PAGE 1
Keystone Strategic Development Fund
Seeks capital growth by investing in companies involved in industrial and
infrastructure development.
Dear Shareholder:
We are writing to report on the activities of Keystone Strategic Development
Fund for the twelve-month period which ended March 31, 1996.
Performance
For the twelve-month period which ended March 31, 1996, your Fund produced
the following total returns.
Class A shares returned 19.07%.
Class B shares returned 18.13%.
Class C shares returned 18.13%.
The Standard & Poor's 500 Index--a widely recognized benchmark of stock
price performance--returned 32.10% for the same period, and the Morgan
Stanley Capital International World Index, representing the performance of
stocks from more than 20 countries including the U.S., returned 20.01%. We
believe this performance was satisfactory, reflecting our careful stock
selection and an improved environment for infrastructure and natural resource
stocks.
Market conditions for your Fund were generally positive during the fiscal
year. In the U.S., low interest rates, low inflation and moderate economic
growth provided a positive environment for U.S. stocks. The strength of the
U.S. market spilled into the overseas markets and investor confidence began
to return, which also helped your Fund's foreign holdings.
Improved opportunities overseas
Measurable improvements in the Mexican economy helped lift the cloud of
concern that had hampered investing in Latin America since the end of 1994.
The realization that Mexico's peso crisis had been an isolated event--not the
crest of a wave that might sweep through the developing countries--had a
calming effect on the emerging markets.
Greater emphasis on infrastructure
The two primary areas in which the Fund invested were natural resources and
infrastructure stocks. We continued to believe that these two types of companies
would be the first to benefit from the long-term growth trends already in
progress in many developing countries. We increased infrastructure stocks
significantly during the period, believing that they would provide improved
price stability. Infrastructure stocks rose from 29% of portfolio assets on
March 31, 1995 to 43% on March 31, 1996. We also increased natural resource
stocks from 50% to 55% over the same period. We believed these two sectors
complemented one another and helped balance the portfolio.
Greater growth opportunities
We believe stocks of companies involved in industrial and infrastructure
development offer unique growth opportunities for investors. They can also
add much-needed diversification for investors with core holdings limited to
American companies. Of course, these stocks may also experience greater price
fluctuations than the broad stock market averages, in part because of their
direct relationship with developing economies. To reduce investment risk and
enhance potential returns, we carefully evaluate and monitor your Fund's
holdings. As market conditions change, we are always ready to reallocate
assets in seeking to take advantage of opportunities around the world.
(continued)
<PAGE>
PAGE 2
Keystone Strategic Development Fund
Outlook
While U.S. interest rates rose towards the end of the fiscal period, we
expect moderate economic growth with controlled inflation to continue to
provide a good environment for infrastructure and natural resource stocks.
Recently there have been signs that growth in the U.S. is stronger than
originally thought, which usually is positive for these types of companies.
Overseas, we continue to see rapid growth in selected countries, especially
the emerging markets of Asia, the Pacific Rim and Latin America. However,
investors should remember that these markets may experience greater price
volatility. As a result, we hope you take a long term view with respect to
your investment in this dynamic area.
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
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.
[graphics] 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
John C. Madden, Jr. is a vice president and senior portfolio manager of your
Fund and Keystone Precious Metals Holdings, Inc. A Chartered Financial
Analyst, Mr. Madden has over 30 years of investment experience with both
domestic and foreign securities. He holds a BA from Yale University. Together
with Keystone's international team, headed by Gilman Gunn, Mr. Madden
evaluates infrastructure and natural resource stocks for your Fund.
Q What kinds of companies do you invest in?
A The Fund's objective is to seek capital growth by investing in companies
involved in infrastructure development and natural resources. These companies
typically provide the building blocks that are needed in growing economies.
We believe there are many opportunities in these areas in developing markets
around the globe, including Asia, the Pacific Rim and Latin America. At the
end of the period, the portfolio's top industry holdings included metals and
mining, oil, and capital goods companies.
Q Did you make any changes to the portfolio during the period?
A We reduced our cash position from 21% to 2% of net assets over the course
of the year, and put more money to work. Improved economic conditions world-
wide broadened the number of opportunities from which we could choose. We
raised the percentage of infrastructure stocks from 29% to 43% of net assets
during the period, and increased natural resource stocks from 50% to 55% of
net assets over the course of the year. We believed this was a good time to
make these changes. Natural resource stocks were performing well, and we
wanted to develop the infrastructure portion of the portfolio because we
believed those stocks had the potential to provide more consistent
performance over the long term.
Q What are some examples of the Fund's infrastructure holdings?
A Enersis is a Chilean holding company which specializes in power projects in
Chile, Argentina and Peru. The company is well managed, has recent earnings
growth record of over 20% per year, and is well positioned to continue this
growth, in our opinion. We continued to hold AGCO, one of the world's largest
producers of agricultural equipment. We favored AGCO based on the belief that
increasing agricultural sophistication goes hand in hand with economic
development.
Q What about natural resource companies?
A Schlumberger, one of our top holdings, is the dominant oil field service
company in the world. We like the energy sector in general, and energy
services in particular because oil companies explore for oil and pay for
services throughout changes in the cycle for oil prices. Western Mining was
the Fund's number one holding at the end of the period. It is one of
Australia's premier mining companies with expanding production of nickel,
copper, gold and aluminum.
Q What was the geographic mix of the Fund's holdings?
A As of of March 31, 1996, North American stocks were the largest sector at
43%, followed by Asia/ Pacific stocks at 23% and Latin American stocks at
20%. We increased Latin American holdings selectively during the year, from
about 6% of the portfolio on March 31, 1995. The Fund's Latin American
holdings were well diversified, including stocks from Brazil, Chile, Mexico,
Argentina, Peru and Bolivia.
Fund Profile
Objective: Seeks capital growth by investing in companies involved in
infrastructure development and natural resources.
Commencement of investment operations: October 7, 1994
Countries: 15
Net assets: $22 million
Newspaper listing: "StrDv"
<PAGE>
PAGE 4
Keystone Strategic Development Fund
Diversification by Region
as of March 31, 1996
(as a percentage of net assets)
[world map]
NORTH AMERICA 43%
ASIA/PACIFIC 23%
LATIN AMERICA 20%
EUROPE 8%
OTHER 6%
[end world map]
Q Why weren't more of the Fund's assets invested in stocks from emerging
markets?
A Keystone Strategic Development Fund seeks to benefit from growth and
industrialization in foreign countries, but it is not an emerging markets
fund. Close to half of the Fund's stock holdings on March 31, 1996 were
headquartered in the United States, Canada and Australia. However, these
companies are international in scope. We attempt to invest in companies that
are involved with infrastructure development and natural resources in all
parts of the world. We work hard to identify the companies that we believe
are world industry leaders, regardless of where they are located.
Q What is your outlook?
A Over the past year we've seen investors come full circle in their attitudes
about investing in the emerging countries. We believe this improved sentiment
will have a positive effect on the Fund's investments for two reasons. First,
it makes investing in developing countries more attractive, and second, it
implies that growth in those countries is likely to move ahead at a faster
pace. At the same time, however, it is essential to remember that these
countries lack the economic and political resilience of the developed
nations.
We continue to scrutinize the stocks of companies headquartered in emerging
markets with extreme care. For a significant portion of your Fund's holdings,
we
<PAGE>
PAGE 5
expect to continue to concentrate on companies in developed countries that
are doing business globally and are leaders in their field. We think their
depth of resources, management experience and established distribution
channels make them good candidates for your Fund.
Q What is the role of EquitiLink in the management of the Fund?
A EquitiLink Investment Management is Australia's leading independent mutual
fund manager. It provides investment research and analysis for many of the
Fund's foreign investments. EquitiLink has developed a particular expertise
in natural resources companies and the Pacific Rim region. We rely on
EquitiLink for its knowledge and experience in these areas.
Asset Allocation
as of March 31, 1996
(as percentage of total assets)
[pie chart]
Natural resource stocks (55%)
Infrastructure stocks (43%)
Cash/other (2%)
[end pie chart]
Top 10 Holdings
as of March 31, 1996
Percent of
Stocks Industry net assets
-------------------------------------------------------------------------------
Western Mining (Australia) Metals and mining 3.9
-------------------------------------------------------------------------------
AGCO (U.S.) Capital goods 3.4
-------------------------------------------------------------------------------
Schlumberger (U.S.) Oil service 3.2
-------------------------------------------------------------------------------
Enersis (Chile) Utilities 3.2
-------------------------------------------------------------------------------
Potash Corp. of Saskatchewan (Canada) Metals and mining 3.0
-------------------------------------------------------------------------------
RTZ (U.K.) Metals and mining 2.8
-------------------------------------------------------------------------------
TECK (Canada) Metals and mining 2.6
-------------------------------------------------------------------------------
Caterpillar (U.S.) Capital goods 2.6
-------------------------------------------------------------------------------
CRA Limited (Australia) Iron and steel 2.6
-------------------------------------------------------------------------------
Enron Global Power & Pipelines (U.S.) Utilities 2.6
-------------------------------------------------------------------------------
[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,
200 Berkeley Street, 22nd Floor,
Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
Keystone Strategic Development Fund
Your Fund's Performance
[mountain chart]
Growth of an investment in
Keystone Strategic Development Fund Class A
In Thousands
Reinvested Distributions Initial Investment
10/94 9,453
3/95 8,501
3/96 10,123
Total Value $10,122
A $10,000 investment in Keystone Strategic Development Fund Class A made on
October 7, 1994 with all distributions reinvested was worth $10,122 on March
31, 1996. Past performance is no guarantee of future results.
[end mountain chart]
Twelve-Month Performance as of March 31, 1996
Class A Class B Class C
Total returns* 19.07% 18.13% 18.13%
Net asset value 3/31/95 $ 9.02 $ 8.99 $ 8.99
3/31/96 $10.74 $10.62 $10.62
Dividends None None None
Capital gains None None None
* Before deducting front-end or contingent deferred sales charge (CDSC),
if applicable.
Historical Record as of March 31, 1996
Cumulative total returns Class A Class B Class C
1-year
w/o sales charge 19.07% 18.13% 18.13%
with sales charge 12.22% 14.13% 18.13%
Life of Class 1.22% 2.20% 6.20%
Average annual returns
1-year
w/o sales charge 19.07% 18.13% 18.13%
with sales charge 12.22% 14.13% 18.13%
Life of Class 0.84% 1.51% 4.22%
Class A, Class B, and Class C shares began investment operations on October
7, 1994.
Class A share performance is reported at the current maximum front-end sales
charge of 5.75%.
Class B shares purchased after June 1, 1995 are subject to a contingent
deferred sales charge (CDSC) that declines from 5% to 1% over six years from
the month purchased. Performance assumes that shares were redeemed after the
end of a one-year holding period and reflects the deduction of a 4% CDSC.
Class C share performance 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 will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 7
Growth of an Investment
[Line Chart]
Comparison of change in value of a $10,000 investment in Keystone Strategic
Development Fund, the Standard & Poor's 500 Index and the Morgan Stanley
Capital International World Index.
In Thousands October 7, 1994 through March 31, 1996
Average Annual Total Return
------------------------------------------
1 Year Life of Class
Class A 12.22% 0.84%
Class B 14.13% 1.51%
Class C 18.13% 4.22%
Class A Class B Class C S&P 500 MSCIWI
10/94 9,453 10,030 10,030 10,000 10,000
3/95 8,501 8,990 8,990 10,972 10,392
3/96 10,123 10,220 10,620 14,494 12,471
Past performance is no guarantee of future results. The performance of Class
may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The Standard & Poor's 500 Stock Index and
the Morgan Stanley Capital International World Index are from September 30,
1994.
[end line chart]
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Strategic Development Fund
The Fund seeks capital growth by investing in companies involved in
industrial and infrastructure development. The return is quoted after
deducting sales charges (if applicable), fund expenses and transaction costs
and assumes reinvestment of all distributions.
2. Standard & Poor's 500 Index (S&P 500)
The S&P 500 is a broad-based unmanaged index of common stock prices. It is
comprised of stocks of the largest U.S. companies. These stocks are selected
and compiled by Standard & Poor's Corporation according to criteria that may
be unrelated to your Fund's investment objective.
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 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
<PAGE>
PAGE 8
Keystone Strategic Development Fund
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 of a certain company size. 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 9
SCHEDULE OF INVESTMENTS--March 31, 1996
NUMBER
OF MARKET
SHARES VALUE
-------------------------------------------------------------
COMMON STOCKS (91.3%)
[diamond] ARGENTINA (2.1%)
Oil (0.9%)
YPF SA 10,100 $ 202,505
-------------------------------------------------------------
Utilities (1.2%)
Central Costanera 93,200 270,280
-------------------------------------------------------------
[diamond] TOTAL ARGENTINA 472,785
==============================================================
[diamond] AUSTRALIA (18.3%)
Oil (3.4%)
Santos Ltd. 75,000 251,426
Woodside Petroleum 86,800 485,651
-------------------------------------------------------------
737,077
-------------------------------------------------------------
Capital Goods (2.2%)
MEMTEC Limited 18,823 485,394
-------------------------------------------------------------
Iron and Steel (5.0%)
Broken Hill Proprietary Co. Ltd. 36,267 516,359
CRA Limited 38,055 569,472
-------------------------------------------------------------
1,085,831
-------------------------------------------------------------
Metals and Mining (7.7%)
QNI Limited 150,000 339,923
Savage Resources 664,000 492,928
Western Mining Corp. 128,150 847,190
-------------------------------------------------------------
1,680,041
-------------------------------------------------------------
[diamond] TOTAL AUSTRALIA 3,988,343
==============================================================
[diamond] BOLIVIA (1.6%)
Utilities (1.6%)
Compania Bolivia De Energia 9,600 352,800
-------------------------------------------------------------
[diamond] BRAZIL (1.3%)
Telecommunications (1.3%)
Telecomunicacoes Brasileiras S.A.
ADR 5,500 273,625
-------------------------------------------------------------
[diamond] CANADA (15.5%)
Oil (2.4%)
Arakis Energy Corporation (b) 44,600 $ 183,975
Canadian Occidental Petroleum Ltd. 10,050 339,054
-------------------------------------------------------------
523,029
-------------------------------------------------------------
Metals and Mining (10.5%)
Alcan Aluminum Ltd. 15,200 490,502
Inco Ltd. 17,800 561,349
Potash Corp. of Saskatchewan, Inc. 10,500 661,304
TECK Corp. 26,200 571,654
-------------------------------------------------------------
2,284,809
-------------------------------------------------------------
Precious Metals (2.6%)
TVX Gold, Inc. (b) 63,200 567,803
-------------------------------------------------------------
[diamond] TOTAL CANADA 3,375,641
==============================================================
[diamond] CHILE (4.4%)
Forest Products ( 1.2%)
Maderas Ysinteticos Sociedad 14,200 252,050
-------------------------------------------------------------
Utilities (3.2%)
Enersis S.A. 24,500 692,125
-------------------------------------------------------------
[diamond] TOTAL CHILE 944,175
==============================================================
[diamond] FINLAND (0.9%)
Telecommunications (0.9%)
Nokia Corp. 5,500 188,375
-------------------------------------------------------------
[diamond] FRANCE (2.2%)
Oil (1.4%)
Total S.A. 4,525 305,476
-------------------------------------------------------------
Oil Service (0.8%)
Coflexip 3,920 167,342
-------------------------------------------------------------
[diamond] TOTAL FRANCE 472,818
==============================================================
(continued on next page)
<PAGE>
PAGE 10
Keystone Strategic Development Fund
SCHEDULE OF INVESTMENTS -- March 31, 1996
NUMBER
OF MARKET
SHARES VALUE
==============================================================
[diamond] HONG KONG (3.2%)
Telecommunications (2.1%)
Hong Kong Telecommunication 232,800 $ 465,058
--------------------------------------------------------------
Building (1.1%)
Kumagai Gumi HK 260,000 231,963
-------------------------------------------------------------
[diamond] TOTAL HONG KONG 697,021
==============================================================
[diamond] KOREA (2.5%)
Utilities (2.4%)
Korea Electric Power Corp. 23,100 531,300
-------------------------------------------------------------
Iron and Steel (0.1%)
Pohang Iron and Steel 170 12,300
-------------------------------------------------------------
[diamond] TOTAL KOREA 543,600
==============================================================
[diamond] MEXICO (3.2%)
Precious Metals (3.2%)
Apasco SA 66,000 332,847
Industrias Penoles S.A.
de C.V. 85,000 367,751
-------------------------------------------------------------
[diamond] TOTAL MEXICO 700,598
==============================================================
[diamond] PERU (2.3%)
Telecommunications (2.3%)
CPT Telefonica Del Peru 238,000 490,774
-------------------------------------------------------------
[diamond] SWEDEN (2.6%)
Electrical Products (2.6%)
Asea AB, Series B 5,521 568,902
-------------------------------------------------------------
[diamond] UNITED KINGDOM (4.6%)
Iron and Steel (1.8%)
British Steel PLC 134,000 388,584
-------------------------------------------------------------
Metals and Mining (2.8%)
RTZ Corp. 41,539 600,566
-------------------------------------------------------------
[diamond] TOTAL UNITED KINGDOM 989,150
==============================================================
[diamond] UNITED STATES (26.6%)
Capital Goods (8.1%)
AGCO Corp. 30,600 $ 738,225
Caterpillar Inc. 8,400 571,200
Fluor Corp. 6,700 457,275
-------------------------------------------------------------
1,766,700
-------------------------------------------------------------
Metals and Mining (2.1%)
Phelps Dodge Corp. 6,700 459,788
-------------------------------------------------------------
Precious Metals (6.6%)
AMAX Gold Inc. 33,000 226,875
Homestake Mining Co. 28,600 554,125
Newmont Mining Corp. 4,800 271,800
Santa Fe Pacific Gold Corp. 24,000 384,000
-------------------------------------------------------------
1,436,800
-------------------------------------------------------------
Utility (2.6%)
Enron Global Power & Pipelines 22,100 569,075
-------------------------------------------------------------
Oil (2.8%)
Frontier Oil Exploration Co. (b) 100,000 312,500
Triton Energy Corp. 5,500 306,625
-------------------------------------------------------------
619,125
-------------------------------------------------------------
Oil Services (3.2%)
Schlumberger, Ltd. 8,900 704,213
-------------------------------------------------------------
Paper & Packaging (1.2%)
Weyerhaeuser Co. 5,600 258,300
-------------------------------------------------------------
[diamond] TOTAL UNITED STATES 5,814,001
==============================================================
TOTAL COMMON STOCKS
(COST--$16,570,229) 19,872,608
==============================================================
PREFERRED STOCKS (4.2%)
[diamond] BRAZIL (4.2%)
Iron and Steel (1.4%)
Vale do Rio Doce Navegacao S.A. 1,236,000 193,927
Marco Polo SA 700,000 118,332
-------------------------------------------------------------
312,259
-------------------------------------------------------------
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS -- March 31, 1996
NUMBER
OF MARKET
SHARES VALUE
==============================================================
Oil (1.3%)
Petrol Brasilieros 2,330,000 $278,308
-------------------------------------------------------------
Utilities (1.5%)
Cemig CIA Energy 7,500,000 210,295
Electrobras 440,000 120,255
-------------------------------------------------------------
330,550
-------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost--$880,013) 921,117
==============================================================
MATURITY
VALUE
-------------------------------------------------------------
REPURCHASE AGREEMENTS (2.3%)
Investments in repurchase agreements,
in a joint trading account,
purchased 3/29/96, 5.557%,
maturing 4/1/96 (a) $ 509,079 509,000
-------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost--$509,000) 509,000
==============================================================
INVESTMENT COMPANY (1.8%)
[diamond] AUSTRALIA (1.8%)
First Resources Development Fund
(b) 600,000 384,465
-------------------------------------------------------------
MATURITY MARKET
VALUE VALUE
==============================================================
TOTAL REGULATED INVESTMENT COMPANY
(Cost--$464,864) $ 384,465
==============================================================
WARRANTS/RIGHTS (0.2%)
Australia (0.2%)
First Resources Development Fund,
options (b) 600,000 49,230
==============================================================
TOTAL WARRANTS/RIGHTS
(Cost--$0) 49,230
==============================================================
TOTAL INVESTMENTS
(Cost--$18,424,106) (c) 21,736,420
==============================================================
FOREIGN CURRENCY HOLDINGS (0.1%)
(COST--$7,586) 7,455
==============================================================
OTHER ASSETS AND LIABILITIES--
NET (0.1%) 13,580
==============================================================
NET ASSETS (100.0%) $21,757,455
==============================================================
(a) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at March 31, 1996.
(b) Non-income-producing security.
(c) The cost of investments for federal income tax purposes is $18,424,106.
Gross unrealized appreciation and depreciation of investments based on
identified tax cost, at March 31, 1996 are as follows:
Gross unrealized appreciation $3,590,038
Gross unrealized depreciation (278,020)
----------
$3,312,018
==========
See Notes to Financial Statements.
<PAGE>
PAGE 12
Keystone Strategic Development Fund
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Exchange U.S. Value at In Exchange Appreciation/
Date March 31, 1996 for U.S. $ (Depreciation)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
---------------------------------------------------------------------------------------------------
03/31/96 575,735 French Francs $ 113,000 $ 114,475 ($ 1,475)
03/31/96 2,814,174 Australian Dollars $2,122,000 $2,193,395 ($71,395)
-----------
($72,870)
-----------
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
---------------------------------------------------------------------------------------------------
03/31/96 100,918 Pound Sterling $ 153,749 $ 154,027 $ 278
-----------
Net Unrealized Depreciation on Forward Foreign Currency Exchange Contracts ($72,592)
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 13
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Period from October 7, 1994
Year Ended (commencement of operations)
March 31, 1996 to March 31, 1995
=====================================================================================================
<S> <C> <C>
Net asset value beginning of year $ 9.02 $ 10.00
----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.040) (0.002)
Net gain (loss) on investment and foreign
currency related transactions 1.760 (0.978)
----------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 1.720 (0.980)
----------------------------------------------------------------------------------------------------
Net asset value end of year $ 10.74 $ 9.02
=====================================================================================================
Total return(a) 19.07% (9.80%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 2.38%(c) 2.77%(b)
Net investment loss (0.41%) (0.07%)(b)
Portfolio turnover rate 40% 13%
Average commission rate paid $0.0025 N/A
Net assets end of year (thousands) $ 4,574 $ 4,890
=====================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized
(c) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended March 31, 1996, the expense ratio would have
been 2.37%.
See Notes to Financial Statements.
<PAGE>
PAGE 14
Keystone Strategic Development Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Period from October 7, 1994
Year Ended (commencement of operations)
March 31, 1996 to March 31, 1995
=====================================================================================================
<S> <C> <C>
Net asset value beginning of year $ 8.99 $ 10.00
----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.130) (0.026)
Net gain (loss) on investment and foreign
currency related transactions 1.760 (0.984)
Total income from investment operations 1.630 (1.010)
Net asset value end of year $ 10.62 $ 8.99
=====================================================================================================
Total return(a) 18.13% (10.10%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 3.13%(c) 3.55%(b)
Net investment income (loss) 1.16% (.80%)(b)
Portfolio turnover rate 40% 13%
Average commission rate paid $0.0025 N/A
Net assets end of year (thousands) $15,161 $14,688
=====================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized
(c) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended March 31, 1996, the expense ratio would have
been 3.12%.
See Notes to Financial Statements.
<PAGE>
PAGE 15
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Period from October 7, 1994
Year Ended (commencement of operations)
March 31, 1996 to March 31, 1995
=====================================================================================================
<S> <C> <C>
Net asset value beginning of year $ 8.99 $ 10.00
-----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.100) (0.034)
Net gain (loss) on investment and foreign
currency related transactions 1.730 (0.976)
Total income from investment operations 1.630 (1.010)
-----------------------------------------------------------------------------------------------------
Net asset value end of year $ 10.62 $ 8.99
=====================================================================================================
Total return(a) 18.13% (10.10%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 3.13%(c) 3.51%(b)
Net investment income (loss) 1.16% (.93%)(b)
Portfolio turnover rate 40% 13%
Average commission rate paid $0.0025 N/A
Net assets end of year (thousands) $ 2,023 $ 1,393
=====================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized
(c) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended March 31, 1996, the expense ratio would have
been 3.12%.
See Notes to Financial Statements.
<PAGE>
PAGE 16
Keystone Strategic Development Fund
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1996
Assets:
=================================================================
Investments at market value
(identified cost--$18,424,106) (Note 1) $21,736,420
Foreign currency holdings
(identified cost--$7,586) (Note 1) 7,455
-----------------------------------------------------------------
Total Investments
(identified cost--$18,431,692) 21,743,875
-----------------------------------------------------------------
Cash 338
Receivable for:
Investments sold 37,340
Dividends and interest 68,761
Fund shares sold 173,983
Deferred organization expense (Note 1) 34,076
Prepaid expenses 990
Foreign tax receivable 2,142
-----------------------------------------------------------------
Total assets 22,061,505
-----------------------------------------------------------------
Liabilities:
Payable for:
Investments purchased 191,367
Net unrealized depreciation on forward foreign
currency exchange contracts 72,592
Fund shares redeemed 21,456
Foreign taxes withheld 2,557
Other accrued expenses 16,078
-----------------------------------------------------------------
Total liabilities 304,050
-----------------------------------------------------------------
Net assets $21,757,455
=================================================================
Net assets represented by:
Paid-in-capital (Note 1) $19,347,224
Undistributed net investment income 3,718
Accumulated net realized losses on investment and
foreign currency related transactions (832,661)
Net unrealized appreciation on investments and
foreign currency related transactions 3,311,766
Net unrealized depreciation on forward foreign
currency exchange contracts (72,592)
-----------------------------------------------------------------
Total net assets $21,757,455
-----------------------------------------------------------------
Net asset value per share: (Note 2)
Class A Shares ($10.74 425,914 shares
outstanding) $ 4,573,576
Class B Shares ($10.62 1,427,520 shares
outstanding) 15,161,116
Class C Shares ($10.62 190,428 shares
outstanding) 2,022,763
-----------------------------------------------------------------
$21,757,455
-----------------------------------------------------------------
Offering price per share:
Class A Shares (including sales charge of 5.75%)
(Note 1) $11.40
-----------------------------------------------------------------
Class B Shares $10.62
-----------------------------------------------------------------
Class C Shares $10.62
=================================================================
STATEMENT OF OPERATIONS--
Year Ended March 31, 1996
=================================================================
Investment income (Note 1):
Interest $ 63,179
Dividends (net of withholding taxes of $29,052) 362,677
---------------------------------------------------------------
Total income 425,856
----------------------------------------------------------------
Expenses (Notes 1, 2 and 4):
Management fee 217,332
Shareholder Services 87,125
Accounting, Auditing and Legal 29,791
Custodian fees 29,732
Printing 28,702
Distribution Plan expenses 181,551
Registration fees 60,396
Amortization of organization expense 9,467
Miscellaneous expenses 3,027
---------------------------------------------------------------
Total expenses 647,123
Less: Expenses paid indirectly (Note 5) (3,498)
---------------------------------------------------------------
Net expenses 643,625
---------------------------------------------------------------
Net investment loss (217,769)
---------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency
related transactions (Note 3):
Realized gain (loss) on:
Investment transactions 279,944
Foreign currency related transactions (148,032)
---------------------------------------------------------------
Net realized gain on investments and foreign
currency related transactions 131,912
---------------------------------------------------------------
Net unrealized appreciation (depreciation) on
investments and foreign currency related
transactions
Beginning of period (561,958)
End of period 3,311,766
---------------------------------------------------------------
3,873,724
---------------------------------------------------------------
Net unrealized appreciation (depreciation) on
forward foreign currency exchange contracts
Beginning of period 25,799
End of period (72,592)
---------------------------------------------------------------
(98,391)
---------------------------------------------------------------
Net change in unrealized appreciation on investments,
foreign currency related transactions and
forward foreign currency exchange contracts 3,775,333
---------------------------------------------------------------
Net gain on investments, foreign currency related
transactions and forward foreign currency
exchange contracts 3,907,245
---------------------------------------------------------------
Net increase in net assets resulting from
operations $3,689,476
================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 17
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period from October 7, 1994
Year Ended (commencement of operations)
March 31, 1996 to March 31, 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net Investment loss ($ 217,769) ($ 54,640)
Net realized gain (loss) on investment and foreign currency
related transactions 131,912 (1,120,540)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency related transactions and
foreign currency exchange contracts 3,775,333 (536,159)
--------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 3,689,476 (1,711,339)
--------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 1,145,130 5,752,543
Proceeds from shares sold--Class B Shares 2,628,135 17,241,435
Proceeds from shares sold--Class C Shares 672,747 1,573,595
Payments for shares redeemed--Class A Shares (2,328,932) (506,367)
Payments for shares redeemed--Class B Shares (4,711,542) (1,400,994)
Payments for shares redeemed--Class C Shares (308,032) (78,400)
--------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
capital share transactions (2,902,494) 22,581,812
--------------------------------------------------------------------------------------------------------------
Total increase in net assets 786,982 20,870,473
--------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period 20,970,473 100,000
--------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income and accumulated distributions in excess of net
investment income as follows: 1996--$3,718 and 1995--
($24,251)) (Note 1) $21,757,455 $20,970,473
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
Keystone Strategic Development Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Strategic Development Fund (the "Fund") is a Massachusetts business
trust for which Keystone Investment Management Company (formerly, Keystone
Custodian Funds, Inc.)("Keystone"), is the investment adviser. The Fund is
registered under the Investment Company Act of 1940 (the "1940 Act"), as a
diversified, open-end investment company. The Fund seeks long term capital
growth by investing primarily in equity securities.
Equitilink International Management Limited ("EIML"), acts as sub-adviser to
the Fund. Subject to the supervision of the Fund's Board of Trustees and
Keystone, EIML provides investment supervision and furnishes an investment
program for certain assets of the Fund, as well as providing research and
advice concerning the purchase and sale of securities by the Fund.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly, Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is a
private corporation predominately owned by current and former members of
management of Keystone and its affiliates. Keystone Investor Resource Center,
Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
The Fund currently offers three classes of shares. Class A shares are offered
at a public offering price which includes a maximum sales charge of 5.75%
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 of purchase. Class C shares are
available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company (formerly, Keystone
Distributors, Inc.), ("KIDCO") the Fund's principal underwriter.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Investments, including American Depository Receipts ("ADRs"), are usually
valued at the closing sales price or, in the absence of sales and for
over-the-counter securities, the mean of bid and asked quotations. Management
values the following securities at prices it deems in good faith to be fair
by or under the direction of the Board of Trustees: (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.
ADRs, which are certificates representing shares of foreign securities
deposited in domestic and foreign banks, are traded and valued in United
States dollars.
Short-term investments maturing in sixty days or less are valued at amortized
cost (original purchase cost as adjusted for amortization of premium or
accretion of discount) which, when combined with accrued interest,
approximates market. Short-term investments maturing in more than sixty days
for which market quotations are readily available are valued at current
market value. Short-term investments maturing in more than sixty days when
purchased which are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount) which, when combined with accrued interest,
approximates market.
<PAGE>
PAGE 19
Investments denominated in foreign currencies are adjusted daily to reflect
changes in exchange rates. These securities traded in foreign currency
amounts are translated into United States dollars as follows: market value of
investments, assets and liabilities at the daily rate of exchange; and
purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
B. The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security,financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract, the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income.
C. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date.
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 is relieved of any federal
income tax liability by distributing all of its net taxable investment income
and net taxable capital gains, if any, to its shareholders. The Fund intends
to avoid excise tax liability by making the required distributions under the
Internal Revenue Code.
E. 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 the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase
<PAGE>
PAGE 20
Keystone Strategic Development Fund
agreements that are fully collateralized by U.S. Treasury and/or Federal
Agency obligations.
F. From time to time the Fund may enter into forward foreign currency
exchange contracts to hedge certain foreign currency assets. Contracts are
recorded at market value. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. The Fund is subject to the credit risk that the other
party will not complete the obligations of the contract.
G. The Fund distributes net investment income and net capital gains, if any,
annually. Distributions are determined in accordance with income tax
regulations. Distributions from taxable net investment income and net capital
gains can exceed from book basis net investment income and net capital gains.
The significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are due to differing treatment of 12b-1 expenses prior to April 1995 and
unrealized appreciation on foreign currency exchange contracts.
H. Organizational 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 unamortized organization expense
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.
(2) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the Fund
were as follows:
Class A Shares
-------------------------------------------------
Year Ended Period from October 7, 1994
March 31, 1996 to March 31, 1995
------------------------------------------------------------------------------
Shares sold 114,080 594,548
Shares redeemed (230,445) (55,269)
------------------------------------------------------------------------------
Net increase/(decrease) (116,365) 539,279
===============================================================================
Class B Shares
-----------------------------------------------
Year Ended Period from October 7, 1994
March 31, 1996 to March 31, 1995
------------------------------------------------------------------------------
Shares sold 263,001 1,787,714
Shares redeemed (469,950) (156,245)
------------------------------------------------------------------------------
Net increase/(decrease) (206,949) 1,631,469
===============================================================================
Class C Shares
-----------------------------------------------
Year Ended Period from October 7, 1994
March 31, 1996 to March 31, 1995
------------------------------------------------------------------------------
Shares sold 65,799 160,011
Shares redeemed (30,391) (8,991)
------------------------------------------------------------------------------
Net increase 35,408 151,020
===============================================================================
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. Under its Distribution Plans, the Fund pays
KIDCO a wholly owned subsidiary of Keystone, amounts that in total may not
exceed each Distribution Plan's maximum.
The Class A Distribution Plan provides for payments that are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDCO 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 daily net asset value of shares maintained by such recipients and
outstanding on the books of the Fund for specified periods.
The Class B Distribution Plans provide for payments at an annual rate of
1.00% of the average daily net asset value of Class B shares to pay expenses
of the
<PAGE>
PAGE 21
distribution of Class B shares. Amounts paid by the Fund under the Class B
Distribution Plans are currently used to pay others (dealers) a commission at
the time of purchase normally equal to 4.00% of the price paid for each share
sold plus the first year's service fee in advance of 0.25% of the price paid
for each Class B share sold. Beginning approximately 12 months after the
purchase of a Class B share, the dealer or other party will receive service
fees at an annual rate of 0.25% of the average daily net asset value of such
Class B shares maintained by such others and remaining outstanding on the
Fund's books for specified periods. A contingent deferred sales charge will
be imposed, if applicable, on Class B shares purchased on or after June 1,
1995 at rates ranging from a maximum of 5% of amounts redeemed during the
first 12 months following the date of purchase to 1% of amounts redeemed
during the sixth twelve-month period following the date of purchase. Class B
shares purchased on or after June 1, 1995 that have been outstanding for
eight years following the month of purchase will automatically convert to
Class A shares without a front end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 will retain their existing conversion
rights.
The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares; to pay
expenses 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, a commission at an annual
rate of 0.75% (subject to applicable limitations imposed by the National
Association of Securities Dealers, Inc.) ("NASD") and service fees at an
annual rate of 0.25%, respectively, of the average net asset value of each
share sold by such others and remaining and 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 Board of Trustees, payments to
KIDCO may continue as compensation for its services which have been earned
while the Distribution Plan was in effect.
During the fiscal year ended March 31, 1996, the Fund paid KIDCO $11,886,
under its Class A Distribution Plan; $144,420 for Class B shares sold prior
to June 1, 1995 and $7,960 for Class B share on or after June 1, 1995 under
its Class B Distribution plans; and $17,285 under its Class C Distribution
Plan.
Under the NASD Rule, the maximum uncollected amounts for which KIDCO may seek
payment from the Fund under its Class B Distribution Plans were $872,923 for
class B shares purchased prior to June 1, 1995 and $95,782 for Class B shares
purchased on or after June 1, 1995, and remaining outstanding on the Fund's
books as of March 31, 1996. The maximum uncollected amount for which KIDCO
may seek payment from the Fund under its Class C Distribution Plan was
$119,301 as of March 31, 1996.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
Realized gains and losses are computed on the identified cost basis. Gains
and losses on foreign currency related transactions are treated as ordinary
income for federal income tax purposes. As of March 31, 1996 the Fund had a
capital loss carryover for federal income tax purposes of approximately
$833,000, which expires in the year 2003.
<PAGE>
PAGE 22
Keystone Strategic Development Fund
Cost of purchases and proceeds from sales of investment securities excluding
short-term securities for the year ended March 31, 1996 were $8,692,047 and
$8,232,846, respectively.
(4.) Investment Management Agreement and Other Transactions with Affiliates
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund, dated September 21, 1994, Keystone provides investment
management and administrative services to the Fund. In return, Keystone is
paid a management fee at the annual rate of 1.00% of the aggregate net asset
value of the Fund. Keystone has entered into a Sub-Investment Advisory
Agreement with EIML, dated September 21, 1994, under which EIML provides
investment research and advice to the Fund in both a non-discretionary and a
discretionary capacity. For its services EIML receives from Keystone a
monthly fee equal to (1) 20% of Keystone's net fee for such month for
services rendered in a non-discretionary capacity, plus (2) 10% of Keystone's
net fee for such month for services rendered in a discretionary capacity.
For the year ended March 31, 1996, the Fund paid or accrued to Keystone
investment management and administrative service fees of $217,332, which
represented 1.00% of the Fund's average daily net assets. For the year ended
March 31, 1996, Keystone paid or accrued to EIML $43,466 for its services
rendered in a non-discretionary capacity.
During the year ended March 31, 1996, the Fund paid or accrued to KII and
KIRC $8,622 for certain accounting and printing services, and $87,125 for
shareholder services.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of Fund
assets, 2.0% of the next $70 million of Fund assets, and 1.5% of Fund assets
over $100 million.
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of the applicable state expense
limit. However, Keystone is not required to make such reimbursement to an
extent which would result in the Fund's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code.
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.
The Fund has entered into an expense offset arrangement with its custodian.
for the year ended March 31, 1996 the Fund paid or incurred custody fees in
the amount of $29,732 and received credit of $3,498 pursuant to the expense
offset arrangement, resulting in a net custody expense of $26,234. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
(5.) Distributions to Shareholders
The Fund intends to distribute to its shareholders dividends from net
investment income and net capital gains, if any, annually. Any taxable
distribution which is declared in October, November or December and paid by
January 31 of the following year will be includable in the taxable income of
the shareholder in the year declared.
<PAGE>
PAGE 23
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders of
Keystone Strategic Development Fund
We have audited the accompanying statement of assets and liabilities of the
Keystone Strategic Development Fund, including the schedule of investments as
of March 31, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets and the financial highlights
for the year then ended and for the period from October 7, 1994 (commencement
of operations) to March 31, 1995. 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 March 31, 1996 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 Strategic Development Fund as of March 31, 1996, the results of its
operations for the year then ended, the changes in its net assets and
financial highlights for the year then ended and for the period from October
7, 1994 (commencement of operations) to March 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 26, 1996
<PAGE>
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KEYSTONE AMERICA
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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]
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KEYSTONE
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STRATEGIC
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ANNUAL REPORT
MARCH 31, 1996
