N-30D 1 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 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 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 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 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 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 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 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 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 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 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 12 Keystone Strategic Development Fund SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
Net Unrealized Exchange U.S. Value at In Exchange Appreciation/ Date March 31, 1996 for U.S. $ (Depreciation) --------------------------------------------------------------------------------------------------- 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) ===========
See Notes to Financial Statements. PAGE 13 FINANCIAL HIGHLIGHTS--CLASS A SHARES (For a share outstanding throughout the year)
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 ===================================================================================================== 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 =====================================================================================================
(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 14 Keystone Strategic Development Fund FINANCIAL HIGHLIGHTS--CLASS B SHARES (For a share outstanding throughout the year)
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 ===================================================================================================== 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 =====================================================================================================
(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 15 FINANCIAL HIGHLIGHTS--CLASS C SHARES (For a share outstanding throughout the year)
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 ===================================================================================================== 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 =====================================================================================================
(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 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 $3,689,476 ================================================================ See Notes to Financial Statements. PAGE 17 STATEMENTS OF CHANGES IN NET ASSETS
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 -------------------------------------------------------------------------------------------------------------- Operations: Net Investment loss ($ 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 ==============================================================================================================
See Notes to Financial Statements. 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 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 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 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 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 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 [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 OFI-SAR-8/96 3.8M [RECYCLE LOGO] KEYSTONE [Picture of globes and magnifying glass] STRATEGIC DEVELOPMENT FUND [logo] ANNUAL REPORT MARCH 31, 1996