PAGE 1
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 six-month period which ended March 31, 1996.
Performance
Your Fund provided the following returns as of March 31, 1996:
Class A shares returned 3.15% for the six-month period and 6.41% for the
twelve-month period.
Class B shares returned 2.79% for the six-month period and 5.73% for the
twelve-month period.
Class C shares returned 2.79% for the six-month period and 5.74% for the
twelve-month period.
The six-month U.S. Treasury bill, a benchmark for short-term income-oriented
obligations, returned 2.56% for the six-month period and 7.68% for the
twelve-month period which ended March 31, 1996.
We have been pleased with your Fund's performance, which was recently
recognized by Morningstar, an independent mutual fund rating organization.
Morningstar assigned your Fund (star star star star) (four stars) for its risk
adjusted performance among 831 fixed income funds as of March 31, 1996.(1)
The fixed-income market experienced two different kinds of climates over the
six-month period. In the first part of the period, interest rates declined
close to historically low levels. The atmosphere changed at the beginning of
1996, as signs of stronger growth began to develop. One of these signals was
testimony by Federal Reserve Board Chairman Alan Greenspan, which was
interpreted as counter to most investors' expectations. Another signal was
the announcement in February of the largest increase in monthly job growth in
five years, which surprised many investors. These events helped to change
investors' outlooks and caused interest rates to rise and bond prices to
decline.
Despite the considerable price volatility for bond investors during the last
few months, adjustable-rate mortgage securities (ARMS) performed very well in
our opinion. We believe Keystone Capital Preservation and Income Fund
exhibited solid price stability, especially during the last three months of
the period, a period of generally declining bond prices. The net asset value
for Class A shares rose from $9.68 to $9.70 over the six month period. Class
B and Class C shares had similar performance. Class B shares rose from $9.68
to $9.70 and Class C shares rose from $9.67 to $9.69 over the same six-month
period. We attribute this solid performance to our commitment to a
conservative management strategy.
Reflecting the lower rates seen in 1995, the Fund's yield declined modestly.
While some minimal changes may still occur, we believe that most of the
effects of the rate decline have been absorbed in the portfolio.
As you are aware, the markets undergo periods of transition. These can be
natural market phenomenons, with significant price swings unsettling for even
the most seasoned investor. Environments such as these serve as a reminder of
the need for diversification within one's own investment portfolio.
--continued--
(1)Source: Morningstar, Inc. Morningstar's proprietary ratings reflect the
Fund's historical risk-adjusted performance as of March 31, 1996. 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 fixed income
category, the Fund received a 4-star rating for the 3-year period. The Fund
was not rated for the five or ten year periods because the Fund does not yet
have a five or ten year record. There were 831 funds in the 3-year, 443 funds
in the 5-year, and 162 funds in the 10-year category. Past performance is no
guarantee of future results.
<PAGE>
PAGE 2
Keystone Capital Preservation and Income Fund
Keystone Capital Preservation and Income Fund is designed to seek attractive
income, safety and liquidity. We believe these features can be critical during
periods of market uncertainty. We think your Fund has value not only to those
whose primary goal is maintenance of capital, but as the liquid portion of a
well balanced investment portfolio.
We appreciate your continued support of Keystone Capital Preservation and
Income Fund. We encourage you to write to us with your questions or comments
about your Keystone investment.
Sincerely,
/s/ Albert H. Elfner III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
May 1996
[key logo]
DALBAR
HONORS COMMITMENT TO:
INVESTORS
1995
Dalbar Key Honors
Honoring Commitment to Excellence
Keystone was recently recognized by Dalbar, an independent mutual fund rating
organization, for demonstrating a commitment to serving the needs of
customers. The award is intended to distinguish companies who are committed
to investors and have a proven ability to provide good service.
*******[boxed text]******
[graphic] telephone off hook
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear Keystone portfolio
managers discuss their latest strategies. You can also listen to Keystone's
overall market outlook from James McCall, Chief Investment Officer. The
service is available 24 hours a day, seven days a week and updated at least
monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2
***************************
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
Christopher P. Conkey is Senior Portfolio Manager of your Fund and head of
Keystone's High Grade Fixed-Income Group. Mr. Conkey is a Chartered Financial
Analyst and has more than 12 years of experience managing fixed-income
investments. He holds a BA in economics from Clark University and an MBA in
finance from Boston University.
Together with senior portfolio manager Barbara McCue and analysts David J.
Bowers and Gary E. Pzegeo, the team evaluates the economic environment in
selecting adjustable-rate mortgage securities for your Fund.
Q How would you characterize the fixed income market environment over the
past six months?
A The environment can be broken down into two different time periods with
two different climates. For the first three months, a strong momentum drove
interest rates close to historically low levels. This momentum was stimulated
by an outlook for slow economic growth and low inflation here in the U.S., as
well as interest rate cuts abroad. "Cheap money" poured into the U.S. bond
market, pushing prices higher.
Q What happened to change that outlook?
A Late in 1995, investors' focus turned to the budget gridlock in Washington
and speculation about the upcoming election year. The positive momentum
stopped; and with it, sellers began to "unwind" some of the trades that
helped drive the bond market.
In the weeks that followed, economic data was reported that depicted a
healthier economy than many people expected. That data was followed by
comments from Federal Reserve Board Chairman Alan Greenspan who said he
anticipated moderate economic growth with low inflation. His statement jarred
what was already an uncertain bond market. Many investors thought the economy
would slip into a recession later in 1996 and saw further interest rate cuts
as a foregone conclusion. Now believing that bond prices had seen their peak,
sellers entered the market in force and interest rates rose and bond prices
declined.
Q How did the Fund perform?
A We believe the Fund performed as it was designed to perform. Despite the
price volatility that bonds experienced over the past six months, the
portfolio demonstrated excellent price stability. During the six months,
yields on ARMs fell modestly, as the lower rates of 1995 were reflected in
the underlying adjustable rate mortgages. At this point, though, it appears
that most of the rate declines have been absorbed; and now we expect to see a
period of improved yield stability.
********boxed text********
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 quality: AAA
Net assets: $74 million
*************************
<PAGE>
PAGE 4
Keystone Capital Preservation and Income Fund
[pie chart]
Asset Allocation
as of March 31, 1996
ARMs (90.9%)
Fixed-rate mortgages (2.4%)
U.S. government issues (4.6%)
Other assets and liabilities (1.5%)
Short-term obligations (0.6%)
(as a percentage of net assets)
[end pie chart]
We think this type of environment demonstrated the importance of
diversification, capital preservation and liquidity in an individual's
investment portfolio. Markets occasionally go through these periods of
readjustment, but they can be unsettling. We believe Keystone Capital
Preservation and Income Fund provided a safe-haven during an uncertain
period.
Q How did you manage the Fund?
A Our goal for the Fund is to provide greater return potential than other
short-term alternatives, but incur less price volatility than long-term
alternatives. In seeking to reach that goal, we undergo a selection process
that reviews securities based on their geographic diversification, mortgage
rate adjustment dates and characteristics, and our interest rate outlook. We
maintain high credit standards, investing only in those securities that are
government guaranteed or issued by a U.S. agency. These currently include
Federal National Mortgage Association (FNMA) and Federal National Mortgage
Loan Corporation (FHLMC). All of these factors contribute to the Fund's price
stability and liquidity.
We invested over 90% of the Fund's assets in non-convertible, fully
indexed, well seasoned adjustable rate mortgages. These mortgages have a
history that enables us to review prepayment patterns and maximize income for
the portfolio. Newly issued mortgages can carry much lower "teaser rates"
that favor the mortgage holder over the investor. We also look for geographic
diversification and to stagger reset dates throughout the year, so that
changes to the Fund's income are gradual.
Q What is your outlook?
A While there may be some near term volatility, we are cautiously optimistic
that bonds are headed for a period of relative price stability. Investors
have a clearer picture of the economy, since volatile monthly data has begun
to emerge into measurable trends. We experienced a period of "expectation
readjustment", which we believe should lead to bonds trading within a
reasonable range. There also appears to be an ample supply of ARMS, which
should benefit our selection process.
Q Does Keystone Capital Preservation and Income Fund have value in this
type of market?
A We think that maintenance of capital plays an important role in any well
diversified portfolio. The portion dedicated to that purpose depends upon the
goal of the particular investor. This Fund seeks to provide the returns of
bonds with short maturities with less price volatility. We believe it has
value not only for the investor seeking attractive income and stability, but
is a good fit for the short maturity portion of most investment portfolios.
[solid diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 5
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
7/91 10068 10010
3/92 10474 9970
3/93 10848 9890
3/94 11128 9800
3/95 11448 9660
3/96 12104 9700
Total Value $12,104
A $10,000 investment in Keystone Capital Preservation and Income Fund Class B
made on July 1, 1991 with all distributions reinvested was worth $12,104 on
March 31, 1996. Past performance is no guarantee of future results.
[end mountain chart]
Six-Month Performance as of March 31, 1996
Class A Class B Class C
Total returns* 3.15% 2.79% 2.79%
Net asset
value 9/30/95 $9.68 $9.68 $9.67
3/31/96 $9.70 $9.70 $9.69
Dividends $0.28 $0.25 $0.25
Capital gains None None None
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of March 31, 1996
Cumulative total returns Class A Class B Class C
1-year
Without sales charge 6.41% 5.73% 5.74%
With sales charge 3.22% 2.73% 5.74%
Since inception
Without sales charge 9.69% 21.04% 13.00%
With sales charge 6.40% 21.04% 13.00%
Average Annual Returns
1-year
Without sales charge 6.41% 5.73% 5.74%
With sales charge 3.22% 2.73% 5.74%
Since inception 5.07% 4.10% 3.93%
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 at the end of the period. If you have not redeemed, your
return was greater than the figure listed.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received after holding shares for one year 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.
<PAGE>
PAGE 6
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 7
SCHEDULE OF INVESTMENTS--March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Face Market
Rate Date Amount Value
================================================================ ====== ====== ========= ============
<S> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (90.9%)
FHLMC (33.0%)
FHLMC Pool #605386, Cap 12.89%, Margin 2.11% + CMT, Resets
Annually 7.790% 09/01/17 $2,619,855 $ 2,704,581
FHLMC Pool #605343, Cap 13.57%, Margin 2.12% + CMT, Resets
Annually 7.890 03/01/19 2,813,883 2,905,334
FHLMC Pool #645062, Cap 14.10%, Margin 2.33% + CMT, Resets
Annually 7.788 05/01/19 250,588 257,166
FHLMC Pool #785114, Cap 13.24%, Margin 2.12% + CMT, Resets
Annually 8.198 07/01/19 180,660 185,939
FHLMC Pool #865220, Cap 15.06%, Margin 2.34% + CMT, Resets
Annually 8.402 04/01/20 1,053,810 1,077,026
FHLMC Pool #785147, Cap 12.78%, Margin 2.01% + CMT, Resets
Annually 7.937 05/01/20 93,051 95,029
FHLMC Pool #845039, Cap 12.45%, Margin 2.08% + CMT, Resets
Annually 7.780 10/01/21 3,082,895 3,181,162
FHLMC Pool #606679, Cap 12.07%, Margin 2.15% + CMT, Resets
Annually 7.803 10/01/21 1,714,285 1,754,468
FHLMC Pool #845049, Cap 12.80%, Margin 2.17% + CMT, Resets
Annually 7.910 11/01/21 1,421,731 1,470,603
FHLMC Pool #845063, Cap 12.07%, Margin 2.18% + CMT, Resets
Annually 7.901 11/01/21 1,911,086 1,976,780
FHLMC Pool #845070, Cap 11.84%, Margin 2.12% + CMT, Resets
Annually 7.835 01/01/22 6,147,911 6,374,616
FHLMC Pool #845082, Cap 12.47%, Margin 1.98% + CMT, Resets
Annually 7.724 03/01/22 2,290,129 2,354,538
---------------------------------------------------------------- ---- ----- ------- ----------
TOTAL FHLMC 24,337,242
---------------------------------------------------------------- ---- ----- ------- ----------
FNMA (57.9%)
FNMA Pool #094564, Cap 15.85%, Margin 1.97% + CMT, Resets
Annually 7.552 01/01/16 2,868,562 2,948,796
FNMA Pool #092086, Cap 15.44%, Margin 2.07% + CMT, Resets
Annually 8.198 10/01/16 1,236,473 1,273,184
FNMA Pool #070033, Cap 14.33%, Margin 1.75% + CMT, Resets
Annually 7.435 10/01/17 954,712 975,897
FNMA Pool #070119, Cap 12.02%, Margin 2.00% + CMT, Resets
Annually 7.860 11/01/17 6,682,610 6,920,678
FNMA Pool #062610, Cap 12.75%, Margin 2.12% + CMT, Resets
Annually 8.125 06/01/18 455,758 471,709
FNMA Pool #090678, Cap 13.15%, Margin 2.17% + CMT, Resets
Annually 7.748 09/01/18 5,206,450 5,388,676
FNMA Pool #124015, Cap 13.32%, Margin 1.81% + CMT, Resets
Annually 7.623 11/01/18 1,980,291 2,023,917
FNMA Pool #114714, Cap 12.60%, Margin 1.75 % + CMT, Resets
Annually 7.489 03/01/19 395,116 404,255
FNMA Pool #105007, Cap 13.17%, Margin 2.03% + CMT, Resets
Annually 8.020 07/01/19 381,592 389,342
FNMA Pool #095405, Cap 13.77%, Margin 2.06% + CMT, Resets
Annually 7.943 12/01/19 1,976,791 2,042,272
FNMA Pool #102905, Cap 13.08%, Margin 2.00% + CMT, Resets
Annually 8.013 07/01/20 1,025,312 1,056,390
FNMA Pool #124289, Cap 13.43%, Margin 2.00% + CMT, Resets
Annually 7.730 09/01/21 8,344,287 8,602,459
FNMA Pool #124204, Cap 13.63%, Margin 2.01% + CMT, Resets
Annually 7.718 01/01/22 2,211,378 2,274,269
FNMA Pool #238847, Cap 13.34%, Margin 2.32% + CMT, Resets
Annually 8.072 06/01/31 7,752,910 8,024,262
---------------------------------------------------------------- ---- ----- ------- ----------
TOTAL FNMA 42,796,106
---------------------------------------------------------------- ---- ----- ------- ----------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST--$67,183,274) 67,133,348
================================================================ ====== ====== ========= ============
<PAGE>
PAGE 8
Keystone Capital Preservation and Income Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
(Unaudited)
Interest Maturity Face Market
Rate Date Amount Value
================================================================ ====== ====== ========= ============
FIXED RATE MORTGAGE SECURITIES (2.4%)
FHLMC (0.8%)
FHLMC CMO, Series 11 Class 11C (Est. Mat. 1998) (a) 9.500% 04/15/19 $ 39,301 $ 40,308
FHLMC CMO, Series 41 Class 41E (Est. Mat. 1996) (a) 10.000 08/15/19 520,820 523,424
---------------------------------------------------------------- ---- ----- ------- ----------
TOTAL FHLMC 563,732
---------------------------------------------------------------- ---- ----- ------- ----------
FNMA (1.6%)
FNMA Pool #058442 (Est. Mat. 1999) (a) 11.000 01/01/18 1,092,868 1,209,028
---------------------------------------------------------------- ---- ----- ------- ----------
TOTAL FIXED RATE MORTGAGE SECURITIES (COST--$1,789,331) 1,772,760
================================================================ ====== ====== ========= ============
U.S. TREASURY NOTES (4.6%)
U.S. Treasury Notes (Cost--$3,408,261) 6.000 08/31/97 3,390,000 3,403,763
---------------------------------------------------------------- ---- ----- ------- ----------
Maturity
Value
================================================================ ====== ====== ========= ============
REPURCHASE AGREEMENT (0.6%)
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, purchased 3/29/96) (b)
(Cost--$446,000) 5.557 4/1/96 $ 446,207 446,000
================================================================ ====== ====== ========= ============
TOTAL INVESTMENTS (COST--$72,826,866) 72,755,871
---------------------------------------------------------------- ---- ----- ------- ----------
OTHER ASSETS AND LIABILITIES--NET (1.5%) 1,096,673
---------------------------------------------------------------- ---- ----- ------- ----------
NET ASSETS--(100%) $73,852,544
================================================================ ====== ====== ========= ============
</TABLE>
(a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected prepayment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed dates.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at March 31, 1996.
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
See Notes to Financial Statements.
<PAGE>
PAGE 9
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
Six Months December 30, 1994
Ended (Date of Initial
March 31, Public Offering) to
1996 September 30, 1995
==============================================================================
(Unaudited)
Net asset value beginning of period $ 9.68 $ 9.51
-------------------------------------------- --------- ---------------
Income from investment operations:
Net investment income 0.31 0.46
Net realized and unrealized gain (loss) on
investments (0.01) 0.14
-------------------------------------------- --------- ---------------
Total from investment operations 0.30 0.60
-------------------------------------------- --------- ---------------
Less distributions from:
Net investment income (0.28) (0.42)
In excess of net investment income 0 (0.01)
-------------------------------------------- --------- ---------------
Total distributions (0.28) (0.43)
-------------------------------------------- --------- ---------------
Net asset value end of period $ 9.70 $ 9.68
============================================ ========= ===============
Total return (a) 3.15% 6.36%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 0.92%(c) 0.86%(c)
Total expenses excluding reimbursement 1.30%(c) 1.27%(c)
Net investment income 6.46%(c) 6.37%(c)
Portfolio turnover rate 7% 67%
Net assets end of period (thousands) $17,883 $19,293
============================================ ========= ===============
(a) Excluding applicable sales charges.
(b) "Ratio of total expenses to average net assets" includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would
have been 0.90% (annualized) for the six months ended March 31, 1996 and
0.82% (annualized) for the period December 30, 1994 (Date of Initial
Public Offering) to September 30, 1995.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 10
Keystone Capital Preservation and Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months July 1, 1991
Ended (Commencement
March 31, Year Ended September 30, of Operations) to
1996 1995 1994 1993 1992 September 30, 1991
==================================================== ======= ======= ======== ======== ===================
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06 $ 10.00
----------------------------------- --------- ---- ---- ----- ----- ---------------
Income from investment operations:
Net investment income 0.27 0.52 0.47 0.45 0.58 0.18
Net realized and unrealized gain
(loss) on investments 0 0.03 (0.41) (0.05) (0.21) 0.06
----------------------------------- --------- ---- ---- ----- ----- ---------------
Total from investment operations 0.27 0.55 0.06 0.40 0.37 0.24
----------------------------------- --------- ---- ---- ----- ----- ---------------
Less distributions from:
Net investment income (0.25) (0.48) (0.34) (0.37) (0.55) (0.18)
In excess of net investment income 0 (0.01) (0.01) 0 0 0
----------------------------------- --------- ---- ---- ----- ----- ---------------
Total distributions (0.25) (0.49) (0.35) (0.37) (0.55) (0.18)
----------------------------------- --------- ---- ---- ----- ----- ---------------
Net asset value end of period $ 9.70 $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06
=================================== ========= ==== ==== ===== ===== ===============
Total return (a) 2.79% 5.81% 0.58% 4.16% 3.71% 2.43%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.62%(c) 1.53% 1.50% 1.50% 1.36% 1.19%(c)
Total expenses excluding
reimbursement 2.08%(c) 2.09% 1.93% 1.94% 2.03% 3.19%(c)
Net investment income 5.75%(c) 5.46% 4.05% 4.44% 5.50% 6.42%(c)
Portfolio turnover rate 7% 67% 34% 60% 41% 2%
Net assets end of period
(thousands) $53,058 $62,998 $95,761 $144,725 $186,742 $25,769
=================================== ========= ==== ==== ===== ===== ===============
</TABLE>
(a) Excluding applicable sales charges.
(b) Beginning with the year ended September 30, 1995, the "Ratio of total
expenses to average net assets" includes indirectly paid expenses.
Excluding indirectly paid expenses, the expense ratios would have been
1.60% (annualized) for the six months ended March 31, 1996 and 1.50% for
the year ended September 30, 1995.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months Year Ended (Date of Initial
Ended September 30, Public Offering) to
March 31, 1996 1995 1994 September 30, 1993
==================================================================== ====== ===================
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 9.67 $ 9.60 $ 9.90 $ 9.82
---------------------------------------- ------------- --- --- ---------------
Income from investment operations:
Net investment income 0.28 0.52 0.40 0.23
Net realized and unrealized gain (loss)
on investments (0.01) 0.04 (0.35) 0.09
---------------------------------------- ------------- --- --- ---------------
Total from investment operations 0.27 0.56 0.05 0.32
---------------------------------------- ------------- --- --- ---------------
Less distributions from:
Net investment income (0.25) (0.48) (0.34) (0.24)
In excess of net investment income 0 (0.01) (0.01) 0
---------------------------------------- ------------- --- --- ---------------
Total distributions (0.25) (0.49) (0.35) (0.24)
---------------------------------------- ------------- --- --- ---------------
Net asset value end of period $ 9.69 $ 9.67 $ 9.60 $ 9.90
======================================== ============= === === ===============
Total return (a) 2.79% 5.93% 0.48% 3.28%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.62%(c) 1.53% 1.50% 1.50%(c)
Total expenses excluding reimbursement 2.08%(c) 2.08% 1.94% 1.67%(c)
Net investment income 5.75%(c) 5.51% 4.08% 2.91%(c)
Portfolio turnover rate 7% 67% 34% 60%
Net assets end of period (thousands) $2,911 $2,755 $2,874 $2,077
======================================== ============= === === ===============
</TABLE>
(a) Excluding applicable sales charges.
(b) Beginning with the year ended September 30, 1995, the "Ratio of total
expenses to average net assets" includes indirectly paid expenses.
Excluding indirectly paid expenses, the expense ratios would have been
1.60% (annualized) for the six months ended March 31, 1996 and 1.50% for
the year ended September 30, 1995.
(c) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 12
Keystone Capital Preservation and Income Fund
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996 (Unaudited)
Assets (Notes 1 and 4)
Investments at market value (identified cost--
$72,826,866) $72,755,871
Cash 599
Receivable for:
Principal paydown 633,682
Interest 618,972
Investments sold 169,040
Due from investment adviser 36,644
Prepaid expenses and other assets 4,597
--------------------------------------------------- ----------
Total assets 74,219,405
--------------------------------------------------- ----------
Liabilities (Notes 2 and 4)
Payable for:
Fund shares redeemed 5,397
Distributions to shareholders 331,551
Distribution fee payable 5,065
Accrued reimbursable expenses 223
Other accrued expenses 24,625
--------------------------------------------------- ----------
Total liabilities 366,861
--------------------------------------------------- ----------
Net assets $73,852,544
=================================================== ==========
Net assets represented by (Note 1)
Paid-in capital $81,557,512
Accumulated distributions in excess of net
investment income (167,786)
Accumulated net realized loss on investments (7,466,187)
Net unrealized depreciation on investments (70,995)
--------------------------------------------------- ----------
Total net assets $73,852,544
=================================================== ==========
Net asset value per share (Notes 1 and 2)
Class A
Net assets of $17,883,229 / 1,843,253 shares
outstanding $9.70
Offering price per share ($9.70 / 0.97) (based on
a sales charge of 3.00% of the offering price
at March 31, 1996) $10.00
Class B
Net assets of $53,058,133 / 5,467,884 shares
outstanding $9.70
Class C
Net assets of $2,911,182 / 300,426 shares
outstanding $9.69
=================================================== ==========
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1996 (Unaudited)
Investment income (Note 1)
Interest $2,929,770
------------------------------------ ---------
Expenses (Notes 2 and 4)
Management fee $ 258,516
Transfer agent fees 59,398
Accounting, auditing and legal fees 28,998
Custodian fees 29,415
Distribution Plan expenses 326,554
Registration fees 29,248
Amortization of organization
expenses 3,896
Other 19,047
Reimbursement from investment
adviser (176,013)
------------------------------------ ------
Total expenses 579,059
Less: Expenses paid indirectly
(Note 4) (6,690)
------------------------------------ ------
Net expenses 572,369
------------------------------------ ---------
Net investment income 2,357,401
------------------------------------ ---------
Net realized and unrealized loss on
investments (Notes 1 and 3)
Net realized loss on investments (332,531)
Net change in unrealized
appreciation (depreciation)
on investments 314,427
------------------------------------ ---------
Net realized and unrealized loss
on investments (18,104)
------------------------------------ ---------
Net increase in net assets
resulting from operations $2,339,297
==================================== =========
<PAGE>
PAGE 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1996 September 30, 1995
================================================================== ================ =====================
(Unaudited)
<S> <C> <C>
Operations (Notes 1 and 3)
Net investment income $ 2,357,401 $ 5,308,068
Net realized loss on investments (332,531) (1,162,200)
Net change in unrealized appreciation (depreciation) on
investments 314,427 1,169,382
------------------------------------------------------------------ -------------- -------------------
Net increase in net assets resulting from operations 2,339,297 5,315,250
------------------------------------------------------------------ -------------- -------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A (543,694) (909,585)
Class B (1,493,915) (3,706,229)
Class C (72,461) (143,406)
In excess of net investment income:
Class A 0 (26,148)
Class B 0 (106,543)
Class C 0 (4,122)
------------------------------------------------------------------ -------------- -------------------
Total distributions to shareholders (2,110,070) (4,896,033)
------------------------------------------------------------------ -------------- -------------------
Capital share transactions (Note 2)
Shares issued in connection with the acquisition of Keystone
America Capital Preservation and Income Fund-Class A (Note 5) 0 23,825,980
Proceeds from shares sold:
Class A 786,839 699,481
Class B 933,549 26,668,622
Class C 405,954 1,440,686
Payments for shares redeemed:
Class A (2,660,647) (6,023,682)
Class B (12,053,246) (62,204,625)
Class C (317,099) (1,696,123)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A 412,896 689,075
Class B 1,008,718 2,480,740
Class C 60,169 111,984
------------------------------------------------------------------ -------------- -------------------
Net decrease in net assets resulting from capital share
transactions (11,422,867) (14,007,862)
------------------------------------------------------------------ -------------- -------------------
Total decrease in net assets (11,193,640) (13,588,645)
------------------------------------------------------------------ -------------- -------------------
Net assets
Beginning of period 85,046,184 98,634,829
------------------------------------------------------------------ -------------- -------------------
End of period [including accumulated distributions in excess of
net investment income as follows: 1996--($167,786) and 1995--
($415,117)] (Note 1) $ 73,852,544 $ 85,046,184
================================================================== ============== ===================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
Keystone Capital Preservation and Income Fund
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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 adviser 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
management company. The Fund seeks a high level of current income consistent
with low volatility of principal by investing under ordinary circumstances at
least 65% of its assets in adjustable rate securities issued or guaranteed by
the United States ("U.S.") government, its agencies or instrumentalities,
such as adjustable rate mortgage securities, loan pools and collateralized
mortgage obligations.
The Fund currently offers three classes of shares. Class A shares are sold
subject to a maximum initial sales charge of 3.00% 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 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 predominantly of current and
former members of management of Keystone and its affiliates.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. The Fund values most of its securities at the mean of the bid and asked
price at the time of valuation and values other securities at fair value
according to procedures established by the Board of Trustees, including
valuing certain of its fixed rate mortgage securities collateralized by a
pool of mortgages and loan pool securities on the basis of valuations
provided by a pricing service, approved by the Fund's Board of Trustees,
which uses information with respect to transactions in mortgage securities
and loan pool securities, quotations from dealers, market transactions in
comparable securities and various relationships between securities in
determining value.
The Fund values short-term investments with maturities of sixty days or less
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 securities with remaining
maturities of more than 60 days, for which market quotations are readily
available, are valued at market. Short-term securities with remaining
maturities of more than 60 days when purchased that are held on the sixtieth
day prior to maturity are valued at amortized cost (market value on the
sixtieth day adjusted for amortization of
<PAGE>
PAGE 15
premium or accretion of discount), which, when combined with accrued interest
approximates market. All other investments are valued at market value or,
where market quotations are not readily available, are valued at fair value
as determined in good faith in accordance with procedures established by the
Fund's Board of Trustees.
B. When the Fund enters into a repurchase agreement (a purchase of
securities whereby the seller agrees to repurchase the securities at a
mutually agreed upon date and price), the repurchase price of the securities
will generally equal the amount paid by the Fund plus a negotiated interest
amount. The seller under the repurchase agreement will be required to provide
securities (collateral) to the Fund, the value of which 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 are limited to transactions
with dealers or domestic banks believed to present minimal credit risks. The
Fund takes constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
C. 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.
D. 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.
E. Organization expenses were amortized to operations over a five-year
period on a straight-line basis. As of March 31, 1996, all organization costs
have been fully amortized.
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 to shareholders are recorded by the Fund at the close
of business on the ex-dividend date. Distributions from net investment income
and net capital gains are determined in accordance with income tax
regulations.
Distributions from taxable net investment income and net capital gains can
exceed book basis net investment income and net capital gains. 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.
<PAGE>
PAGE 16
Keystone Capital Preservation and Income Fund
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest, without par value. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
December 30, 1994
(Date of Initial
Six Months Ended Public Offering) to
March 31, 1996 September 30, 1995
---------------------------------------- ---------------- ---------------------
<S> <C> <C>
Class A Shares
Shares issued in connection with
acquisition of Keystone America Capital
Preservation and Income Fund (Note 5) 0 2,506,041
Sales 81,084 72,460
Redemptions (274,100) (656,221)
Reinvestment of dividends and
distributions 42,569 71,420
---------------------------------------- -------------- -------------------
Net increase (decrease) (150,447) 1,993,700
======================================== ============== ===================
Six Months Ended Year Ended
March 31, 1996 September 30, 1995
---------------------------------------- -------------- -------------------
Class B Shares
Sales 96,154 2,758,618
Redemptions (1,241,334) (6,464,191)
Reinvestment of dividends and
distributions 103,982 257,649
---------------------------------------- -------------- -------------------
Net decrease (1,041,198) (3,447,924)
======================================== ============== ===================
Class C Shares
Sales 41,881 150,700
Redemptions (32,706) (176,498)
Reinvestment of dividends and
distributions 6,211 11,638
---------------------------------------- -------------- -------------------
Net increase (decrease) 15,386 (14,160)
======================================== ============== ===================
</TABLE>
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, to pay expenses associated with 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 such others.
The Fund's Class B Distribution Plans provide for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class B shares to
pay expenses associated with the distribution of Class B shares. For Class B
shares sold on or after June 1, 1995, amounts paid by the Fund under the
Class B Distribution Plan for such shares are currently used to pay others
(dealers) a commission at the time of purchase normally equal to 2.75% of the
price paid for each share sold plus the first year's service fee in advance
in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of such Class B shares,
the dealer or other party will receive service fees at an annual rate of
0.25% of the average daily net asset value of such Class B shares maintained
by such others. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares purchased on or after June 1, 1995 at rates
ranging from a maximum of 3% of amounts redeemed during the first 12 month
period from and including the month of purchase to 1% of amounts redeemed
during the fourth twelve month period. Class B shares purchased on or after
June 1, 1995 that have been outstanding for six years from and including the
month of purchase will
<PAGE>
PAGE 17
automatically convert to Class A shares without a front-end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 retain their
existing exchange rights.
The Fund's Class C Distribution Plan provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares to
pay expenses associated with 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 date, the dealer or
other party will receive a commission at an annual rate of 0.75% of the
average net asset value (subject to applicable limitations imposed by rules
adopted by the National Association of Securities Dealers, Inc. ("NASD"))
plus service fees at the annual rate of 0.25% of the average net asset value
of each Class C share maintained by such others on the Fund's books for
specified periods.
Each of the Distribution Plans may be terminated at any time by a vote of
the Fund's Independent Trustees or by a vote of a majority of the outstanding
voting shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
During the six months ended March 31, 1996, the Fund paid or accrued to KIDC
$20,867 under its Class A Distribution Plan. During the six months ended
March 31, 1996 under its Class B Distribution Plans, the Fund paid or accrued
to KIDC $286,481 for Class B shares sold prior to June 1, 1995 and $5,058 for
Class B shares sold on or after June 1, 1995. During the six months ended
March 31, 1996, the Fund paid or accrued $14,148 under its Class C
Distribution Plan.
Under applicable NASD rules, the maximum uncollected amounts for which KIDC
may seek payment from the Fund under its Distribution Plans as of March 31,
1996 are $8,585,480 for Class B shares purchased prior to June 1, 1995 and
$77,999 for Class B shares purchased on or after June 1, 1995 and $408,768
for Class C shares.
(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.
Cost of purchases and proceeds from sales of U.S. government securities,
excluding short-term securities, during the six months ended March 31, 1996
were $5,803,668 and $16,417,004, respectively.
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provides investment advisory and management
services to the Fund. In return, Keystone is paid a management fee computed
and payable daily at a rate of 2.0% of the Fund's gross investment income
plus an amount determined by applying percentage rates, which start at 0.50%
and decline, as net assets increase, to 0.25% per annum, to the net asset
value of the Fund. During the six months ended March 31, 1996, the Fund paid
or accrued to Keystone investment management and advisory services fees of
<PAGE>
PAGE 18
Keystone Capital Preservation and Income Fund
$258,516, which represented 0.65% of the Fund's average net assets on an
annualized basis.
During the six months ended March 31, 1996, the Fund paid or accrued $9,577
to KII as reimbursement for certain accounting services provided to the Fund.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the Fund's transfer and dividend disbursing agent. For the
six months ended March 31, 1996, the Fund paid or accrued $59,398 to KIRC for
transfer agent fees.
Keystone has voluntarily limited the annual expenses of the Fund's Class A
shares to 0.90% of the average daily net assets of Class A. Effective
December 1, 1995, the Fund has limited the expenses of the Fund's Class B and
C shares to 1.65% of each respective class' average daily net assets. Prior
to December 1, 1995, the expenses of Class B and C shares were limited to
1.50% of each respective class' average daily net assets. Keystone would not
be required to reimburse the Fund in connection with the expense limits to
the extent it 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 the voluntary expense limitations then in effect, Keystone
reimbursed the Fund $176,013 for the six month period ended March 31, 1996.
Keystone does not intend to seek repayment for these amounts.
The Fund has entered into an expense offset arrangement with its custodian
bank. For the six months ended March 31, 1996, the Fund paid custody fees in
the amount of $22,725 and received a credit of $6,690 pursuant to the expense
offset arrangement, resulting in a total expense of $29,415. The assets
deposited with the custodian bank under the expense offset arrangement could
have been invested in income-producing assets.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees 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 were $115,746,857.
<PAGE>
PAGE 19
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
[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
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
KEYSTONE INVESTMENTS [LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
CPI-SAR-5/96
9.6M [RECYCLE LOGO]
KEYSTONE
[Picture of stars and stripes]
CAPITAL
PRESERVATION AND
INCOME FUND
[logo]
SEMIANNUAL REPORT
MARCH 31, 1996
