,579
</TABLE>
See Notes to Schedule of Investments. (continued on next page)
<PAGE>
PAGE 10
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
<TABLE>
<CAPTION>
Interest Maturity Face Market
Rate Date Amount Value
===============================================================================================================
<S> <C> <C> <C> <C>
FNMA (continued)
FNMA Pool #124015, Cap 13.307%, Margin 1.817% + CMT,
Resets Annually 7.580% 11/01/18 $ 2,178,811 $ 2,221,363
FNMA Pool #114714, Cap 12.603%, Margin 1.750% + CMT,
Resets Annually 7.441 03/01/19 427,887 435,507
FNMA Pool #105007, Cap 13.165%, Margin 2.030% + CMT,
Resets Annually 7.940 07/01/19 393,903 399,568
FNMA Pool #095405, Cap 13.738%, Margin 2.068% + CMT,
Resets Annually 7.853 12/01/19 2,252,023 2,318,176
FNMA Pool #102905, Cap 13.071%, Margin 2.000% + CMT,
Resets Annually 8.025 07/01/20 1,127,214 1,155,744
FNMA Pool #124289, Cap 13.425%, Margin 2.005% + CMT,
Resets Annually 7.696 09/01/21 10,673,033 10,956,509
FNMA Pool #124204, Cap 13.506%, Margin 2.026% + CMT,
Resets Annually 7.644 01/01/22 2,606,214 2,682,785
FNMA Pool #238847, Cap 13.334%, Margin 2.317% + CMT,
Resets Annually 8.023 06/01/31 8,775,760 9,082,912
- ---------------------------------------------------------------------------------------------------------------
TOTAL FNMA 45,414,381
===============================================================================================================
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST--$78,479,966) 78,131,300
===============================================================================================================
FIXED RATE MORTGAGE SECURITIES (3.6%)
FHLMC (1.2%)
FHLMC CMO, Series 11 Class 11C (Est. Mat. 1997) (b) 9.500 04/15/19 47,275 48,560
FHLMC CMO, Series 41 Class 41E (Est. Mat. 1996) (b) 10.000 08/15/19 968,164 977,545
- ---------------------------------------------------------------------------------------------------------------
TOTAL FHLMC 1,026,105
===============================================================================================================
FNMA (1.6%)
FNMA Pool #058442 11.000 01/01/18 1,263,837 1,392,445
- ---------------------------------------------------------------------------------------------------------------
GNMA (0.8%)
GNMA Pool #265405 10.000 03/15/04 142,567 149,828
GNMA Pool #265615 10.000 03/15/04 43,598 45,818
GNMA Pool #272915 10.000 04/15/04 57,335 60,255
GNMA Pool #185579 10.000 05/15/04 46,914 49,304
GNMA Pool #258327 10.000 05/15/04 168,026 176,584
GNMA Pool #258340 10.000 05/15/04 147,770 155,296
- ---------------------------------------------------------------------------------------------------------------
TOTAL GNMA 637,085
===============================================================================================================
TOTAL FIXED RATE MORTGAGE SECURITIES (COST--$3,093,211) 3,055,635
===============================================================================================================
</TABLE>
See Notes to Schedule of Investments.
<PAGE>
PAGE 11
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS--September 30, 1995
<TABLE>
<CAPTION>
Interest Maturity Face Market
Rate Date Amount Value
===============================================================================================================
<S> <C> <C> <C> <C>
U.S. GOVERNMENT ISSUES (2.1%)
U.S. Treasury Notes (Cost--$1,753,555) 6.000% 08/31/97 $ 1,750,000 $ 1,754,375
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Maturity
Value
===============================================================================================================
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT (1.4%)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account,
purchased 9/29/95) (c) (Cost--$1,223,000) 6.391 10/02/95 1,223,651 1,223,000
===============================================================================================================
TOTAL INVESTMENTS (COST--$84,549,732) (a) 84,164,310
===============================================================================================================
OTHER ASSETS AND LIABILITIES--NET (1.0%) 881,874
===============================================================================================================
NET ASSETS (100.0%) $85,046,184
===============================================================================================================
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
(a) 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 September 30, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $ 76,897
Gross unrealized depreciation (462,319)
--------
Net unrealized appreciation (depreciation) $(385,422)
========
</TABLE>
(b) 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 dates.
These estimated maturity dates are unaudited.
(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at September 30, 1995.
Legend of Portfolio Abbreviations:
CMO--Collateralized Mortgage Obligation
CMT--1, 3, or 5 year Constant Maturity Treasury Index
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
See Notes to Financial Statements.
<PAGE>
PAGE 12
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 30, 1994
(Date of Initial
Public Offering) to
September 30, 1995
=============================================================================
<S> <C>
Net asset value beginning of period $ 9.51
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.46
Net realized and unrealized gain (loss) on
investments 0.14
- -----------------------------------------------------------------------------
Total from investment operations 0.60
- -----------------------------------------------------------------------------
Less distributions from:
Net investment income (0.42)
In excess of net investment income (0.01)
- -----------------------------------------------------------------------------
Total distributions (0.43)
- -----------------------------------------------------------------------------
Net asset value end of period $ 9.68
=============================================================================
Total return (a) 6.36%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 0.86%(c)(d)
Net investment income 6.37%(d)
Portfolio turnover rate 67%
- -----------------------------------------------------------------------------
Net assets end of period (thousands) $19,293
=============================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.27%
(annualized) for the period December 30, 1994 (Date of Initial Public
Offering) to September 30, 1995.
(c) "Ratio of total expenses to average net assets" for the period ended
September 30, 1995 includes indirectly paid expenses. Excluding
indirectly paid expenses for the period December 30, 1994 (Date of
Initial Public Offering) to September 30, 1995, the expense ratio would
have been 0.82% (annualized).
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 13
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
July 1, 1991
(Commencement
of Operations) to
Year Ended September 30, September 30,
1995 1994 1993 1992 1991
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 9.62 $ 9.91 $ 9.88 $ 10.06 $ 10.00
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.52 0.47 0.45 0.58 0.18
Net realized and unrealized gain (loss)
on investments 0.03 (0.41) (0.05) (0.21) 0.06
- --------------------------------------------------------------------------------------------------------
Total from investment operations 0.55 0.06 0.40 0.37 0.24
- --------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.48) (0.34) (0.37) (0.55) (0.18)
In excess of net investment income (0.01) (0.01) 0 0 0
- --------------------------------------------------------------------------------------------------------
Total distributions (0.49) (0.35) (0.37) (0.55) (0.18)
- --------------------------------------------------------------------------------------------------------
Net asset value end of year $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06
========================================================================================================
Total return (a) 5.81% 0.58% 4.16% 3.71% 2.43%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.53%(c) 1.50% 1.50% 1.36% 1.19%(d)
Net investment income 5.46% 4.05% 4.44% 5.50% 6.42%(d)
Portfolio turnover rate 67% 34% 60% 41% 2%
- --------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $62,998 $95,761 $144,725 $186,742 $25,769
========================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.09%,
1.93%, 1.94%, 2.03%, and 3.19% (annualized) for the years ended September
30, 1995, 1994, 1993, 1992, and the period July 1, 1991 (Commencement of
Operations) to September 30, 1991, respectively.
(c) "Ratio of total expenses to average net assets" for the year ended
September 30, 1995 includes indirectly paid expenses. Excluding
indirectly paid expenses for the year ended September 30, 1995, the
expense ratio would have been 1.50%.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended
September 30,
February 1, 1993
(Date of Initial
Public Offering) to
1995 1994 September 30, 1993
==============================================================================================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.60 $ 9.90 $ 9.82
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.52 0.40 0.23
Net realized and unrealized gain (loss) on
investment 0.04 (0.35) 0.09
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.56 0.05 0.32
- ----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.48) (0.34) (0.24)
In excess of net investment income (0.01) (0.01) 0
- ----------------------------------------------------------------------------------------------
Total distributions (0.49) (0.35) (0.24)
- ----------------------------------------------------------------------------------------------
Net asset value end of year $ 9.67 $ 9.60 $ 9.90
==============================================================================================
Total return (a) 5.93% 0.48% 3.28%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.53%(c) 1.50% 1.50%(d)
Net investment income 5.51% 4.08% 2.91%(d)
Portfolio turnover rate 67% 34% 60%
- ----------------------------------------------------------------------------------------------
Net assets end of year (thousands) $2,755 $2,874 $2,077
==============================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.08%,
1.94% and 1.67% (annualized) for the years ended September 30, 1995, 1994
and the period February 1, 1993 (Date of Initial Public Offering) to
September 30, 1993, respectively.
(c) "Ratio of total expenses to average net assets" for the year ended
September 30, 1995 includes indirectly paid expenses. Excluding
indirectly paid expenses for the year ended September 30, 1995, the
expense ratio would have been 1.50%.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
===================================================================
Assets (Notes 1 and 4):
Investments at market value (identified
cost--$84,549,732) $84,164,310
Cash 851
Receivable for:
Principal paydown 708,751
Interest 754,978
Fund shares sold 24,140
Due from Investment Advisor 53,272
Unamortized organization expenses 3,896
Prepaid expenses and other assets 3,734
- -------------------------------------------------------------------
Total assets 85,713,932
- -------------------------------------------------------------------
Liabilities (Notes 2 and 4):
Payable for:
Fund shares redeemed 187,990
Distributions to shareholders 408,294
Commissions payable to Principal Underwriter 5,625
Transfer agent fees payable 12,781
Accrued reimbursable expenses 2,001
Other accrued expenses 51,057
- -------------------------------------------------------------------
Total liabilities 667,748
- -------------------------------------------------------------------
Net assets $85,046,184
===================================================================
Net assets represented by (Note 1):
Paid-in capital $92,980,379
Distributions in excess of net investment income (415,117)
Accumulated net realized gain (loss) on
investments (7,133,656)
Net unrealized appreciation (depreciation) on
investments (385,422)
- -------------------------------------------------------------------
Total net assets $85,046,184
- -------------------------------------------------------------------
Net Asset Value (Notes 1 and 2):
Class A Shares
Net assets of $19,293,209/1,993,700 shares
outstanding $9.68
Offering price per share ($9.68/0.97) (based on
a sales charge of 3.00% of the offering price
at September 30, 1995) $9.98
Class B Shares
Net assets of $62,997,920/6,509,082 shares
outstanding $9.68
Class C Shares
Net assets of $2,755,055/285,040 shares
outstanding $9.67
===================================================================
</TABLE>
STATEMENT OF OPERATIONS
Year Ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
===================================================================
Investment income (Note 1):
Interest $ 6,619,373
- -------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $ 605,247
Transfer agent fees 177,284
Accounting, auditing, and legal
fees 50,970
Custodian fees 83,965
Printing 22,535
Distribution Plan expenses 825,370
Registration fees 53,531
Amortization of organization
expenses 12,215
Insurance expenses 4,906
Miscellaneous 9,060
Reimbursement from investment
adviser (503,005)
- -------------------------------------------------------------------
Total expenses 1,342,078
Less: Expenses paid indirectly
(Note 4) (30,773)
- -------------------------------------------------------------------
Net expenses 1,311,305
- -------------------------------------------------------------------
Net investment income 5,308,068
- -------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (Notes 1 and 3):
Net realized gain (loss) on
investments (1,162,200)
Net change in unrealized
appreciation (depreciation) on
investments 1,169,382
- -------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 7,182
- -------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations $ 5,315,250
===================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 16
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended September 30,
1995 1994
===================================================================================================================
<S> <C> <C>
Operations (Notes 1 and 3):
Net investment income $ 5,308,068 $ 4,985,154
Net realized gain (loss) on investments (1,162,200) (1,149,491)
Net change in unrealized appreciation (depreciation) on
investments 1,169,382 (3,057,603)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 5,315,250 778,060
- -------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1):
Net investment income:
Class A Shares (909,585) 0
Class B Shares (3,706,229) (4,106,725)
Class C Shares (143,406) (110,103)
In excess of net investment income:
Class A Shares (26,148) 0
Class B Shares (106,543) (102,697)
Class C Shares (4,122) (3,081)
- -------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (4,896,033) (4,322,606)
- -------------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Shares issued in connection with acquisition of Keystone America
Capital Preservation and Income Fund--Class A (Note 5) 23,825,980 0
Proceeds from shares sold:
Class A Shares 699,481 0
Class B Shares 26,668,622 5,381,706
Class C Shares 1,440,686 4,231,471
Payments for shares redeemed:
Class A Shares (6,023,682) 0
Class B Shares (62,204,625) (53,383,466)
Class C Shares (1,696,123) (3,402,642)
Net asset value of shares issued in reinvestment of dividends and distributions:
Class A Shares 689,075 0
Class B Shares 2,480,740 2,480,644
Class C Shares 111,984 69,654
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital
share transactions (14,007,862) (44,622,633)
- -------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (13,588,645) (48,167,179)
- -------------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of year 98,634,829 146,802,008
- -------------------------------------------------------------------------------------------------------------------
End of year [including distributions in excess of net investment
income as follows: September 30, 1995--($415,117), September
30, 1994--($327,922)] (Note 1) $ 85,046,184 $ 98,634,829
===================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 17
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Capital Preservation and Income Fund (formerly Keystone America
Capital Preservation and Income Fund II) (the "Fund") is a Massachusetts
business trust for which Keystone Investment Management Company (formerly
Keystone Custodian Funds, Inc.) ("Keystone") is the Investment Advisor and
Manager. The Fund was organized on December 19, 1990 and had no operations
prior to July 1, 1991. It is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a diversified open-end investment
company.
The Fund currently offers three classes of shares. Class A shares are sold
subject to a maximum sales charge of 3.00% of the amount invested payable at
the time of purchase. Class B shares are sold subject to a contingent
deferred sales charge payable upon redemption which decreases depending on
when the shares were purchased and how long the shares have been held. Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase, and are available only through
dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company (formerly Keystone Distributors, Inc.)
("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned
by an investor group consisting of current and former members of management
of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned
subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. U.S. Government agency securities and certificates are traded in the
over-the-counter market and are valued at the mean of bid and asked prices at
the time of valuation. Short-term investments which are purchased with
maturities of sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount) which when combined with accrued interest approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased which
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount) which when combined with accrued interest approximates
market. All other securities for which market quotations are readily
available are valued at current market value. 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.
B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the
identified cost basis. Interest income is recorded on the accrual basis. All
discounts are amortized for both financial reporting and federal income tax
purposes. Distributions to shareholders are recorded by the Fund at the close
of business on the ex-dividend date.
<PAGE>
PAGE 18
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
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 or excise 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. Any distribution which is
declared before December 31 and paid before the next February 1 will be
taxable to the shareholder in the year declared.
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.
E. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five year amortization period,
redemption proceeds will be reduced by any amortized organization expenses in
the same proportion as the number of initial shares being redeemed bears to
the number of initial shares outstanding at the time of redemption.
F. The Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, to shareholders
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.
Differences between book basis net investment income available for
distribution and tax basis net investment income available for distribution
are primarily attributable to 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:
<PAGE>
PAGE 19
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
December 30, 1994
(Date of Initial Public Offering)
to September 30, 1995
- ------------------------------------------------------------------------
<S> <C>
Shares issued in
connection with
acquisition of
Keystone America
Capital Preservation
and Income Fund
(Note 5) 2,506,041
Shares sold 72,460
Shares redeemed (656,221)
Shares issued in
reinvestment of
dividends and
distributions 71,420
- ------------------------------------------------------------------------
Net increase
(decrease) 1,993,700
========================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
--------------------------
Year Ended September 30,
1995 1994
- ----------------------------------------------------
<S> <C> <C>
Shares sold 2,758,618 549,945
Shares redeemed (6,464,191) (5,448,882)
Shares issued in
reinvestment of
dividends and
distributions 257,649 253,073
- ----------------------------------------------------
Net increase
(decrease) (3,447,924) (4,645,864)
====================================================
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
----------------------
Year Ended September 30,
1995 1994
- ------------------------------------------------
<S> <C> <C>
Shares sold 150,700 432,197
Shares redeemed (176,498) (349,958)
Shares issued in
reinvestment of
dividends and
distributions 11,638 7,141
- ------------------------------------------------
Net increase
(decrease) (14,160) 89,380
================================================
</TABLE>
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 1940 Act.
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses for the distribution of Class A shares. 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 up to 0.25% of
the average net asset value of Class A shares maintained by the such others
and remaining outstanding on the Fund's books for specified periods.
The Class B Distribution Plan provides for payment at an annual rate of up
to 1.00% of the average daily net asset value of Class B shares to pay
expenses for the distribution of Class B shares. 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 2.75% of the
value of each share sold plus the first year's service in the amount of 0.25%
of the price paid for each Class B share sold. Beginning approximately 12
months after the purchase of a Class B share, the dealer or other party will
receive service fees at an annual rate of 0.25% of the average daily net
asset value of such Class B shares maintained by such others 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 3% of amounts redeemed
during the first 12 months following the date of purchase to 1% of amounts
redeemed during the fourth twelve month period following the date of
purchase. Class B shares purchased on or after June 1, 1995 that have been
outstanding for 8 years following the month of pur-
<PAGE>
PAGE 20
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
chase will automatically convert to Class A shares without a front-end sales
charge or exchange fee. Class B shares purchased prior to June 1, 1995 will
retain their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(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 books of the Fund for
specified periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Independent Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
During the period December 30, 1994 (Date of Initial Public Offering) to
September 30, 1995, the Fund paid or accrued to KIDC $34,962 under its Class
A Distribution Plan. During the year ended September 30, 1995, the Fund paid
or accrued to KIDC $759,804 for Class B shares sold prior to June 1, 1995 and
$1,553 for Class B shares sold on or after June 1, 1995. During the year
ended September 30, 1995, the Fund paid or accrued $29,051 under its Class C
Distribution Plan. These amounts represent 0.22% (annualized), 1.00% and
1.00%, respectively, of the average daily net assets of Class A, B and C.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Distribution Plans are $8,487,962 for
Class B shares purchased prior to June 1, 1995 and $42,766 for Class B shares
purchased on or after June 1, 1995 and $380,401 for Class C shares. These
amounts represent 13.54% and 13.81% of the net assets of Classes B and C,
respectively, as of September 30, 1995.
(3.) Securities Transactions
As of September 30, 1995 the Fund had a capital loss carryover for federal
income tax purposes of approximately $6,867,000 which expires as follows:
$59,000 in 1999, $34,000 in 2000, $5,935,000 in 2001, $197,000 in 2002, and
$642,000 in 2003.
Purchases and sales of investment securities (including proceeds received
at maturity) for the year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases From Sales
- ----------------------------------------------------
<S> <C> <C>
Portfolio securities $ 60,428,326 $ 73,066,544
Short-term
investments 487,450,000 487,848,000
- ----------------------------------------------------
$547,878,326 $560,914,544
====================================================
</TABLE>
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provided investment advisory and management
services to the Fund for the year ended September 30,
<PAGE>
PAGE 21
- -------------------------------------------------------------------------------
1995. In return, Keystone was paid a management fee computed and payable
daily calculated at a rate of 2.0% 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 net asset value
of the Fund. During the year ended September 30, 1995 the Fund paid or
accrued to Keystone investment management and advisory services fees of
$605,247, which represented 0.64% of the Fund's average net assets.
During the year ended September 30, 1995, the Fund paid or accrued to KII
$17,744 as reimbursement for the cost of certain accounting and printing
services provided to the Fund and $177,284 was paid or accrued to KIRC for
transfer agent fees.
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 voluntarily agreed to reimburse all expenses incurred by the Fund
in excess of certain expense limitations. In accordance with this voluntary
expense limitation, Keystone reimbursed the Fund $65,140 for Class A Shares
for the period December 30, 1994 (Date of Initial Public Offering) to
September 30, 1995. For the year ended September 30, 1995 Keystone reimbursed
the Fund $421,990 and $15,875 for Class B Shares and Class C Shares,
respectively. Keystone does not intend to seek repayment for these amounts.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended September 30, 1995, the Fund paid custody fees
in the amount of $53,192 and received a credit of $30,773 pursuant to the
expense offset arrangement, resulting in a total expense of $83,965. The
assets deposited with the custodian under this expense offset arrangement
could have been invested in an income- producing asset.
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 Independent Trustees of
the Fund receive no compensation for their services.
(5.) Fund Reorganization
On December 30, 1994, the Fund acquired the net assets of Keystone America
Capital Preservation and Income Fund in exchange for Class A Shares of the
Fund pursuant to a plan of reorganization approved by the shareholders of
Keystone America Capital Preservation and Income Fund on December 30, 1994.
The acquisition was accomplished by a tax-free exchange of 2,506,041 shares
of the Fund for the net assets of Keystone America Capital Preservation and
Income Fund. The net assets of Keystone America Capital Preservation and
Income Fund on that date including $301,751 of unrealized depreciation on
investments, were combined with the Fund. The aggregate net assets of the
Fund and Keystone America Capital Preservation and Income Fund immediately
before the acquisition were $91,920,877 and $23,825,980, respectively. The
net assets of the Fund immediately after the acquisition was $115,746,857.
<PAGE>
PAGE 22
- -------------------------------------------------------------------------------
Keystone Capital Preservation and Income Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Capital Preservation and Income Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Capital Preservation and Income Fund (formerly Keystone America
Capital Preservation and Income Fund II) including the schedule of
investments, as of September 30, 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 the period from December 30, 1994 (Date of Initial Public
Offering) to September 30, 1995 for Class A Shares, for each of the years in
the four-year period then ended and the period from July 1, 1991
(Commencement of Operations) to September 30, 1991 for Class B Shares and for
each of the years in the two-year period then ended and the period from
February 1, 1993 (Date of Initial Public Offering) to September 30, 1993 for
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 September 30, 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 Capital Preservation and Income Fund as of September 30, 1995, the
results of its operations for the year then ended, the changes in its net
assets for each of the years in the two- year period then ended, and the
financial highlights for each of the years or periods specified in the first
paragraph above in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 27, 1995
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FEDERAL TAX STATUS--Fiscal 1995 Distributions (Unaudited)
During the period December 30, 1994 (Date of Initial Public Offering) to
September 30, 1995, dividends of $0.43 per share were paid or are payable to
shareholders of Class A. During the fiscal year ended September 30, 1995,
dividends of $0.49 per share were paid or are payable to shareholders of
Class B and Class C shares. These dividends are taxable to shareholders as
ordinary income in the year in which received by them or credited to their
accounts and none are eligible for the corporate dividends received
deduction. In January 1996, we will send you information on the distributions
paid during the calendar year to help you in completing your federal tax
return.
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[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
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone at 1-800-343-2898.
[Keystone Logo] KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
CPI-AR-11/95
6M ["Recycled" symbol]
[FRONT COVER]
KEYSTONE
[Photo]
CAPITAL PRESERVATION AND INCOME FUND
[Keystone logo]
ANNUAL REPORT
SEPTEMBER 30, 1995
