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PROSPECTUS JANUARY 17, 1996
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KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION
GROWTH FUND
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-633-4200 X3621
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Keystone Institutional Trust (the "Trust") is a mutual fund that is
authorized to issue more than one series of shares. At this time, the Trust
issues only one series of shares, the Keystone Institutional Small
Capitalization Growth Fund (the "Fund"), whose goal is long-term growth of
capital.
The Fund invests, under normal circumstances, at least 65% of its total
assets in equity securities of companies with small market capitalizations.
Generally, the Fund intends to invest at least 80% of its net assets in small
cap stocks.
The Fund is designed primarily for institutional investors, and certain
existing investment advisory clients of Keystone Investment Management Company,
Fiduciary Investment Company, Inc., or any of their affiliates. Fund shares are
sold at net asset value without an initial sales charge at the time of purchase
and are not subject to a sales charge when they are redeemed. Furthermore, there
is no provision for 12b-1 expenses in an effort to minimize fund expenses for
shareholders.
This prospectus sets forth concisely the information about the Fund
that you should know before investing. Please read it and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Additional information about the Fund is contained in a statement of
additional information dated January 17, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number listed above.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
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TABLE OF CONTENTS
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Page
Fee Table ......................................................... 3
The Fund .......................................................... 5
Investment Objective and Policies ................................. 5
Investment Restrictions ........................................... 6
Risk Factors ...................................................... 7
Pricing Shares .................................................... 8
Dividends and Taxes ............................................... 9
Fund Management and Expenses ...................................... 10
How to Buy Shares ................................................. 12
How to Redeem Shares .............................................. 14
Shareholder Services .............................................. 16
Performance Data .................................................. 17
Fund Shares ....................................................... 18
Additional Information ............................................ 18
Additional Investment Information ................................. (i)
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FEE TABLE
Keystone Institutional Small Capitalization Growth Fund
The purpose of the fee table is to assist investors in understanding
the costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plan"; and "Shareholder Services."
Shareholder Transaction Expenses
Sales Charge ............................. None
Contingent Deferred Sales Charge ......... None
Exchange Fee ............................ None
Annual Fund Operating Expenses(1)
(as a percentage of average net assets)
Management Fee ........................... 0.80%
12b-1 Fees ............................... None
Other Expenses ........................... 0.20%
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Total Fund Operating Expenses ............ 1.00%
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Example(2)
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
1 Year 3 Years
$10 $32
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years
$10 $32
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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(1) Expense ratios are estimated for the Fund's fiscal period ending
December 31, 1996.
(2) The Securities and Exchange Commission requires use of a 5% annual
return figure for purposes of this example. Actual return for the Fund
may be greater or less than 5%.
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THE FUND
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The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. The Trust was formed as a Massachusetts
business trust on November 30, 1995. The Fund is managed or advised by Keystone
Investment Management Company ("Keystone"), the Fund's investment adviser.
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INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide shareholders with
long-term growth of capital. The Fund invests, under normal circumstances, at
least 65% of its total assets in equity securities of companies with small
market capitalizations. Generally, the Fund intends to invest at least 80% of
its net assets in small cap stocks. For this purpose, companies with small
market capitalizations are generally those with market capitalization of less
than $1 billion and more than $100 million at the time of the Fund's investment.
Companies whose capitalization falls outside this range after the purchase
continue to be considered small cap for this purpose; however, the Fund intends
to sell securities of companies whose capitalizations fall below $50 million or
rise above $2 billion.
Under normal economic conditions, the strategy is to remain essentially
fully invested with cash reserves below 5% of the market value of the Fund.
However, if market conditions warrant, the Fund may adopt a more defensive
strategy to preserve shareholder's capital by investing in money market
investments. Such instruments, which must mature within one year of their
purchase, consist of United States ("U.S.") government securities; instruments,
including certificates of deposit, demand and time deposits and bankers'
acceptances, of banks that are members of the Federal Deposit Insurance
Corporation and have at least $1 billion in assets as of the date of their most
recently published financial statements; and prime commercial paper.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid, securities which
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investment on
its books and (2) limiting its holdings of such securities to 10% of the Fund's
net assets.
The Fund may invest in restricted equity securities, including
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933 (the "1933 Act"). Generally, Rule 144A establishes a safe harbor from the
registration requirements of the 1933 Act for resales by large institutional
investors of securities not publicly traded in the U.S. The Fund may purchase
Rule 144A securities when such securities present an attractive investment
opportunity and otherwise meet the Fund's selection criteria. The Board of
Trustees has adopted guidelines and procedures pursuant to which Keystone
determines the liquidity of the Fund's Rule 144A securities. The Board monitors
Keystone's implementation of such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the
market for Rule 144A securities will develop. A Rule 144A security that was
readily marketable upon purchase may subsequently become illiquid. In such an
event, the Board of Trustees will consider what action, if any, is appropriate.
The Fund may enter into repurchase agreements and reverse repurchase
agreements for the purpose of investing cash balances held by the Fund. In
addition, the Fund may lend its portfolio securities. The Fund retains the right
to buy stock index futures as a means for increasing or decreasing market
exposure but not for leverage.
For further information about the types of investments and investment
techniques available to the Fund, and the risks associated therewith, see the
"Risk Factors" and "Additional Investment Information" sections of this
prospectus and the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its
investment objective since there is uncertainty in every investment.
The investment objective of the Fund cannot be changed without a vote
of the holders of a majority (as defined in the Investment Company Act of 1940
("1940 Act")) of the Fund's outstanding shares.
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INVESTMENT RESTRICTIONS
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The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the approval of a majority (as defined
in the 1940 Act) of the Fund's outstanding shares. These restrictions and
certain other fundamental restrictions are set forth in the statement of
additional information.
The Fund may not do the following: (1) invest more than 5% of its
total assets in the securities of any one issuer (other than U.S. government
securities), except that up to 25% of its total assets may be invested
without regard to this limit; and (2) borrow money, except that the Fund may
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets (computed at cost) or
enter into reverse repurchase agreements provided that bank borrowings and
reverse repurchase agreements, in aggregate, shall not exceed one-third of the
value of the Fund's net assets.
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RISK FACTORS
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Like any investment, your investment in the Fund involves some degree
of risk. Before you buy shares of the Fund, you should carefully evaluate your
ability to assume the risks your investment in the Fund poses. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN
THE VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE
VALUE OF YOUR INVESTMENTS.
The Fund seeks to provide long-term growth of capital by investing
principally in equity securities of companies with small market capitalizations.
The Fund is best suited to institutional investors who can afford to maintain
their investments over a relatively long period of time, and who are seeking a
fund which is aggressive and has the potential for high returns. The Fund
involves a high degree of risk and is not an appropriate investment for
conservative investors who are seeking preservation of capital and/or income.
Certain risks related to the Fund are discussed below. To the extent
not discussed in this section, specific risks attendant to individual securities
or investment practices are discussed in "Additional Investment Information".
FUND RISKS. Investing in growth companies with small market
capitalizations involves greater risk than investing in larger companies. Their
stock prices can rise very quickly and drop dramatically in a short period of
time. This volatility results from a number of factors, including reliance by
these companies on limited product lines, markets, and financial and management
resources. These and other factors may make small cap companies more susceptible
to setbacks or downturns. These companies may experience higher rates of
bankruptcy or other failures than larger companies. They may be more likely to
be negatively affected by changes in management. In addition, the stock of small
cap companies may be less marketable than older, larger companies.
A need for cash due to large liquidations from the Fund when the prices
of small cap stocks are declining could result in losses to the Fund.
Investing in the Fund involves the risk common to investing in any
security, that the value of the securities held by the Fund will fluctuate in
response to changes in economic conditions or expectations about those
securities. The net asset value of the Fund's shares will change accordingly.
OTHER CONSIDERATIONS
The Fund, which normally invests at least 65% of its assets in small
cap stocks does not, by itself, constitute a balanced investment plan. The Fund
may be appropriate as part of an overall investment program. Investors may wish
to consult their financial advisers or consultants when considering what portion
of their total assets to invest in small cap stocks.
Past performance should not be considered representative of results for
any future period of time.
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PRICING SHARES
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The net asset value of a Fund share is computed each day on which the
New York Stock Exchange (the "Exchange") is open as of the close of trading on
the Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing Fund
shares) except on days on which changes in the value of the Fund's portfolio
securities will not materially affect the current net asset value of its shares.
The Exchange currently is closed on weekends, New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share is arrived at by determining the
value of all of the Fund's assets, subtracting all liabilities and dividing the
result by the number of shares outstanding.
Current values for the Fund's securities are generally determined as follows:
1. securities that are traded on a national securities exchange or on the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the
time of the valuation, provided that a sale has occurred and that this price
reflects current market value according to procedures established by the Board
of Trustees;
2. securities traded in the over-the-counter market, other than NMS, for
which market quotations are readily available, are valued at the mean of the
bid and asked prices at the time of valuation;
3. instruments having maturities of more than sixty days for which market
quotations are readily available are valued at current market value; where
market quotations are not available, such instruments are valued at fair value
as determined by the Board of Trustees;
4. instruments purchased with maturities of sixty days or less (including
all master demand notes) 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; instruments maturing in
more than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market; and which, in either
case, reflects fair value as determined by the Fund's Board of Trustees; and
5. the following securities are valued at prices deemed in good faith to be
fair under procedures established by the Board of Trustees: (a) securities,
including restricted securities, for which complete quotations are not readily
available, (b) listed securities or those on NMS if, in the Fund's opinion,
the last sales price does not reflect a current market value or if no sale
occurred, and (c) other assets.
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DIVIDENDS AND TAXES
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The Fund has qualified and intends to qualify in the future as a
regulated investment company under the Internal Revenue Code. The Fund qualifies
if, among other things, it distributes to its shareholders at least 90% of its
net investment income for its fiscal year. The Fund also intends to make timely
distributions, if necessary, sufficient in amount to avoid the nondeductible 4%
excise tax imposed on a regulated investment company when it fails to
distribute, with respect to each calendar year, at least 98% of its ordinary
income for such calendar year and 98% of its net capital gains for the one-year
period ending on October 31 of such calendar year. Any taxable dividend declared
in October, November, or December to shareholders of record in such month, and
paid by the following January 31 will be includable in the taxable income of the
shareholders as if paid on December 31 of the year in which the dividend was
declared. If the Fund qualifies and if it distributes all of its net investment
income and net capital gains, if any, to shareholders, it will be relieved of
any federal income tax liability. The Fund distributes its net income and net
capital gains to its shareholders at least annually.
Distributions are payable in shares of the Fund or, at the
shareholder's option (which must be exercised before the record date for the
distribution), in cash. Fund distributions in the form of additional shares are
made at net asset value without the imposition of a sales charge. Income
dividends and net short-term gains distributions are taxable as ordinary income,
and net long-term gains dividends are taxable as capital gains regardless of how
long the Fund's shares are held. If Fund shares held for less than six months
are sold at a loss, however, such loss will be treated for tax purposes as a
long-term capital loss to the extent of any long-term capital gains dividends
received. Dividends and distributions may also be subject to state and local
taxes. The Fund advises its shareholders annually as to the federal tax status
of all distributions made during the year.
In the event the Trust establishes additional Funds, each Fund will be
considered and intends to qualify as, a regulated investment company.
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FUND MANAGEMENT AND EXPENSES
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BOARD OF TRUSTEES
Under Massachusetts law, the Trust's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Trust's Board of Trustees, Keystone, the Fund's
investment adviser, provides investment advice, management and administrative
services to the Trust and the Fund.
INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("Keystone
Investments"), located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and
former members of management and certain employees of Keystone and its
affiliates. The shares of Keystone Investments common stock beneficially owned
by management are held in a number of voting trusts, the Trustees of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
Pursuant to its Investment Advisory and Management Agreement (the
"Advisory Agreement") with the Trust with respect to the Fund, Keystone manages
the investment and reinvestment of the Fund's assets, supervises the operation
of the Fund, provides all necessary office space, facilities, equipment and
personnel and arranges, at the request of the Trust and the Fund, for its
employees to serve as officers or agents of the Trust and the Fund.
The Fund pays Keystone a fee for its services at the annual rates set
forth below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
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0.80% of the first $ 100,000,000, plus
0.75% of the next $ 150,000,000, plus
0.65% of amounts over $ 250,000,000.
Keystone's fee is computed as of the close of business each business day and
payable daily.
An advisory fee of 0.80% is higher than that paid by general equity
funds. However, we believe the Fund's advisory fee is comparable to that of
other small cap growth equity funds.
The Advisory Agreement continues in effect from year to year only so
long as such continuance is specifically approved at least annually by the
Trust's Board of Trustees or by vote of a majority of the outstanding shares of
the Fund. In either case, the terms of the Advisory Agreement and continuance
thereof must be approved by the vote of a majority of Independent Trustees in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated, without penalty, on 60 days' written
notice by the Trust on behalf of the Fund or Keystone. The Advisory Agreement
will terminate automatically upon its assignment.
The Trust has adopted a Code of Ethics incorporating policies on
personal securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Keystone's Small Cap Growth Team has been the Fund's Portfolio Manager
since its inception. Members of the team are Christopher R. Ely, Philip C. Fine
and David L. Smith. Mr. Ely is a Senior Vice President and Senior Portfolio
Manager and has more than 15 years' investment experience. Mr. Fine is a Vice
President and Portfolio Manager and has more than 7 years' investment
experience. Mr. Smith is a Keystone Vice President and Portfolio Manager and has
more than 10 years' investment experience. Messrs. Ely, Fine and Smith are also
Chartered Financial Analysts.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
advisory and management fees discussed above, the principal expenses that the
Fund is expected to pay include, but are not limited to, expenses of its
transfer, dividend disbursing and shareholder servicing agent and its custodian,
fees of its independent auditors and legal counsel to the Independent Trustees;
fees of its Independent Trustees; expenses of shareholders' and Trustees'
meetings; fees payable to government agencies, including registration and
qualification fees of the Fund and its shares under federal and state securities
laws; expenses of preparing, printing and mailing Fund reports, prospectuses,
notices, and proxy material; and certain extraordinary expenses. In addition to
such expenses, the Fund pays its brokerage commissions, interest charges and
taxes.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
Due to the limited marketability of small cap stocks, the portfolio manager and
trading desk employees may also utilize crossing networks to minimize
transaction costs, especially in Over-The-Counter securities.
Under certain circumstances, the Fund may pay higher commissions to
broker-dealers that provide research services beneficial to the Fund. Keystone
may use these services in advising the Fund as well as in advising its other
clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is expected, generally, not to
exceed 75% to 100%. High portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs, which would be borne directly
by the Fund, as well as additional realized gains and/or losses to shareholders.
For further information about brokerage and distributions, see the statement of
additional information.
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HOW TO BUY SHARES
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You may purchase shares of the Fund through Fiduciary Investment
Company, Inc. ("FICO" or the "Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter, an affiliate of Keystone, is located at
200 Berkeley Street, Boston, Massachusetts 02116-5034.
The Fund's shares are sold at the net asset value per share next
computed after the Fund receives the purchase order on each day on which the
Exchange is open for business. The initial purchase must be at least $2 million.
The Fund will accommodate multiple shareholder accounts for an investor as small
as $25,000 provided that the investor's aggregate investment in the Fund is at
least $2 million or that the investor is an existing advisory client of
Keystone. This provision for client subaccounts is intended to accommodate
certain investors that require separate subaccounts for tax purposes. Subsequent
purchases by an investor must be at least $100,000. Purchase payments are fully
invested at net asset value. Shares of the Fund are sold without a sales charge
at the time of purchase and are not subject to any charge at the time of
redemption.
Shares of the Fund are available only to institutional investors, and
certain existing investment advisory clients of Keystone, FICO, or any of their
affiliates.
Shares are held in "open accounts," i.e., they are credited to the
shareholder's account on the Fund's books. No certificates are issued. All
orders for the purchase of shares are subject to acceptance by the Fund, which
has the right to reject any order.
Shares become entitled to income distributions declared on the first
business day following receipt by the Fund's transfer agent of payment for the
shares.
PURCHASES IN KIND
The Fund may, in its discretion, require that proposed investments of
$5 million or more in the Fund, be made in kind. This requirement is intended to
minimize the effect of transaction costs on existing shareholders of the Fund.
Such transaction costs, which may include broker's commissions and taxes or
governmental fees, may, in such event, be borne by the proposed investor in
shares of the Fund. Under these circumstances, the Fund would inform the
investor of the securities and amounts that are acceptable to the Fund. The
securities would then be purchased and then accepted by the Fund at their then
market value in return for shares in the Fund of an equal value.
OPENING AN ACCOUNT
First, telephone Keystone Investor Resource Center, Inc. ("KIRC"), the
Fund's transfer agent and dividend disbursing agent, toll free at 1-800-633-2700
to open an account and obtain an account or wire identification number.
Second, for more technical questions relating to Fund investment
policies or current strategy, call Keystone Institutional Company, Inc. toll
free at (800) 633-4200.
Third, arrange with your bank to wire federal funds to the Fund's
custodial bank at the following address (please include your account number):
State Street Bank and Trust Company
Boston, Massachusetts
ABA 011000028 Attn: Mutual Fund Division
For incoming wire A/C 0127-654-2
For credit to Keystone Institutional Small
Capitalization Growth Fund
Client Name and/or Account Number:
Fourth, complete and sign the Account Application and mail it to:
Keystone Investor Resource Center, Inc.
P.O. Box 2121
Boston, Massachusetts 02106-2121
If KIRC deems it appropriate, additional documentation or verification
of authority may be required, especially with respect to trust funds and taxable
investors.
Information on how to wire federal funds is available at any national
bank or any state bank that is a member of the Federal Reserve System. The bank
may charge fees for these services. Presently, there is no fee for receipt by
KIRC of federal funds wired, but the right to charge for this service is
reserved.
For additional assistance with sales or account information, contact:
Keystone Institutional Company, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
TEL: 1-800-633-4200
FAX: 1-617-338-3366
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HOW TO REDEEM SHARES
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Shares of the Fund may be redeemed at net asset value by mail or by
using the telephone or telecommunication redemption privilege.
MAIL REDEMPTIONS
Shares may be redeemed on each day on which the Exchange is open by
mailing a written request to KIRC at the following address:
Keystone Investor Resource Center, Inc.
P.O. Box 2121
Boston, Massachusetts 02106-2121
Signatures on written requests must be PROPERLY GUARANTEED by a U.S.
stock exchange member, a bank or other persons eligible to guarantee signatures
under the Securities Exchange Act of 1934 and KIRC's policies, when the
circumstances of such redemptions indicate that guaranteed signatures are
appropriate, in the judgment of the Fund or KIRC, for the protection of the
Fund, its shareholders and KIRC. The Fund and KIRC may waive this requirement,
but also may require additional documentation in certain cases.
TELEPHONE OR TELECOMMUNICATION REDEMPTIONS
Shares may be redeemed on each day on which the Exchange is open for
business by telephone (toll free 1-800-633-2700), mailgram, facsimile or other
request not bearing a signature and a signature guarantee to KIRC.
Shareholders must complete and sign an Account Application, including
the Redemption Authorization.
Redemption proceeds will be wired in federal funds only to the
commercial bank (and account number) designated by the shareholder on the
Account Application. If KIRC deems it appropriate, additional documentation may
be required. Although at present KIRC pays the wire costs involved, it reserves
the right at any time to require the shareholder to pay such costs.
Except as otherwise noted, neither the Fund, KIRC nor FICO assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over the telephone are genuine
including recording verbal instructions. Neither the Fund, KIRC nor FICO will be
liable when following instructions received by telephone that KIRC reasonably
believes to be genuine.
The Fund computes the amount due a shareholder at the close of the
Exchange at the end of the business day on which it has received all proper
documentation. Payment will be made promptly and, in any event, within seven
days after a properly completed redemption request is received, subject to
suspension of the right of redemption or extension of the date for payment when
(1) the Exchange is closed, other than customary weekend and holiday closings;
(2) trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
Any change in the shareholder's bank account designated to receive
redemption proceeds must be made in an Account Application signed by the
shareholder (WITH SIGNATURES PROPERLY GUARANTEED IN THE MANNER DESCRIBED ABOVE)
and delivered to KIRC at the address above.
If a shareholder redeems all the shares in an account, the shareholder
will receive, in addition to the value thereof, all declared but unpaid
distributions thereon.
GENERAL
The Fund reserves the right, at any time, to terminate, suspend or
change the terms of any redemption method described in this prospectus, except
redemption by mail.
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SHAREHOLDER SERVICES
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Details on all shareholder services may be obtained from KIRC by
calling toll free 1-800-633-2700 or from FICO by writing FICO at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
SHAREHOLDER ACCOUNTS
Each investor will automatically have established an account under
which it will receive a statement showing details of all transactions, including
the current balance of full and fractional shares in the account.
SUBACCOUNTS
Special processing has been arranged with KIRC for banks and other
institutions that wish to open multiple accounts (a master account and
subaccounts). An investor wishing to avail itself of KIRC's subaccounting
facilities will be required to enter into a separate agreement, with the charges
to be determined on the basis of the level of services to be rendered.
Subaccounts may be opened with the initial investment or at a later date and may
be established by an investor with registration either by name or by number.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange
shares of the Fund for shares of any of the funds in the Keystone Institutional
Fund Family, on the basis of their respective net asset values by calling toll
free 1-800-633-2700 or by writing KIRC at Box 2121, Boston, Massachusetts
02106-2121. (See "How to Redeem Shares" for additional information with respect
to telephone transactions.)
Fund shares purchased by check may be exchanged for shares of the named
funds. You may exchange your shares for another Keystone Institutional Fund by
calling or writing to Keystone or FICO. The Fund reserves the right to terminate
this exchange offer or to change its terms.
Orders for exchanges received by the Fund prior to 4:00 p.m. on any day
the funds are open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate both purchase and exchange privileges of any shareholder
who attempts to market time or implement tactical asset allocation programs that
generate excessive transactions.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange constitutes a sale for federal income tax purposes.
The exchange privilege is available only in states where shares of the
fund being acquired may legally be sold.
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PERFORMANCE DATA
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From time to time, the Fund may discuss "total return" and "current
yield." BOTH FIGURES ARE BASED ON HISTORICAL RESULTS AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE. Total return refers to the fund's average annual
compounded rate of return over specified periods determined by comparing the
initial amount invested to the ending redeemable value of that amount. The
resulting figure assumes reinvestment of all dividends and distributions and
deduction of all recurring charges, if any, applicable to all shareholder
accounts.
Current yield quotations represent the yield on an investment for a
stated 30-day period computed by dividing net investment income earned per share
during the base period by the maximum offering price per share on the last day
of the base period. Due to the nature of this Fund, dividends and current yield
will be minimal.
The Fund may also include comparative performance information in
advertising or marketing the Fund's shares, such as data from Lipper Analytical
Services, Inc., Morningstar, Inc., PIPER, Nelson Publications, Inc., or other
industry sources.
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FUND SHARES
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The Trust currently issues shares of only one series of shares, those
of the Fund. The Fund currently issues one class of shares, which participate
equally in dividends and distributions and have equal voting, liquidation and
other rights. When issued and paid for, the shares will be fully paid and
nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are redeemable, transferable and freely assignable
as collateral. The Trust is authorized to issue additional series or classes of
shares.
Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares. Shares of the Fund vote together except
when required by law to vote separately by series or class. The Trust is not
required by its Declaration of Trust to hold annual meetings. However, the Trust
intends to hold meetings at least annually. The Trust will have special meetings
from time to time as required under its Declaration of Trust and under the 1940
Act. As provided in the Declaration of Trust of the Trust, shareholders have the
right to remove Trustees by an affirmative vote of two-thirds of the outstanding
shares. A special meeting of the shareholders will be held when 10% of the
outstanding shares request a meeting for the purpose of removing a Trustee. As
prescribed by Section 16(c) of the 1940 Act, shareholders may be eligible for
shareholder communication assistance in connection with the special meeting.
Under Massachusetts law, it is possible that a Fund shareholder may be
held personally liable for the Trust's obligations. The Trust's Declaration of
Trust provides, however, that shareholders shall not be subject to any personal
liability for the Trust's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Trust's obligations.
Disclaimers of such liability are included in each Trust and Fund agreement.
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ADDITIONAL INFORMATION
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KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent
and dividend disbursing agent.
When the Fund determines from its records that more than one account in
the Fund is registered in the name of a shareholder or shareholders having the
same address, upon written notice to those shareholders, the Fund intends, when
an annual report or semi-annual report of the Fund is required to be furnished,
to mail one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in this
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
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ADDITIONAL INVESTMENT INFORMATION
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The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by Keystone
to be credit-worthy. Such persons must be registered as U.S. government
securities dealers with an appropriate regulatory organization. Under such
agreements, the bank, primary dealer or other financial institution agrees upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund intends
only to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Fund's custodian or in the Federal Reserve book entry
system. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses, including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees has established procedures to evaluate the creditworthiness of each
party with whom the Fund enters into repurchase agreements by setting guidelines
and standards of review for Keystone and monitoring Keystone's actions with
regard to repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities
and agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having to
sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement, it
will establish a segregated account with the Fund's custodian containing liquid
assets such as U.S. government securities or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities that the Fund is obligated to repurchase may decline below the
repurchase price. Borrowing and reverse repurchase agreements magnify the
potential for gain or loss on the portfolio securities of the Fund and,
therefore, increase the possibilty of fluctuation in the Fund's net asset value.
Such practices may constitute leveraging. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such determination. The staff of the
Securities and Exchange Commission has taken the position that reverse
repurchase agreements are subject to the percentage limit on borrowings imposed
under the 1940 Act.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend its portfolio securities to brokers and dealers
pursuant to agreements requiring that the loans be continuously secured by cash
or securities of the U.S. government, its agencies or instrumentalities, or any
combination of cash and such securities, as collateral at all times at least
equal in value to the market value of the securities loaned. Such securities
loans will not be made with respect to the Fund if, as a result, the aggregate
of all outstanding securities loans exceeds one-third of the value of the Fund's
total assets taken at their current value. The Fund continues to receive
interest or dividends on the securities loaned and simultaneously earns interest
on the investment of the cash loan collateral in U.S. Treasury notes,
certificates of deposit, other high-grade, short-term obligations or interest
bearing cash equivalents. Although voting rights attendant to securities loaned
pass to the borrower, such loans may be called at any time and will be called so
that the securities may be voted by the Fund if, in the opinion of the Fund, a
material event affecting the investment is to occur. There may be risks of delay
in receiving additional collateral or in recovering the securities loaned or
even loss of rights in the collateral should the borrower of the securities fail
financially. Loans may only be made to borrowers deemed to be of good standing,
under standards approved by the Board of Trustees, when the income to be earned
from the loan justifies the attendant risks.
STOCK INDEX FUTURES
The Fund may purchase stock index futures as a means for increasing or
decreasing market exposure, but not for leverage, in furtherance of its
investment objective. Stock index futures are derivatives.
DERIVATIVES -- GENERALLY.
Derivatives are financial contracts whose value depends on, or is derived
from, the value of an underlying asset, reference rate or index. These assets,
rates, and indices may include bonds, stocks, mortgages, commodities, interest
rates, currency exchange rates, bond indices and stock indices. Derivatives can
be used to earn income or protect against risk, or both. For example, one party
with unwanted risk may agree to pass that risk to another party who is willing
to accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes, although the Fund generally uses derivatives
primarily as direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options for hedging purposes. Derivatives are a valuable tool which,
when used properly, can provide significant benefit to Fund shareholders.
Keystone is not an aggressive user of derivatives with respect to the Fund.
However, the Fund may take positions in those derivatives that are within its
investment policies if, in Keystone's judgement, this represents an effective
response to current or anticipated market conditions. Keystone's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts, or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding futures transactions, is provided
later in this section and is provided in the Fund's statement of additional
information. The Fund does not presently engage in the use of forwards or swaps.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to
as a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
FUTURES TRANSACTIONS
The Fund may enter into futures contracts based on securities indices and may
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund may enter into
other types of futures contracts that may become available and relate to the
securities held by the Fund. A futures contract is an agreement to buy or sell
securities or currencies at a specified price during a designated month. The
Fund does not make payment or deliver securities upon entering into a futures
contract. Instead, it puts down a margin deposit, which is adjusted to reflect
changes in the value of the contract and which continues until the contract is
terminated. The Fund will "cover" its futures contract obligations by
maintaining in a segregated account with its custodian the securities
underlying the contract or liquid assets, such as cash, U.S.
Government securities or other appropriate high grade debt obligations,
sufficient in amount to satisfy the Fund's contract obligations.
The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the contract will tend to rise when the value of
the underlying securities declines and to fall when the value of such securities
increases. Thus, the Fund would sell futures contracts in order to offset a
possible decline in the value of its securities. If a futures contract were
purchased by the Fund, the value of the contract would tend to rise when the
value of the underlying securities increased and to fall when the value of such
securities declined. The Fund intends to purchase futures contracts in order to
fix what is believed by its portfolio manager to be a favorable price and rate
of return for securities the Fund intends to purchase.
The Fund also may purchase put and call options on securities and currency
futures contracts for hedging purposes. A put option purchased by the Fund would
give it the right to assume a position as the seller of a futures contract. A
call option purchased by the Fund would give it the right to assume a position
as the purchaser of a futures contract. The purchase of an option on a futures
contract requires the Fund to pay a premium. In exchange for the premium, the
Fund becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may write (sell) put and call options on futures contracts for
hedging purposes. The writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, the Fund becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price.
Conversely, the writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the Fund's assets.
By writing a call option, the Fund becomes obligated, in exchange for the
premium, to sell a futures contract, which may have a value higher than the
exercise price.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case it would continue to bear market
risk on the transaction.
Although futures and options transactions are intended to enable the
Fund to manage market risk, unanticipated changes in market prices could result
in poorer performance than if it had not entered into these transactions. Even
if Keystone correctly predicts market movements, a hedge could be unsuccessful
if changes in the value of the Fund's futures position did not correspond to
changes in the value of its investments. This lack of correlation between the
Fund's futures and securities positions may be caused by differences between the
futures and securities markets or by differences between the securities
underlying the Fund's futures position and the securities held by or to be
purchased for the Fund. In addition, futures contracts transactions involve the
remote risk that a party participating in a transaction will not be able to
fulfill its obligations and the amount of the obligation will exceed the ability
of the clearing broker to satisfy. Keystone will attempt to minimize these risks
through careful selection and monitoring of the Fund's futures and options
positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
JANUARY 17, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Institutional Trust (the "Trust") relating to its series of shares named
Keystone Institutional Small Capitalization Growth Fund (the "Fund") dated
January 17, 1996. A copy of the prospectus may be obtained from Fiduciary
Investment Company ("FICO" or the "Principal Underwriter"), the Fund's principal
underwriter, located at 200 Berkeley Street, Boston, Massachusetts, 02116-5034
or your broker-dealer.
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TABLE OF CONTENTS
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Page
Investment Objective and Policies 2
Investment Restrictions 2
Valuation of Securities 4
Distributions and Taxes 5
Declaration of Trust 6
Investment Manager and Adviser 7
Trustees and Officers 9
Principal Underwriter 13
Brokerage 14
Standardized Total Return 16
Additional Information 16
Appendix A-1
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INVESTMENT OBJECTIVE AND POLICIES
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The Trust is an open-end, diversified management investment company
that is authorized to issue more than one series of shares. At this time, the
Trust issues only one series of shares, the Keystone Institutional Small
Capitalization Growth Fund (the "Fund"). The Fund's investment objective is to
provide shareholders with long-term growth of capital. It is the Fund's policy
to invest its assets as fully as practicable.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the vote of a majority (as defined in
the Investment Company Act of 1940 ("1940 Act")) of the Fund's outstanding
voting shares. Unless otherwise stated, all references to Fund assets are in
terms of current market value.
The Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined at the
time of purchase; provided that these limitations do not apply to investments in
securities issued or guaranteed by the United States ("U.S.") government or its
agencies or instrumentalities;
(2) concentrate its investments in the securities of issuers in any one
industry other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities;
(3) borrow money, except that the Fund may (a) borrow from any bank,
provided that, immediately after any such borrowing there is asset coverage of
at least 300% for all borrowings; (b) borrow for temporary purposes only and in
an amount not exceeding 5% of the value of the Fund's total assets, computed at
the time of borrowing; or (c) enter into reverse repurchase agreements, provided
that, immediately after entering into any such agreements, there is asset
coverage of at least 300% of all bank borrowings and reverse repurchase
agreements;
(4) issue senior securities, except that the Fund may (a) make
permitted borrowings of money; (b) enter into firm commitment agreements and
collateral arrangements with respect to the writing of options on securities and
engage in permitted transactions in futures and options thereon and forward
contracts; and (c) issue shares of any additional permitted classes or series;
(5) engage in the business of underwriting securities issued by other
persons, except insofar as the Fund may be deemed to be an underwriter in
connection with the disposition of its portfolio investments;
(6) invest in real estate or commodities, except that the Fund may (a)
invest in securities directly or indirectly secured by real estate and interests
therein and securities of companies that invest in real estate and interests
therein, including mortgages and other liens; and (b) enter into financial
futures contracts and options thereon for hedging purposes and enter into
forward contracts; or
(7) make loans, except that the Fund may (a) make, purchase, or hold
publicly and nonpublicly offered debt securities (including convertible
securities) and other debt investments, including loans, consistent with its
investment objective; (b) lend its portfolio securities to broker-dealers; and
(c) enter into repurchase agreements.
NON-FUNDAMENTAL INVESTMENT POLICIES
It is the position of the staff of the Securities and Exchange
Commission that investment (including holdings of debt securities) of more than
25% of the value of the Fund's assets in any one industry or group of industries
represents concentration, it being understood that securities issued by the U.S.
government or state governments or political subdivisions thereof are excluded
from the calculation because these issuers are not considered by the staff of
the Securities and Exchange Commission to be members of any industry.
In order to permit the sale of Fund shares in certain states or foreign
countries, the Fund may make commitments more restrictive than the investment
restrictions described above. Should the Fund determine that any such commitment
is no longer in the best interests of the Fund, it may revoke the commitment by
terminating sales of its shares in the state or country involved.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's securities are generally determined as
follows:
(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;
(2) securities traded in the over-the-counter market, other than on NMS,
for which market quotations are readily available, are valued at the mean of the
bid and asked prices at the time of valuation;
(3) instruments having maturities of more than sixty day for which market
quotations are readily available, are valued at current market value; where
market quotations are not available, such instruments are valued at fair value
as determined by the Board of Trustees;
(4) instruments purchased with maturities of sixty days or less (including
all master demand notes) 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; instruments maturing in
more than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market; and which, in either case, reflects fair
value as determined by the Board of Trustees; and
(5) the following securities are valued at prices deemed in good faith to
be fair under procedures established by the Board of Trustees: (a) securities,
including restricted securities, for which complete quotations are not readily
available; (b) listed securities or those on NMS if, in the Fund's opinion, the
last sales price does not reflect a current market value or if no sale occurred;
and (c) other assets.
Foreign securities for which market quotations are not readily available
are valued on the basis of valuations provided by a pricing service, approved by
the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund distributes to its shareholders dividends from net investment
income and net realized long-term and short-term capital gains annually in
shares or, at the option of the shareholder, in cash. (Distributions of ordinary
income may be eligible in whole or in part for the corporate 70% dividends
received deduction.) Shareholders who have not opted, prior to the record date
for any distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the day on the record date after adjustment for the distribution. Net
asset value is used in computing the number of shares in both gains and income
distribution reinvestments. Account statements and/or checks as appropriate will
be mailed to shareholders by the 15th of the appropriate month. Unless the Fund
receives instructions to the contrary from a shareholder before the record date,
it will assume that the shareholder wishes to receive that distribution and
future gains and income distributions in shares. Instructions continue in effect
until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of the period of time Fund shares have been held by the
shareholder. However, if such shares are held less than six months and redeemed
at a loss, the shareholder will recognize a long-term capital loss on such
shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated November 30, 1995. The Trust is similar in most
respects to a business corporation. The principal distinction between the Trust
and a corporation relates to the shareholder liability described below. A copy
of the Declaration of Trust (the "Declaration of Trust") is filed as an exhibit
to the Registration Statement of which this statement of additional information
is a part. This summary is qualified in its entirety by reference to the
Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
a Fund represents an equal proportionate interest with each other share of that
series and class. Upon liquidation, shares are entitled to a pro rata share of
the Trust based on the relative net assets of each series and class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable. The Trust is authorized to issue additional classes or series of
shares. The Trust currently issues one series and one class of shares, but may
issue additional series or classes of shares at a later date.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Trust were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
(1) the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for obligations of the Trust and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or the Trustees; and (2) the Declaration of Trust
provides for indemnification out of the Trust's property for any shareholder
held personally liable for the obligations of the Trust.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. However, the Trust intends to hold meetings at least
annually. At meetings called for the initial election of Trustees or to consider
other matters, shares are entitled to one vote per share. Shares generally vote
together as one class on all matters. Classes of shares of a Fund have equal
voting rights. No amendment may be made to the Declaration of Trust which
adversely affects any class of shares without the approval of a majority of the
shares of that class. Shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees to be elected at a meeting and, in such event,
the holders of the remaining 50% or less of the shares voting will not be able
to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
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INVESTMENT MANAGER AND ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Trust's Board of Trustees,
Keystone Investment Management Company ("Keystone"), located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034, provides investment advice, management
and administrative services to the Fund. Keystone, organized in 1932, is a
wholly-owned subsidiary of Keystone Investments, Inc. ("Keystone Investments"),
200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and
former members of management and certain employees of Keystone Investments and
its affiliates. The shares of Keystone Investments common stock beneficially
owned by management are held in a number of voting trusts, the trustees of which
are George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey, and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to an Investment Advisory and
Management Agreement with the Trust with resect to the Fund (the "Advisory
Agreement") and subject to the supervision of the Trust's Board of Trustees,
Keystone manages and administers the Fund's operation and manages the investment
and reinvestment of the Fund's assets in conformity with the Fund's investment
objective and restrictions. The Advisory Agreement stipulates that Keystone
shall provide office space, all necessary office facilities, equipment and
personnel in connection with its services under the Advisory Agreement and pay
or reimburse the Fund for the compensation of officers and Trustees of the Trust
who are affiliated with the investment adviser as well as pay all expenses of
Keystone incurred in connection with the provision of its services. All charges
and expenses other than those specifically referred to as being borne by
Keystone will be paid by the Fund, including, but not limited to, custodian
charges and expenses; bookkeeping and auditors' charges and expenses; transfer
agent charges and expenses; fees of Independent Trustees; brokerage commissions;
brokers' fees and expenses; issue and transfer taxes; taxes and trust fees
payable to governmental agencies; fees and expenses of the registration and
qualification of the Fund and its shares with the Securities and Exchange
Commission (sometimes referred herein as the "SEC" or the "Commission") or under
state or other securities laws, expenses of preparing, printing and mailing
reports, prospectuses, statements of additional information, notices, and proxy
materials to shareholders of the Fund; expenses of shareholders' and Trustees'
meetings; charges and expenses of legal counsel for the Trust and for the
Trustees of the Trust on matters relating to the Fund; charges and expenses of
filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
As compensation for its services to the Fund, Keystone is entitled to a
fee at the annual rate set forth below:
Management Aggregate Net Asset Value
Fee of the Shares of the Fund
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0.80% of the first $100,000,000, plus
0.75% of the next $150,000,000, plus
0.65% of amounts over $250,000,000
computed as of the close of business on each business day and paid daily.
As a continuing condition of registration of shares in a state,
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of certain percentages of the Fund's
average daily net assets. However, Keystone is not required to make such
reimbursements 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. This condition may be modified or eliminated in the future.
Under the Advisory Agreement any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence, or reckless disregard of its
duties.
The Advisory Agreement continues in effect only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of the
outstanding shares, and such renewal has been approved by the vote of a majority
of the Independent Trustees cast in person at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be terminated, without
penalty on 60 days' written notice by the Trust's Board of Trustees or by a vote
of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Trust, their principal occupations and
some of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments, Inc. ("Keystone Investments");
President, Chief Executive Officer and Trustee or Director of all 30
Funds in the Keystone Investments Family of Funds; Director and
Chairman of the Board, Chief Executive Officer and Vice Chairman of
Keystone Investment Management Company ("Keystone"); Chairman of the
Board and Director of Keystone Institutional Company, Inc. ("Keystone
Institutional") (formerly named Keystone Investment Management
Corporation), and Keystone Fixed Income Advisors ("KFIA"); Director,
Chairman of the Board, Chief Executive Officer and President of
Keystone Management, Inc. ("Keystone Management"), Keystone Software
Inc. ("Keystone Software"); Director and President of Keystone Asset
Corporation, Keystone Capital Corporation, and Keystone Trust Company;
Director of Keystone Investment Distributors Company ("the Principal
Underwriter"), Keystone Investor Resource Center, Inc. ("KIRC"), and
Fiduciary Investment Company, Inc. ("FICO"); Director of Boston
Children's Services Association; Trustee of Anatolia College, Middlesex
School, and Middlebury College; Member, Board of Governors, New England
Medical Center; former Director and President of Hartwell Keystone
Advisers, Inc. ("Hartwell Keystone"); former Director and Vice
President of Robert Van Partners, Inc.; and former Trustee of Neworld
Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation
(investment advice) and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other Keystone Investments Funds; Director and Chairman of the
Board of Hartwell Keystone; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital (and Chairman of its
Investment Committee); former Chairman of the Board and Chief Executive
Officer of Keystone Investments; and former Chief Executive Officer of
the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.;
and former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman of the Board, Director and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the
Board and Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation,
Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central
Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont;
former Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc. and J & M Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director
of Connecticut Natural Gas Corporation, Trust Company of Connecticut,
Hartford Hospital, Old State House Association and Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford
School and Greater Hartford YMCA; former Director, Executive Vice
President and Vice Chairman of The Travelers Corporation; and former
Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar
Association; former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, Keystone Trust Company; Treasurer of Keystone
Institutional, and FICO; Treasurer and Director of Keystone Management,
and Keystone Software; Vice President and Treasurer of KFIA; and
Director of KIRC; former Treasurer and Director of Hartwell Keystone;
former Treasurer of Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; and President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other Keystone
Investment Funds; Vice President and Controller of Keystone
Investments, Keystone, Keystone Institutional, Keystone Management, the
Principal Underwriter, FICO and Keystone Software; and Controller of
Keystone Asset Corporation and Keystone Capital Corporation.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone;
Senior Vice President, General Counsel, Secretary and Director of the
Principal Underwriter, Keystone Management and Keystone Software;
Senior Vice President and General Counsel of Keystone Institutional;
Senior Vice President, General Counsel and Director of FICO and KIRC;
Vice President and Secretary of KFIA; Senior Vice President, General
Counsel and Secretary of Keystone Investments, Keystone Asset
Corporation, Keystone Capital Corporation and Keystone Trust Company;
former Senior Vice President and Secretary of Hartwell Keystone and
Robert Van Partners, Inc.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and a Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
Annual retainers and meeting fees paid by all funds in the Keystone
Investments Family of Funds (which includes over 30 mutual funds) for the fiscal
period ended October 31, 1995, totalled approximately $477,480. On October 31,
1995, the Trustees and officers beneficially owned less than 1.0% of the Fund's
then outstanding shares.
The address of all the Trust's Trustees and officers and the address of
the Trust is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
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The Trust has entered into a Distribution Agreement with FICO (the
"Distribution Agreement"). FICO is a wholly-owned subsidiary of Keystone.
The Trust has appointed FICO to act as Principal Underwriter of the
Fund's shares in such states as the Fund may, from time to time, designate. FICO
will act as agent for the Fund and not as principal. FICO will have the right to
obtain subscriptions for and to sell shares as agent of the Fund.
All subscriptions and sales of shares by FICO are at the offering price
of the shares in accordance with the provisions of the Trust's Declaration of
Trust and By-Laws, and the current prospectus and statement of additional
information. All orders are subject to acceptance by the Fund, and the Fund
reserves the right in its sole discretion to reject any order received. Under
the Distribution Agreement, the Fund is not liable to anyone for failure to
accept any order.
FICO has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares and will indemnify
and hold harmless the Trust, and each person who has been, is or may be a
Trustee or officer of the Trust or the Fund, against expenses reasonably
incurred by any of them in connection with any claim or in connection with any
action, suit or proceeding to which any of them may be a party, that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of FICO or any other person for whose acts FICO is
responsible or is alleged to be responsible, unless such misrepresentation or
omission was made in reliance upon written information furnished by the Trust.
The Distribution Agreement provides that it will remain in
effect for two years and from year to year thereafter as long as its terms and
continuance are approved by a majority of the Trust's Independent Trustees at
least annually at a meeting called for that purpose, and if its continuance is
approved annually by vote of a majority of Trustees, or by vote of a majority of
the outstanding shares of the Fund.
The Distribution Agreement may be terminated, without penalty, on 60
days' written notice by the Trust or on 90 days' written notice by FICO. The
Distribution Agreement will terminate automatically upon its "assignment" as
that term is defined in the 1940 Act.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by management in determining the
overall reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund or Keystone is considered to be in
addition to and not in lieu of services required to be performed by Keystone
under the Advisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of Keystone or any of its affiliates who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for such other clients. Under the Advisory Agreement, Keystone is
permitted to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934. In the event Keystone does follow such a practice, it will do so on a
basis which is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark-up or reflect a dealer's mark-down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities for the Fund's
portfolio thereby taking advantage of the lower purchase price available to
members of such a group.
Neither Keystone nor the Fund intends to place securities transactions
with any particular broker-dealer or group thereof.
The policy of the Fund with respect to trading and brokerage is and
will be reviewed by the Trust's Board of Trustees from time to time. Because of
the possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
from those of the other funds and investment accounts managed by Keystone or any
of its affiliates. It may frequently develop that the same investment decision
is made for more than one such fund or account. Simultaneous transactions are
inevitable when the same security is suitable for the investment objective of
more than one such fund or account. When two or more such funds or accounts are
engaged in the purchase or sale of the same security, the transactions are
allocated as to amount in accordance with a formula which is equitable to each
fund or account. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security with respect to the
Fund. In other cases, however, it is believed that the ability of the Fund to
participate in volume transactions will produce better executions for the Fund.
In no instance are portfolio securities purchased from or sold to
Keystone, the Principal Underwriter or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.
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STANDARDIZED TOTAL RETURN
- --------------------------------------------------------------------------------
Total return figures for the Fund as they may appear, from time to
time, in marketing materials are calculated by finding the average annual
compounded rates of return over one, five and ten year periods on a hypothetical
$1,000 investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment, all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five or ten year periods.
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ADDITIONAL INFORMATION
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SMALL ACCOUNTS
The Fund reserves the right to redeem shares in any account in which
the value of shares is less than $25,000 or aggregate of $1,000,000. The
redemption proceeds will be promptly paid to the shareholder. Shareholders will
be notified if their accounts are less than such amount and given 60 days to
bring the account up to such amount before the redemption is made.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property. The Fund has obligated itself under the
1940 Act, however, to redeem for cash all shares presented for redemption by any
one shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
OTHER INFORMATION
State Street Bank and Trust Company, located at 225 Franklin Street,
Boston, Massachusetts 02110, is custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the independent auditors for the Fund.
Keystone Investor Resource Center, Inc., located at 101 Main Street,
Cambridge, Massachusetts 02142-1519, is a wholly-owned subsidiary of Keystone
and acts as transfer agent and dividend disbursing agent for the Trust and the
Fund.
As of December 13, 1995, Keystone Investment Management Company owned
of record 100% of the Fund's outstanding shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No salesman or other person is authorized to give any information or to
make any representation not contained in the Fund's prospectus, this statement
of additional information or in supplemental sales literature issued by the Fund
or the Principal Underwriter. No person is entitled to rely on any information
or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in its registration statement filed with the
Securities and Exchange Commission (the "Commission"), which may be obtained
from the Commission's principal office in Washington, D.C. upon payment of the
fee prescribed by the rules and regulations promulgated by the Commission.
<PAGE>
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APPENDIX
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MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by Standard & Poor's Corporation, PRIME-1 by Moody's Investors Service, Inc.
or F-1 by Fitch Investors Service, Inc. These ratings and other money market
instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash requirements. The
issuer's long-term senior debt is rated "A" or better, although in some cases
"BBB" credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Government include
a variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the United States Government or its
agencies or instrumentalities include direct obligations of the United States
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board and Federal National Mortgage
Association.
Some obligations of United States Government agencies and
instrumentalities, such as Treasury bills and Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the United States; others, such as securities of Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; still others,
such as bonds issued by the Federal National Mortgage Association, a private
corporation, are supported only by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in the securities issued by
such an instrumentality only when Keystone determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. United States Government securities will not include international
agencies or instrumentalities in which the United States Government, its
agencies or instrumentalities participate, such as the World Bank, the Asian
Development Bank or the Inter-American Development Bank, or issues insured by
the Federal Deposit Insurance Corporation.
DERIVATIVE INSTRUMENTS
Derivatives have been variously defined to include forwards, futures, options,
mortgage-backed securities, other asset-backed securities and structured
securities, such as interest rate swaps, equity swaps, index swaps, currency
swaps and caps and floors. These basic vehicles can also be combined to create
more complex products, called hybrid derivatives. The following discussion
addresses options and futures.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS
The Fund writes only covered options. Options written by the Fund will
normally have expiration dates of not more than nine months from the date
written. The exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the times the options are
written.
Unless the option has been exercised, the Fund may close out an option it has
written by effecting a closing purchase transaction, whereby it purchases an
option covering the same underlying security and having the same exercise price
and expiration date ("of the same series") as the one it has written. If the
Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Fund will generally write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular option at any
particular time, and for some options no secondary market may exist. In such
event it might not be possible to effect a closing transaction in a particular
option. If the Fund as a covered call option writer is unable to effect a
closing purchase transaction, it will not be able to sell the underlying
securities until the option expires or it delivers the underlying securities
upon exercise.
Because the Fund intends to qualify as a regulated investment company under
the Internal Revenue Code, the extent to which the Fund may write covered call
options and enter into so-called "straddle" transactions involving put and call
options may be limited.
Many options are traded on registered securities exchanges. Options traded on
such exchanges are issued by the Options Clearing Corporation ("OCC"), a
clearing corporation which assumes responsibility for the completion of options
transactions.
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options. A call option gives the
purchaser of the option the right to buy, and the writer the obligation to sell,
the underlying security at the exercise price during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price during the
option period.
So long as the obligation of the writer continues, the writer may be assigned
an exercise notice by the broker-dealer through whom the option was sold. The
exercise notice would require the writer to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates upon expiration of the option,
or at such earlier time as the writer effects a closing purchase transaction by
purchasing an option of the same series as the one previously sold. Once an
option has been exercised, the writer may not execute a closing purchase
transaction. For options traded on national securities exchanges ("Exchanges"),
to secure the obligation to deliver the underlying security in the case of a
call option, the writer of the option is required to deposit in escrow the
underlying security or other assets in accordance with the rules of the OCC, an
institution created to interpose itself between buyers and sellers of options.
Technically, the OCC assumes the order side of every purchase and sale
transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. In return for the premium, the
covered call option writer has given up the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times be unable to
write additional options unless it sells a portion of its portfolio holdings to
obtain new securities against which it can write options. This may result in
higher portfolio turnover and correspondingly greater brokerage commissions and
other transaction costs.
To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, on a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS
The Fund can close out a put option it has purchased by effecting a closing
sale transaction; for example, the Fund may close out a put option it has
purchased by selling a put option. If, however, a secondary market does not
exist at a time the Fund wishes to effect a closing sale transaction, the Fund
will have to exercise the option to realize any profit. In addition, in a
transaction in which the Fund does not own the security underlying a put option
it has purchased, the Fund would be required, in the absence of a secondary
market, to purchase the underlying security before it could exercise the option.
In each such instance, the Fund would incur additional transaction costs. The
Fund may also purchase call options for the purpose of offsetting previously
written call options of the same series.
The Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which the Fund may invest. The
purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain if, during the option period,
the value of such securities exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise the Fund would realize a loss on the
purchase of the call option.
The Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio (protective puts) or securities
of the type in which it is permitted to invest. The purchase of a put option
would entitle the Fund, in exchange for the premium paid, to sell specified
securities at a specified price during the option period. The purchase of
protective puts is designed merely to offset or hedge against a decline in the
market value of the Fund's securities. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying portfolio securities. Put options may also be purchased by
the Fund for the purpose of affirmatively benefitting from a decline in the
price of securities which the Fund does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize a loss on the purchase
of the put option.
The Fund may purchase put and call options on securities indices for the same
purposes as the purchase of options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
OPTIONS TRADING MARKETS
Options in which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded include the Chicago Board
Options Exchange and the New York, American, Pacific, and Philadelphia Stock
Exchanges. Options on some securities may not be listed on any Exchange, but
traded in the over-the-counter market. Options traded in the over-the-counter
market involve the additional risk that securities dealers participating in such
transactions would fail to meet their obligations to the Fund. The use of
options traded in the over-the-counter market may be subject to limitations
imposed by certain state securities authorities. In addition to the limits on
its use of options discussed herein, the Fund is subject to the investment
restrictions described in the prospectus and the statement of additional
information.
The staff of the Commission currently is of the view that the premiums which
the Fund pays for the purchase of unlisted options, and the value of securities
used to cover unlisted options written by the Fund are considered to be invested
in illiquid securities or assets for the purpose of the Fund's compliance with
its policies pertaining to illiquid securities.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be closed out
only in a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event, it might not be possible
to effect closing transactions in particular options, with the result that the
Fund would have to exercise its options in order to realize any profit and might
incur transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the following:
(i) insufficient trading interest in certain options; (ii) restrictions imposed
on transactions (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an Exchange or by a
broker; (v) inadequacy of the facilities of an Exchange, the OCC or a broker to
handle current trading volume; or (vi) a decision by one or more Exchanges or a
broker to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market in that class or series of options
would cease to exist, although outstanding options that had been issued as a
result of trades would generally continue to be exercisable in accordance with
their terms.
The hours of trading for options on U.S. government securities may not conform
to the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures contracts
as a hedge against changes in prevailing levels of interest or currency exchange
rates to seek relative stability of principal and to establish more definitely
the effective return on securities held or intended to be acquired by the Fund
or as a hedge against changes in the prices of securities or currencies held by
the Fund or to be acquired by the Fund. The Fund's hedging may include sales of
futures as an offset against the effect of expected increases in interest or
currency exchange rates or securities prices and purchases of futures as an
offset against the effect of expected declines in interest or currency exchange
rates.
The Fund intends to engage in options transactions that are related to
currency and other financial futures contracts for hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts and
related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to enter into such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather than in
the securities markets. A futures contract creates an obligation by the seller
to deliver to the buyer the commodity specified in the contract at a specified
future time for a specified price. The futures contract creates an obligation by
the buyer to accept delivery from the seller of the commodity specified at the
specified future time for the specified price. In contrast, a spot transaction
creates an immediate obligation for the seller to deliver and the buyer to
accept delivery of and pay for an identified commodity. In general, futures
contracts involve transactions in fungible goods such as wheat, coffee and
soybeans. However, in the last decade an increasing number of futures contracts
have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the U.S. are The Board of Trade of the
City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options. Options on currency and other
financial futures contracts are similar to options on stocks except that an
option on a currency or other financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) rather than to purchase or sell stock, currency or other
financial instruments at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. This amount represents the amount by which the market price of
the futures contract at exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and value of the futures
contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts is
analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on currency and other financial futures contracts
represents a means of obtaining temporary exposure to market appreciation at
limited risk. It is analogous to the purchase of a call option on an individual
stock which can be used as a substitute for a position in the stock itself.
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the underlying financial instrument
or index itself, the purchase of a call option may be less risky than the
ownership of the interest rate or index based futures contract or the underlying
securities. Call options on currency or other financial futures contracts may be
purchased to hedge against an interest rate increase or a market advance when
the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and other
financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund intends that its futures contracts and related options transactions
will be entered into for traditional hedging purposes. That is, futures
contracts will be sold to protect against a decline in the price of securities
that the Fund owns or futures contracts will be purchased to protect the Fund
against an increase in the price of securities it intends to purchase. The Fund
does not intend to enter into futures contracts for speculation.
In instances involving the purchase or sale of futures contracts by the Fund,
an amount of cash and cash equivalents or securities equal to the market value
of the futures contracts will be deposited in a segregated account with the
Fund's custodian. In addition, in the case of a purchase, the Fund may be
required to make a deposit to a margin account with a Broker to collateralize
the position, and in the case of a sale, the Fund may be required to make daily
deposits to the buyer's margin account. The Fund would make such deposits in
order to insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as income
for each taxable year its net unrealized gains and losses on futures contracts
as of the end of the year as well as those actually realized during the year.
Any gain or loss recognized with respect to a futures contract is considered to
be 60% long term and 40% short term, without regard to the holding period of the
contract. In the case of a futures transaction classified as a "mixed straddle,"
the recognition of losses may be deferred to a later taxable year. The federal
income tax treatment of gains or losses from transactions in options on futures
is unclear.
In order for the Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income. Any net gain realized from
the closing out of futures contracts, for purposes of the 90% requirement, will
be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The Internal Revenue Code
effectively treats both positions in certain hedging transactions as a single
transaction for the purpose of the 30% requirement. The provision provides that,
in the case of any "designated hedge," increases and decreases in the value of
positions of the hedge are to be netted for the purposes of the 30% requirement.
However, in certain situations, in order to avoid realizing a gain within a
three month period, the Fund may be required to defer the closing out of a
contract beyond the time when it would otherwise be advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and are
influenced, among other things, by changes in stock prices, market conditions,
prevailing interest rates and anticipation of future stock prices, market
movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts and of
the securities being hedged can be only approximate. The degree of imperfection
of correlation depends upon circumstances, such as variations in speculative
market demand for futures contracts and for securities, including technical
influences in futures contracts trading; differences between the securities
being hedged and the financial instruments and indexes underlying the standard
futures contracts available for trading, in such respects as interest rate
levels, maturities and creditworthiness of issuers, or identities of securities
comprising the index and those in the Fund's portfolio. A decision of whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading normally involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. In order to be certain that the Fund has sufficient assets
to satisfy its obligations under a futures contract, the Fund will establish a
segregated account in connection with its futures contracts which will hold cash
or cash equivalents equal in value to the current value of the underlying
instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other financial
futures contracts, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular option or at any particular time. The Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities they usually will be denominated in foreign currencies and
the Fund temporarily may hold funds in foreign currencies. Thus, the Fund's
share value will be affected by changes in exchange rates.
#10160670
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
STATEMENT OF NET ASSETS
DECEMBER 13, 1995
ASSETS:
Cash (Note 1) $100,000
Organizational expenses 19,800
--------
Total assets $119,800
========
LIABILITIES:
Accrued expenses $ 19,800
--------
NET ASSETS: $100,000
========
Net asset value and offering price per share (10,000
shares outstanding) $ 10.00
========
Redemption price per share $ 10.00
========
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
NOTES TO STATEMENT OF NET ASSETS
DECEMBER 13, 1995
1. Keystone Institutional Small Capitalization Growth Fund ("Fund") was
organized on November 30, 1995, and had no operations prior to December 13, 1995
other than organizational matters and activities in connection with the purchase
of 10,000 shares by Keystone Investment Management Company ("KIMCO").
KIMCO is a wholly-owned subsidiary of Keystone Investments, Inc.
("Keystone Investments"), a corporation privately owned by current and former
members of management and certain employees of Keystone Investments and its
affiliates.
2. 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 organizational expenses in the same proportion as the
number of initial shares of the Fund being redeemed bears to the number of
initial shares of the Fund outstanding at the time of the redemption.
3. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value.
4. For information on the Investment Advisory and Management Agreement
and the Principal Underwriting Agreement see "Fund Management and Expenses", and
"Principal Underwriter" in the Fund's prospectus and/or statement of additional
information.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholder
Keystone Institutional Trust
We have audited the accompanying statement of net assets of Keystone
Institutional Small Capitalization Growth Fund, a portfolio of Keystone
Institutional Trust, as of December 13, 1995. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the financial position of Keystone
Institutional Small Capitalization Growth Fund, a portfolio of Keystone
Institutional Trust as of December 13, 1995 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
December 14, 1995
