<PAGE>
File Nos. 33-64781
811-7441
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. -3- X
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. -5- X
KEYSTONE INSTITUTIONAL TRUST
Keystone Institutional Small Capitalization Growth Fund
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 338-3200
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street,
Boston, MA 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
- --- immediately upon filing pursuant to paragraph (b)
- -X- on June 30, 1997 pursuant to paragraph (b)
- --- 60 days after filing pursuant to paragraph (a)(1)
- --- on (date) pursuant to paragraph (a)(1)
- --- 75 days after filing pursuant to paragraph (a)(2)
- --- on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
- --- This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has registered an indefinite amount of its securities under the Securities Act
of 1933. A Rule 24f-2 Notice for Registrant's fiscal year ended February 28,
1997 was filed on April 28, 1997.
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
CONTENTS OF
REGISTRATION STATEMENT
This Post-Effective Amendment No. 3 to
Registration Statement No. 33-64781 consists of the
following pages, items of information and documents:
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEMS 24 (a) and (b)
Financial Statements
Independent Auditors' Report
Exhibit Listing
PART C - OTHER INFORMATION - ITEMS 25-32- AND SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections
Principal Underwriter
Location of Accounts and Records
Undertakings
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
Cross-Reference Sheet pursuant to Rule 481(a) under the Securities Act of 1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Expense Information
3 Performance Data
4 Cover Page
The Fund
Investment Objective and Policies
Investment Restrictions
Risk Factors
Additional Investment Information
5 Fund Management and Expenses
5A Not Applicable
6 The Fund
Dividends and Taxes
Fund Shares
Shareholder Services
Pricing Shares
7 How to Buy Shares
Pricing Shares
Shareholder Services
8 How to Redeem Shares
9 Not Applicable
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
Cross-Reference Sheet continued.
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Objective and Policies
Investment Restrictions
Valuation of Securities
Appendix
14 Trustees and Officers
15 Additional Information
16 Investment Adviser
Principal Underwriter
Additional Information
17 Brokerage
18 Declaration of Trust
19 Valuation of Securities
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return
23 Financial Statements
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
Keystone Institutional Small Capitalization Growth Fund
PART A
PROSPECTUS
<PAGE>
<PAGE>
PROSPECTUS July 1, 1997
KEYSTONE INSTITUTIONAL TRUST
KEYSTONE INSTITUTIONAL SMALL CAPITALIZATION GROWTH FUND
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.
Under normal circumstances, the Fund invests 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 or any of its 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, the Fund
does not charge 12b-1 fees.
This prospectus concisely states information about the Fund that
you should know before investing. Please read it and retain it for future
reference.
Additional information about the Fund is contained in a statement
of additional information dated July 1, 1997, 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, write to the
Fund at 200 Berkeley Street, Boston, Massachusetts 02116 or call the Fund
at (800) 633-4200 x3621.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT INSURED OR OTHERWISE PROTECTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
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.
KEEP THIS PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION 2
FINANCIAL HIGHLIGHTS 3
THE FUND 4
INVESTMENT OBJECTIVE AND POLICIES 4
INVESTMENT RESTRICTIONS 5
RISK FACTORS 5
PRICING SHARES 6
DIVIDENDS AND TAXES 6
FUND MANAGEMENT AND EXPENSES 7
HOW TO BUY SHARES 9
HOW TO REDEEM SHARES 10
SHAREHOLDER SERVICES 11
PERFORMANCE DATA 12
FUND SHARES 12
ADDITIONAL INFORMATION 12
ADDITIONAL INVESTMENT INFORMATION i
</TABLE>
EXPENSE INFORMATION
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"; and "Shareholder Services."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge None
Contingent Deferred Sales Charge None
Exchange Fee None
</TABLE>
The following tables show for the Fund the estimated annual operating
expenses (as a percentage of average net assets), together with examples of the
cumulative effect of such expenses on a hypothetical $1,000 investment in each
Class for the periods specified assuming (i) a 5% annual return, and (ii)
redemption at the end of each period and, additionally, no redemption at the end
of each period.
You would pay the following expenses on a $1,000 investment, assuming (1)
a 5% annual return, (2) redemption at the end of each period and (3) no
redemption:
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(1)
<S> <C>
Management Fee 0.80%
12b-1 Fees None
Other Expenses 0.20%
Total Fund Operating Expenses 1.00%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES (2)
Assuming Redemption at Assuming no
End of Period Redemption
<S> <C> <C>
After 1 Year $ 10 $ 10
After 3 Years $ 32 $ 32
After 5 Years $ 55 $ 55
After 10 Years $122 $ 122
</TABLE>
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.
(1) Expense ratios are for the Fund's fiscal period ending February 28, 1997
after giving effect to the reimbursement by Keystone Investment Management
Company ("Keystone") of expenses in accordance with certain voluntary
expense limits. Keystone has voluntarily limited the Fund's annual expenses
to 1.00% of the Fund's average daily net assets for the fiscal period ended
February 28, 1997. Keystone currently intends to continue the foregoing
expense limitation on a month-by-month basis. Keystone may modify or
terminate the foregoing expense limitation at any time.
(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%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1996 TO DECEMBER 28, 1995(e)
FEBRUARY 28, 1997(d) TO JUNE 30, 1996
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD............................................. $11.65 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss............................................................. (0.04)(c) (0.03)
Net realized and unrealized gain (loss)......................................... (0.16) 1.68
Total from investment operations.............................................. (0.20) 1.65
LESS DISTRIBUTIONS FROM:
Net realized gain on investments................................................ (0.17) 0.00
NET ASSET VALUE END OF PERIOD................................................... $11.28 $11.65
TOTAL RETURN.................................................................... (1.75%) 16.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses (a)(b)......................................................... 1.00% 1.00%
Net investment loss (a)....................................................... (0.57%) (0.45%)
Portfolio turnover rate....................................................... 123% 57%
Average commission rate paid.................................................. $ 0.0509 $ 0.0847
NET ASSETS END OF PERIOD (THOUSANDS)............................................ $ 2,888 $ 2,446
</TABLE>
(a) Annualized.
(b) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of total expenses to average net assets" would have been 2.53% for the
eight-months ended February 28, 1997, and 2.81% for the period from December
28, 1995 (Commencement of Operations) to June 30, 1996.
(c) Computed using average shares outstanding throughout the period.
(d) The Fund changed its fiscal year ended from June 30 to the last day in
February, effective February 28, 1997.
(e) Commencement of Operations.
3
<PAGE>
THE FUND
The Fund is a series of The Trust, which 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. Keystone
Investment Management Company ("Keystone") is the Fund's investment adviser.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with long-term
growth of capital. Under normal circumstances, the Fund invests, 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 the stocks of companies with market capitalizations that are generally
less than $1 billion and more than $100 million ("small companies") at the time
of the Fund's investment. Companies whose capitalization falls outside this
range after the purchase continue to be considered small companies 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 Fund's strategy is to remain
essentially fully invested with cash reserves below 5% of its market value.
However, if market conditions warrant, the Fund may adopt a more defensive
strategy to preserve shareholders' 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. When the
Fund invests for defensive purposes, it seeks to limit the risk of loss of
principal and is not pursuing its investment objective.
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. At this time, the Fund (1) treats as illiquid securities that 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) limits 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. 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 associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus and
the statement of additional information.
Any investment involves risk, and there is no assurance that the Fund
will achieve its investment objective.
The investment objective of the Fund cannot be changed, without the vote
of the holders of a majority of the Fund's outstanding shares as defined in the
Investment Company Act of 1940, as amended ("1940 Act"), which means the lesser
of (1) 67% of the Shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares (a "1940 Act Majority").
4
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions summarized
below, which may not be changed without the approval of a 1940 Act Majority 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 (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.
RISK FACTORS
Like any investment, your investment in the Fund involves an element 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 INVESTMENT.
The Fund seeks to provide long-term growth of capital by investing
principally in equity securities of small companies. 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" and
the statement of additional information.
FUND RISKS
Investing in growth companies with small market capitalizations involves
greater risk than investing in larger companies. Small company 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 such
companies on limited product lines, markets, and financial and management
resources. These and other factors may make small 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
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 company 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
company 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 company stocks.
5
<PAGE>
PRICING SHARES
The Fund computes its net asset value as of the close of trading
(currently 4:00 p.m. Eastern time) on each day that the New York Stock Exchange
(the "Exchange") is open. However, the Fund does not compute its net asset value
on days when changes in the value of the Fund's portfolio securities do not
affect the current net asset value of its shares. The Exchange is currently
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 its liabilities and dividing the result by the number of its
outstanding shares.
Current values for the Fund's portfolio 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;
2. securities traded in the over-the-counter market, other than NMS, are
valued at the mean of the bid and asked prices at the time of valuation;
3. short-term investments maturing in 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;
4. short-term investments maturing in more than sixty days for which
market quotations are readily available are valued at current market value;
5. short-term investments 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
6. (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 are valued at prices deemed
in good faith to be fair under procedures established by the Board of Trustees.
DIVIDENDS AND TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company (a "RIC") under the Internal Revenue Code of 1986, as amended
(the "Code"). The Fund qualifies as a RIC 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 RIC
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.
If the Fund qualifies as a RIC 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. Fund 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.
Dividends and distributions are taxable whether they are received in cash
or in shares. Income dividends and net short-term gains distributions are
taxable as ordinary income. 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.
6
<PAGE>
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.
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 separate RIC.
FUND MANAGEMENT AND EXPENSES
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 provides
investment advice, management and administrative services to the Trust and the
Fund.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone is an indirect wholly-owned subsidiary of First Union National
Bank ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First Union"),
the sixth largest bank holding company in the U.S. based on total assets as of
March 31, 1997.
First Union, is headquartered in Charlotte, North Carolina, and had $137
billion in consolidated assets as of March 31, 1997. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB, Keystone
and Evergreen Asset Management Corp., a wholly-owned subsidiary of FUNB, manage
or otherwise oversee the investment of over $62 billion in assets as of March
31, 1997, belonging to a wide range of clients, including the Evergreen Keystone
funds.
Pursuant to its Investment Advisory and Management Agreement with the
Fund (the "Advisory Agreement"), Keystone manages the investment and
reinvestment of the Fund's assets, supervises the operation of the Fund and
provides all necessary office space, facilities and equipment.
The Fund pays Keystone a fee for its services at the annual rates set
forth below:
<TABLE>
<CAPTION>
AGGREGATE
NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE OF THE FUND
<S> <C>
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
</TABLE>
computed as of the close of business each business day and payable monthly.
For the fiscal period ended February 28, 1997, the Fund paid or accrued
to Keystone investment management and administrative services fees of $13,266,
which represented 0.80%, of the Funds average daily net asset value during the
period.
An advisory fee of 0.80% is higher than that paid by general equity
funds. However, the Fund believes that its advisory fee is comparable to that of
other small company growth equity funds.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only so long as such
continuance is specifically approved at least annually by the Trust's Board of
Trustees
7
<PAGE>
or by a majority of the Fund's outstanding shares. In either case, the terms of
the Advisory Agreement and continuance thereof must be approved by the vote of a
majority of Trustees who are not interested persons of the Trust, as defined in
the 1940 Act (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 on behalf
of the Fund or Keystone or may be terminated by a vote of the Fund's
shareholders. The Advisory Agreement will terminate automatically upon its
assignment.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds
Distributor, Inc.) ("EKD"), a subsidiary of The BISYS Group, Inc., which is not
affiliated with First Union, is now the Fund's principal underwriter. EKD
replaced Fiduciary Investment Company, Inc. ("FICO") as the Fund's principal
underwriter. FICO may no longer act as principal underwriter of the Fund due to
regulatory restrictions imposed by the Glass-Steagall Act upon national banks
such as FUNB and their affiliates, that prohibit such entities from acting as
the underwriters or distributors of mutual fund shares. EKD is located at 125
West 55th Street, New York, New York 10019.
SUB-ADMINISTRATOR
BISYS Fund Services ("BISYS"), an affiliate of EKD, principal underwriter
the Fund, serves as sub-administrator to the Fund. For its services, BISYS is
entitled to receive a fee from Keystone calculated on the aggregate average
daily net assets of the Fund at a rate based on the total assets of all mutual
funds for which FUNB affiliates serve as investment adviser. The
sub-administrator fee is calculated in accordance with the following schedule:
<TABLE>
<CAPTION>
AGGREGATE AVERAGE DAILY NET ASSETS
OF MUTUAL FUNDS
FOR WHICH ANY AFFILIATE OF FUNB
SERVES AS INVESTMENT ADVISER AND
SUB-ADMINISTRATOR FEE FOR WHICH BISYS SERVES AS SUB-ADMINISTRATOR
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
</TABLE>
The total assets of the mutual funds for which FUNB affiliates also serve
as investment advisers were approximately $29.2 billion as of February 28, 1997.
PORTFOLIO MANAGEMENT
Thomas Holman has been a Vice President and Portfolio Manager of the Fund
since joining Keystone in January, 1997. Prior to joining Keystone, Mr. Holman
was an investment officer and securities analyst at Invista Capital Management,
Inc. ("Invista"), Des Moines, Iowa, from 1993 to 1997. Mr. Holman manages the
Fund in conjunction with the Keystone Small Cap Growth Team. The Small Cap
Growth Team is headed by J. Gary Craven, a Keystone Senior Vice President. Prior
to joining Keystone in 1996, Mr. Craven was Vice President and Portfolio Manager
of Invista. He joined Invista in 1987 as a Securities Analyst. Rounding out the
Small Cap Growth Team is Margery C. Parker. Ms. Parker has been a Keystone Vice
President and Portfolio Manager since 1993, and has been an equity investment
professional with Keystone since 1988.
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 the 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.
8
<PAGE>
For the fiscal period ended February 28, 1997, after an expense
reimbursement, the Fund paid 1.00% of its average net assets in expenses. In
accordance with the voluntary expense limitation, for the same period, Keystone
reimbursed the Fund $25,490.
Keystone has voluntarily limited the expenses of the Fund to 1.00% of
average daily net assets through February 28, 1997. Keystone intends to continue
the foregoing expense limitation on a month-by-month basis thereafter. After
February 28, 1997, Keystone may modify or terminate the foregoing expense
limitation.
During the fiscal period ended February 28, 1997, the Fund paid or
accrued to Evergreen Keystone Service Company ("EKSC") (formerly Keystone
Investor Resource Center, Inc.), the Fund's transfer and dividend disbursing
agent, fees in the amount of $1,000. EKSC is an indirect wholly-owned subsidiary
of FUNB and is located at 200 Berkeley Street, Boston, MA 02116-5034.
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 company 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. Keystone may use these services
in advising the Fund as well as in advising its other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal periods ended February
28, 1997 and June 30, 1996 were 123% and 57%, respectively. 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.
CODE OF ETHICS
The Trust has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
HOW TO BUY SHARES
You may purchase shares of the Fund through EKD.
The Fund's shares are sold at the public offering price, which is equal
to the net asset value per share next computed after the Fund receives the
purchase order. The initial purchase must be at least $2,000,000, which may be
waived in certain situations. 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 $2,000,000 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, EKD, 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.
9
<PAGE>
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 EKSC, toll free at 1-800-633-2700 to open an account and
obtain an account or wire identification number.
Second, 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
Third, complete and sign the Account Application and mail it to:
Evergreen Keystone Service Company
P.O. Box 2121
Boston, Massachusetts 02106-2121
If EKSC 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
EKSC of federal funds wired, but the right to charge for this service is
reserved.
HOW TO REDEEM SHARES
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 EKSC at the following address:
Evergreen Keystone Service Company
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 EKSC's policies, when the
circumstances of such redemptions indicate that guaranteed signatures are
appropriate, in the judgment of the Fund or EKSC, for the protection of the
Fund, its shareholders and EKSC. The Fund and EKSC may not only waive this
requirement, but also may require additional documentation in certain cases.
10
<PAGE>
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 EKSC.
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 EKSC deems it appropriate, additional documentation may be
required. Although at present EKSC 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, EKSC nor EKD assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing or by telephone. EKSC will employ reasonable
procedures to confirm that instructions received over the telephone are genuine
including recording verbal instructions. Neither the Fund, EKSC nor EKD will be
liable when following instructions received by telephone that EKSC 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 EKSC 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.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from EKSC by calling
toll free 1(800)633-2700 or from EKD by writing to EKD at 125 W. 55th Street,
New York, New York 10019.
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 EKSC for banks and other
institutions that wish to open multiple accounts (a master account and
subaccounts). An investor wishing to avail itself of EKSC'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.
11
<PAGE>
PERFORMANCE DATA
From time to time, the Fund may discuss "total return" and "current
yield." ALL DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
refers to 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.
FUND SHARES
The Trust currently issues shares of only one series of shares, 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 Trust's Declaration of 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 holders of 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.
ADDITIONAL INFORMATION
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.
12
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
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.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to broker-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
i
<PAGE>
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. 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 objective 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
ii
<PAGE>
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.
*LEVERAGE RISK -- Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
*OTHER RISKS -- Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to correlate
perfectly with underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a Fund. Derivatives do not
always perfectly or even highly correlate or track the value of the assets,
rates or indices they are designed to closely track. Consequently, the Fund's
use of derivatives may not always be an effective means of, and sometimes could
be counterproductive to, furthering the Fund's investment objective.
Futures Transactions. The Fund may enter into financial 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 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.
A futures contract on a securities index does not involve the actual delivery of
securities, but merely requires the payment of a cash settlement based on
changes in the securities index. 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 contracts 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 Fund's 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 sells futures contracts in order to offset
a possible decline in the value of its securities. If a futures contract is
purchased by the Fund, the value of the contract will tend to rise when the
value of the underlying securities increases and to fall when the value of such
securities declines. The Fund intends to purchase futures contracts in order to
establish what is believed by Keystone to be a favorable price and rate of
return for securities the Fund intends to purchase. The Fund also intends to
purchase put and call options on 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 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
iii
<PAGE>
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 related 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. 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.
iv
<PAGE>
INVESTMENT ADVISERS
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Keystone Service Company, P.O. Box 2121, Boston, Massachusetts
02106-2121
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Keystone Distributor, Inc., 125 West 55th Street, New York, New York
10019
536115REV02
<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
JULY 1, 1997
This statement of additional information ("SAI") 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
July 1, 1997. A copy of the prospectus may be obtained from Evergreen Keystone
Distributor, Inc., the Fund's principal underwriter, or your broker-dealer. See
"Service Providers" below.
TABLE OF CONTENTS
Page
The Trust and the Fund...............................................2
Service Providers....................................................2
Investment Restrictions..............................................3
Valuation of Securities..............................................4
Brokerage............................................................4
Distributions and Taxes..............................................6
Trustees and Officers................................................6
Investment Adviser..................................................10
Principal Underwriter...............................................11
Sub-administrator...................................................12
Declaration of Trust................................................12
Expenses ...........................................................14
Standardized Total Return...........................................14
Financial Statements................................................15
Additional Information..............................................15
Appendix ..........................................................A-1
20135
<PAGE>
THE TRUST AND THE FUND
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 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.
SERVICE PROVIDERS
<TABLE>
<CAPTION>
SERVICE PROVIDER
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Investment adviser (referred to Keystone Investment Management Company, 200 Berkeley
in this SAI as "Keystone") Street, Boston, Massachusetts 02116. (Keystone is a
wholly-owned subsidiary of First Union Keystone, Inc.,
(formerly Keystone Investments, Inc.) ("First Union
Keystone") also located at 200 Berkeley Street, Boston,
Massachusetts 02116.)
Principal underwriter ( referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 W. 55th Street, New York,
New York 10019.
Sub-administrator (referred to in BISYS Fund Services, Inc., 125 W. 55th Street, New York,
this SAI as "BISYS") New York 10019.
Transfer and dividend Evergreen Keystone Service Company (formerly Keystone
disbursing agent (referred to in Investor Resource Center, Inc.), 200 Berkeley Street, Boston,
this SAI as "EKSC") Massachusetts 02116. (EKSC is a wholly-owned subsidiary
of Keystone.)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants.
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
</TABLE>
20135
2
<PAGE>
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 of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940
("1940 Act") which means the lesser of (1) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or (2)
more than 50% of the outstanding 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.
20135
3
<PAGE>
VALUATION OF SECURITIES
Current value 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;
(2) securities traded in the over-the-counter market, other than on NMS
are valued at the mean of the bid and asked prices at the time of valuation;
(3) short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value;
(4) short-term investments maturing in 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;
(5) short-term investments 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
(6) securities, including restricted securities, for which complete
quotations are not readily available; 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 other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
BROKERAGE
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
20135
4
<PAGE>
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services.")
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research services from a broker,
the Fund would consider such services to be in addition to, and not in lieu of,
the services Keystone is required to perform under the Advisory Agreement.
Keystone believes that the cost, value and specific application of research
services are indeterminable and cannot be practically allocated between the Fund
and its other clients who may indirectly benefit from the availability of
research services. Similarly, the Fund may indirectly benefit from information
made available as a result of transactions effected for Keystone's 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
follows such a practice, it will do so on a basis that is fair and equitable to
the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
when selecting of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
BROKERAGE COMMISSIONS
Generally, the Fund expects to purchase and sell its securities 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 it effects transactions in the over the
counter market, the Fund will deal with primary market makers, unless more
favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Trustees periodically reviews the Fund's brokerage policy.
In the event of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the Board of Trustees may change,
modify or eliminate any of the foregoing practices.
20135
5
<PAGE>
DISTRIBUTIONS AND TAXES
The Fund distributes to its shareholders dividends from net investment
income and net realized capital gains at least annually in shares or, at the
option of the shareholder, in cash. Distributions are taxable whether received
in cash or additional shares. (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 ex-dividend 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.
TRUSTEES AND OFFICERS
Trustees and officers of the Trust, their principal occupations and
some of their affiliations over the last five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
FREDERICK AMLING: Trustee of the Trust; Trustee or Director of 29 other Evergreen
Keystone funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice);
and former Member, Board of Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Trust; Trustee or Director of all Evergreen Keystone
funds other than Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum Equities and
Centrum Properties, Inc.
20135
6
<PAGE>
CHARLES A. AUSTIN III: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Investment Counselor to Appleton Partners, Inc.; and former
Managing Director, Seaward Management Corporation (investment ad
vice).
FOSTER BAM: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds other than Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc. (sulphur company)
and Pet Practice, Inc. (veterinary services); and former Director,
Chartwell Group Ltd. (Manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chief Executive Officer of the Trust and of 29 other Evergreen Keystone
funds; Chairman of the Board and Trustee of the Trust; Chairman of the
Board and Trustee or Director of all Evergreen Keystone funds;
Chairman of the Board and Trustee of Anatolia College; Trustee of
University Hospital (and Chairman of its Investment Committee);
former Director and Chairman of the Board of Hartwell Keystone
Advisers, Inc.; and former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments, Inc.
EDWIN D. CAMPBELL: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Principal, Padanaram Associates, Inc.; and former Executive Di
rector, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Trustee, Treasurer and Chairman of the Finance Committee,
Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chairman and President, Oldways
Preservation and Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The London Harness
Company; former Managing Partner, Roscommon Capital Corp.; former
Chief Executive Officer, Gifford Gifts of Fine Foods; former Chairman,
Gifford, Drescher & Associates (environmental consulting); and former
Director, Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; former Chairman of the Distribution Foundation for the
Carolinas; and former Vice President of Lance Inc. (food manufacturing).
LEROY KEITH, JR.: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Chairman of the Board and Chief Executive Officer, Carson
Products Company; 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.
F. RAY KEYSER, JR.: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
20135
7
<PAGE>
funds; Chairman and 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 Lahey Hitchcock Clinic; Director, Vermont Yankee
Nuclear Power Corporation, Grand Trunk Corporation, Grand Trunk Western Railroad,
Union Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc.,
and the Investment Company Institute; former Director and President, Associated
Industries of Vermont; former Director of Keystone, Central Vermont Railway, Inc.,
S.K.I. Ltd., and Arrow Financial Corp.; and former Director and Chairman of the Board,
Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; Trustee or Director of all of the funds in the Evergreen Family of
Funds; and Sales Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; former Vice President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; and Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Vice Chair and former Executive Vice President, DHR Interna
tional, 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.
RUSSELL A.
SALTON, III MD: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; Medical Director, U.S. Health Care/Aetna Health Services; and
former Managed Health Care Consultant; former President, Primary
Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; and Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Chairman, Environmental Warranty, Inc. (insurance agency);
Executive Consultant, Drake Beam Morin, Inc. (executive
outplacement); Director of Connecticut Natural Gas Corporation,
Hartford Hospital, Old State House Association, Middlesex Mutual
Assurance Company, and Enhance Financial Services, Inc.; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief Investment Officer,
The Travelers Corporation; former Trustee, Kingswood-Oxford School;
and former Managing Director and Consultant, Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
20135
8
<PAGE>
funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.; Adjunct
Professor of Law and former Associate Dean, St. John's University School of Law; Adjunct
Professor of Law, Touro College School of Law; and former President, Nassau County Bar
Association.
JOHN J. PILEGGI: President and Treasurer of the Trust; President and Treasurer of all
other Evergreen Keystone funds; Senior Managing Director, Furman
Selz LLC since 1992; Managing Director from 1984 to 1992; Consultant
to BISYS Fund Services since 1996; 230 Park Avenue, Suite 910, New
York, NY.
GEORGE O. MARTINEZ: Secretary of the Trust; Secretary of all other Evergreen Keystone funds;
Senior Vice President and Director of Administration and Regulatory Services,
BISYS Fund Services; Vice President/Assistant General Counsel,
Alliance Capital Management from 1988 to 1995; 3435 Stelzer Road, Columbus, Ohio.
</TABLE>
* This Trustee may be considered an "interested person" of the Trust within the
meaning of the 1940 Act.
For the fiscal period ended February 28, 1997, none of the affiliated
or Independent Trustees and officers of the Trust received any direct
remuneration from the Trust. For the year ending February 28, 1997, fees paid to
Independent Trustees on a fund complex wide basis (which included approximately
60 mutual funds) were approximately $461,816. On May 31, 1997, the Trustees and
officers of the Trust, as a group, beneficially owned less than 1% of the Fund's
then outstanding shares.
Except as set forth above, the address of all the Fund's Trustees and
officers is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Set forth below for each of the Trustees receiving in excess of $60,000
for the year ended February 28, 1997, is the aggregate compensation paid to such
Trustee by the Evergreen-Keystone Funds:
Total Compensation
Aggregate From Registrant and
Compensation Fund Complex Paid
Name From Registrant To Trustee
James S. Howell $0 $67,200
Thomas McVerry $0 $60,200
Russell A Salton,III M.D. $0 $62,200
Michael Scofield $0 $62,200
INVESTMENT ADVISER
Subject to the general supervision of the Trust's Board of Trustees,
Keystone provides investment advice, management and administrative services to
the Fund.
20135
9
<PAGE>
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by First Union National Bank of North Carolina ("FUNB"), a
wholly-owned subsidiary of First Union Corporation ("First Union"). Keystone
Investments was acquired by FUNB by merger into a wholly-owned subsidiary of
FUNB, which entity then assumed the name "First Union Keystone" and succeeded to
the business of the predecessor corporation. Contemporaneously with the
Acquisition, the Fund entered into a new investment advisory agreement with
Keystone and into a principal underwriting agreement with EKD, a wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS"). The new investment advisory
agreement (the "Advisory Agreement") was approved by the shareholders of the
Fund on December 9, 1996, and became effective on December 11, 1996. As a result
of the above transactions, Keystone Management, Inc. ("Keystone Management"),
which, prior to the Acquisition, acted as the Fund's investment manager, no
longer acts as such to the Fund. Keystone currently provides the Fund with all
the services that may previously have been provided by Keystone Management.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, Keystone and Evergreen Asset Management
Corp., a wholly-owned subsidiary of FUNB, manage or otherwise oversee the
investment of over $60 billion in assets as of December 31, 1996, belonging to a
wide range of clients, including the Evergreen Keystone Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Trust's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
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, (1) custodian charges and expenses; (2) bookkeeping and independent
auditors' charges and expenses; (3) transfer agent charges and expenses; (4)
fees and expenses of Independent Trustees; (5) brokerage commissions, brokers'
fees and expenses; (6) issue and transfer taxes; (7) costs and expenses under
the Distribution Plans; (8) taxes and trust fees payable to governmental
agencies; (9) the cost of share certificates; (10) fees and expenses of the
registration and qualification of the Fund and its shares with the Commission or
under state or other securities laws; (11) expenses of preparing, printing and
mailing prospectuses, statements of additional information, notices, reports and
proxy materials to shareholders of the Fund; (12) expenses of shareholders' and
Trustees' meetings; (13) charges and expenses of legal counsel for the Fund and
for the Independent Trustees of the Fund on matters relating to the Fund; and
(14) charges and expenses of filing annual and other reports with the Commission
and other authorities, and all extraordinary charges and expenses of the Fund.
20135
10
<PAGE>
The Fund pays Keystone a fee at the end of each month for its services
consisting of an amount calculated as set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- -------------------------------------------------------------------
0.80% of the first $ 100,000,000, plus
0.75% of the next $ 150,000,000, plus
0.65% of the next $ 250,000,000
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 for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be 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 Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its assignment.
PRINCIPAL UNDERWRITER
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with EKD. EKD, which is not affiliated with First
Union, replaces Fiduciary Investment Company, Inc. ("FICO") as the Fund's
principal underwriter. FICO may no longer act as principal underwriter of the
Fund due to regulatory restrictions imposed by the Glass-Steagall Act upon
national banks such as FUNB and their affiliates, that prohibit such entities
from acting as the underwriters of mutual fund shares.
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers, and
others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Independent Trustees, and (ii) by vote of a majority of the
Trustees, in each case, cast in person at a meeting called for that purpose.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its assignment.
20135
11
<PAGE>
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software and Fund data files.
SUB-ADMINISTRATOR
BISYS provides personel to serve as officers of the Fund, and provides
certain administrative services to the Fund pursuant to a sub-administrator
agreement. For its services under that agreement, BISYS receives from Keystone a
fee based on the aggregate average daily net assets of the Fund at a rate based
on the total assets of all mutual funds administered by BISYS for which FUNB
affiliates also serve as investment adviser. The sub-administrator fee is
calculated in accordance with the following schedule:
Aggregate Average Daily Net Assets Of Mutual Funds
Sub-Administrator Administered By BISYS For Which Any Affiliate Of
Fee FUNB Serves As Investment Adviser
- -------------------------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also
serve as investment advisers were approximately $29 billion as of March 31,
1997.
DECLARATION OF TRUST
MASSACHUSETTS BUSINESS TRUST
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated November 30, 1995 (the "Declaration of Trust"). 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 is on file as an
exhibit to the Trust's 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/or class. Upon liquidation, shares are entitled to a pro rata share
of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable. The Trust is authorized to
20135
12
<PAGE>
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; (2) 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 (3) 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 that
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.
20135
13
<PAGE>
EXPENSES
INVESTMENT ADVISORY FEES
For each of the Fund's fiscal periods, the table below lists the total
dollar amounts paid by the Fund to Keystone for investment advisory services
rendered. For more information, see "Investment Adviser."
Fee Paid to Keystone
for Services Rendered
under the Advisory Percent of Fund
Agreement Average Net Assets
- ------------------------- -------------------------- ----------------------
Fiscal Period of
July 1, 1996 to
February 28, 1997 $13,266 0.80%
Fiscal Period of
December 25,
1995 (Commencement
of Operations) to
June 30, 1996 $9,209 0.80%
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.
The rate of return of the Fund for the fiscal periods from July 1, 1996
to February 28, 1997 and from December 28, 1995 (commencement of operations) to
June 30, 1996 was (1.75%) and 16.50%, respectively. The average annual rate of
return for the Fund for the period of December 28, 1995 (commencement of
operations) to February 28, 1997 was 12.18%.
20135
14
<PAGE>
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal period ended Februay 28,
1997, and the report thereon of KPMG Peat Marwick LLP, are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission
pursuant to Section 30(d) of the 1940 Act and Rule 30d-1 thereunder.
You may obtain a copy of the Fund's Annual Report without charge by
writing to EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling
EKSC toll free at 1-800-343-2898.
ADDITIONAL INFORMATION
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.
As of May 31, 1997, the following accounts owned of record 5% or more
of the Fund's outstanding shares:
REGISTRATION SHARES OWNED % OF FUND
1. Board of Trustees of 202,943.723 13.53%
Sheet Metal Workers Local No. 85
Pension Fund
3835 Presidental Parkway, Suite 123
Atlanta, GA 30340-37233
2. First Union National Bank 234,961.661 15.66%
FBO Essex Cnty Carpenters Pension fund
A/C 2543001079
20135
15
<PAGE>
401 South Tryon St. CMG-1151
Charlotte, NC 28288-1151
3. Worcester County Retirement System 953,288.847 63.54%
Attn: Michael J. Donoghue
Chairman & Treasurer
2 Main St.
Worcester, MA 01601
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 EKD. 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
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.
20135
16
<PAGE>
A-1
APPENDIX
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
speculativetype 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
20135
<PAGE>
A-2
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 instrumental-ities 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.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into 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 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 securities prices, and
purchases of futures as an offset against the effect of expected declines in
securities prices.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline and, by
doing so, provide an alternative to the liquidation of the Fund's securities
positions and the resulting transaction costs.
The Fund intends to engage in options transactions which are related to
financial futures contracts for the 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
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 engage in
such futures contracts for speculation.
20135
<PAGE>
A-3
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 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 United States 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).
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently, stock index futures contracts can be purchased or sold on
the Standard and Poor's Corporation (S&P) Index of 500 Stocks, the S&P Index of
100 Stocks, the New York Stock Exchange Composite Index, the Value Line Index
and the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.
The Fund does not believe that differences between existing stock
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit
20135
<PAGE>
A-4
on the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs, represents the profit or loss to the Fund.
There can be no assurance, however, 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.
20135
<PAGE>
A-5
OPTIONS ON FINANCIAL FUTURES
The Fund intends to purchase call and put options on financial futures
contracts and sell such options to terminate an existing position. Options on
financial futures contracts are similar to options on stocks except that an
option on a 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 instruments making up a financial futures index,
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 on 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 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 analagous 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 a call option on a financial futures contract
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, purchase of a call option may be less risky than the ownership
of the index based futures contract or the underlying securities. Call options
on 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 FINANCIAL FUTURES CONTRACTS OR
RELATED OPTIONS
The Fund may employ new investment techniques involving 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 herein.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's
20135
<PAGE>
A-6
total assets (taken at market value at the time of entering into the contract)
would be committed to margin deposits 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.
20135
<PAGE>
KEYSTONE INSTITUTIONAL TRUST
Keystone Institutional Small Capitalization Growth Fund
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24(a). The following financial statements are hereby incorporated by
reference from Registrant's Annual Report dated February 29, 1997.
Schedule of Investments February 28, 1997
Financial Highlights For the period from
July 1, 1996 to February 28,
1997 and the period from
December 28, 1995
(Commencement of Operations)
to June 30, 1996
Statement of Assets and Liabilities February 28, 1997
Statement of Operations For the period from July 1,
1996 to February 28, 1997
Statements of Changes in Net Assets For the period from July 1,
1996 to February 28, 1997
and the period from
December 28, 1995
(Commencement of operations)
to June 30, 1996
Notes to Financial Statements
Independent Auditors' Report March 31, 1997
<PAGE>
(24)(b) Exhibits
(1) Registrant's Declaration of Trust (1).
(2) Registrant's By-Laws (1).
(3) Not applicable.
(4) (A) Registrant's Declaration of Trust, Articles III, V, VI, and VIII (1).
(B) Registrant's By-Laws, Article 2., Section 2.5 (1).
(5) Investment Management and Advisory Agreement between Registrant and
Keystone Investment Management Company (2).
(6) Principal Underwriting Agreement between Registrant and Evergreen
Keystone Distributor, Inc. ("EKD")(2).
(7) Not applicable.
(8) Custodian, Fund Accounting and Recordkeeping Agreement between Registrant
and State Street Bank and Trust Company (1).
(9) Form of Sub-administrator Agreement between Keystone Investment Management
Company and BISYS Fund Services, Inc. ("BISYS") (the "Sub-administrator
Agreement") (2).
(10) Opinion of counsel as to the legality of the shares being registered (3).
(11) Consent as to use of Registrant's Independent Auditors' Report (2).
(12) Not applicable.
(13) Subscription Agreement between Registrant and Keystone Investment
Management Company (1).
(14) Not applicable.
(15) Not applicable.
(16) Schedules for computation of performance quotations (2).
(17) Financial Data Schedule (2).
(18) Not applicable.
(19) Powers of Attorney (4).
- ---------------------------------
(1) Filed with Pre-Effective Amendment No. 2 ("Pre-Effective Amendment
No. 2") to Registration Statement 811-07441/33-64781 (the
"Registration Statement") and incorporated by reference herein.
(2) Filed herewith.
(3) Filed with Registrant's 24f-2 Notice for the fiscal period ended
February 28, 1997 that was filed on April 28, 1997 and incorporated
by reference herein.
(4) Filed with Post-Effective Amendment No. 2 ("Post-Effective Amendment
No. 2") to the Registration Statement and incorporated by reference
herein.
<PAGE>
Item 25. Persons Controlled by or Under Common Control With Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of May 31, 1997
-------------- ------------------------
Shares of Beneficial 9
Interest
Item 27. Indemnification
Provisions for the indemnification of the Registrant's Trustees and
officers are contained in Article VIII of Registrant's Declaration of Trust, a
copy of which was filed with Pre-Effective Amendment No. 2 and is incorporated
by reference herein.
Provisions for the indemnification of EKD, the Registrant's principal
underwriter, are contained in Section 7 of the Principal Underwriting Agreement
between the Registrant and EKD, a copy of the form of which is filed herewith.
Provisions for the indemnification of Keystone Investment Management
Company, Registrant's investment adviser, are contained in Section 6 of the
Investment Advisory and Management Agreement between Registrant and Keystone
Investment Management Company, a copy of which is filed herewith.
<PAGE>
Item 28. Businesses and Other Connections of Investment Adviser
The following table lists the names of the various officers and
directors of Keystone Investment Management Company, the Registrant's
investment adviser, and their respective positions. For each named
individual, the table lists, for at least the past two fiscal years,
(i) any other organizations (excluding investment advisory clients)
with which the officer and/or director has had or has substantial
involvement; and (ii) positions held with such organizations.
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
Albert H. Chairman of Senior Vice President
Elfner, III* the Board, First Union Keystone, Inc.
Chief Executive Keystone Asset Corporation
Officer President and Director:
Keystone Trust Company
Director or Trustee:
Evergreen Keystone Investment Services, Inc
Evergreen Keystone Service Company
Boston Children's Services Associates
Middlesex School
Middlebury College
Formerly:
Chairman of the Board,
Chief Executive Officer,
President and Director:
Keystone Management, Inc.
Keystone Software, Inc.
Keystone Capital Corporation
Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Fiduciary Investment Company, Inc.
Formerly Chairman of the Board and Director:
Keystone Fixed Income Advisers, Inc.
Keystone Institutional Company, Inc.
Herbert L. Senior Vice None
Bishop, Jr.* President
Donald C. Dates* Senior Vice None
President
Gilman Gunn* Senior Vice None
President,
Chief Investment
Officer
Edward F. Senior Vice Formerly Senior Vice President,
Godfrey* President, Chief Financial Officer and Treasurer:
Chief Operating First Union Keystone, Inc.
Officer Evergreen Keystone Investment Services, Inc.
Formerly:
Treasurer:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Treasurer and Director:
Hartwell Keystone Advisers, Inc.
Rosemary D. Senior Vice Senior Vice President:
Van Antwerp* President, Evergreen Keystone Service Company
Secretary Senior Vice President and Secretary:
Evergreen Keystone Investment Services, Inc.
Formerly:
Senior Vice President, General Counsel and Secretary:
Keystone Investments, Inc.
Senior Vice President and General Counsel:
Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Fiduciary Investment Company, Inc.
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely* Vice President Vice President:
Evergreen Keystone Investment Services, Inc.
Formerly:
Controller
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Vice President:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Keystone Investments, Inc.
John D. Rogol* Vice President Vice President and
Controller:
Evergreen Keystone Investment Services, Inc.
Treasurer and Vice President:
Evergreen Keystone Service Company
Controller:
Keystone Asset Corporation
Formerly:
Controller:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Formerly Vice President and Controller:
Keystone Investments, Inc.
Christopher P. Senior Vice None
Conkey* President, Chief
Investment Officer
J. Gary Craven* Senior Vice None
President
Richard Cryan* Senior Vice None
President
Maureen E. Senior Vice None
Cullinane* President
Betsy Hutchings* Senior Vice None
President
Walter T. Senior Vice None
McCormick* President
James F. Angelos** Vice President, None
Chief Compliance
Officer
John Addeo* Vice President None
Andrew Baldassarre* Vice President None
David Benhaim* Vice President None
Donald Bisson* Vice President None
Francis X. Claro* Vice President None
Kristine R. Vice President None
Cloyes*
Patrick T. Bannigan** Vice President None
Liu-Er Chen* Vice President None
George E. Dlugos* Vice President None
Antonio T. Docal* Vice President None
Dana E. Erikson* Vice President None
Gordon M. Forrester* Vice President None
Thomas L. Holman* Vice President None
George J. Kimball* Vice President None
JoAnn L. Lyndon* Vice President None
Craig Lewis* Vice President None
John C. Vice President None
Madden, Jr.*
Eleanor H. Marsh* Vice President None
James D. Medvedeff* Vice President None
Stanley M. Niksa* Vice President None
Jonathan A. Noonan* Vice President None
Robert E. O'Brien* Vice President None
Margery C. Parker* Vice President None
William H. Parsons* Vice President None
Joyce W. Petkovich* Vice President None
Gary E. Pzegeo* Vice President None
Harlen R. Sanderling* Vice President None
Thomas W. Trickett* Vice President None
Kathy K. Wang* Vice President None
Judith A. Warners* Vice President None
Peter Willis* Vice President None
Walter Zagrobski* Vice President None
</TABLE>
*Located at Keystone Investment Management Company, 200 Berkeley Street,
Boston, Massachusetts 02116.
**Located at First Union National Bank, 301 South College Street,
Charlotte, North Carolina 28288
Item 29. Principal Underwriters
Evergreen Keystone Distributor, Inc.
The Director and principal executive officers are:
Director Michael C. Petrycki
Officers Robert A. Hering President
Michael C. Petrycki Vice President
Lawrence Wagner VP, Chief Financial Officer
Steven D. Blecher VP, Treasurer, Secretary
Elizabeth Q. Solazzo Assistant Secretary
Evergreen Keystone Distributor, Inc. acts as Distributor for the
following registered investment companies or separate series thereof:
Evergreen Trust
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
The Evergreen Total Return Fund
The Evergreen American Retirement Trust:
The Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
The Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Florida High Income Municipal Bond Fund
Evergreen Tax Exempt Money Market Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Money Market Trust
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen Investment Trust
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short-Intermediate Bond Fund(formerly Evergreen Fixed Income)
Evergreen U.S. Government Fund
Evergreen Florida Municipal Bond Fund
Evergreen Georgia Municipal Bond Fund
Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
Evergreen High Grade Tax Free Fund
Evergreen Treasury Money Market Fund
The Evergreen Lexicon Fund:
Evergreen Intermediate-Term Government Securities Fund
Evergreen Intermediate-Term Bond Fund
Evergreen Tax Free Trust:
Evergreen Pennsylvania Tax Free Money Market Fund
Evergreen New Jersey Tax Free Income Fund
Evergreen Variable Trust:
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
Keystone Quality Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Balanced Fund II
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Fund of the Americas
Keystone Global Opportunities Fund
Keystone Global Resources and Development Fund
Keystone Government Securities Fund
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Institutional Adjustable Rate Fund
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Omega Fund
Keystone Precious Metals Holdings, Inc.
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund
Keystone New York Tax Free Fund
Keystone Pennsylvania Tax Free Fund
Keystone Massachusetts Tax Free Fund
Keystone Florida Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Missouri Tax Free Fund
Keystone California Tax Free Fund
Keystone Strategic Income Fund
Keystone Tax Free Fund
Keystone Tax Free Income Fund
Item 30. Location of Accounts and Records
First Union Keystone, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02777
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Upon request and without charge, the Registrant hereby undertakes to
furnish each person to whom a copy of the Registrant's prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for the effectiveness of this Amendment to its registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston, and The
Commonwealth of Massachusetts, on the 24th day of June, 1997.
KEYSTONE INSTITUTIONAL TRUST
Keystone Institutional Small
Capitalization Growth Fund
By: /s/ George S. Bissell
-----------------------------
George S. Bissell
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 24th day of June, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ George S. Bissell /s/ Charles F. Chapin
- ------------------------ ------------------------- -------------------------
George S. Bissell Charles F. Chapin* William Walt Pettit
Chairman of the Board of Trustees Trustee Trustee
and Chief Executive Officer
/s/ John J. Pileggi /s/ K. Dun Gifford /s/ David M. Richardson
- ------------------------- ------------------------- -------------------------
John J. Pileggi K. Dun Gifford* David M. Richardson*
President amd Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ Frederick Amling
- ------------------------- ------------------------- -------------------------
Frederick Amling* James S. Howell Russell A. Salton, III MD
Trustee Trustee Trustee
/s/ Laurence B. Ashkin /s/ Leroy Keith, Jr.
- ------------------------- ------------------------- -------------------------
Laurence B. Ashkin Leroy Keith, Jr.* Michael S. Scofield
Trustee Trustee Trustee
/s/ Charles A. Austin, III /s/ F. Ray Keyser, Jr. /s/ Richard J. Shima
- ------------------------- ------------------------- -------------------------
Charles A. Austin, III* F. Ray Keyser, Jr.* Richard J. Shima*
Trustee Trustee Trustee
/s/ Andrew J. Simons
- ------------------------- ------------------------- -------------------------
Foster Bam Gerald M. McDonell Andrew J. Simons*
Trustee Trustee Trustee
/s/ Edwin D. Campbell
- ------------------------- -------------------------
Edwin D. Campbell* Thomas L. McVerry
Trustee Trustee
</TABLE>
*By:/s/ Rosemary D. Van Antwerp
- -------------------------------
Rosemary D. Van Antwerp**
Attorney-in-Fact
** Rosemary D. Van Antwerp, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and attached hereto as Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- ------------
1 Declaration of Trust(1)
2 By-Laws(1)
5 Investment Advisory and
Management Agreement(2)
6 Form of Principal Underwriting Agreement(2)
8 Custodian, Trust Accounting
and Recordkeeping Agreement(1)
9 Form of Sub-administrator Agreement(2)
10 Opinion and Consent of Counsel(3)
11 Consent of Independent Auditors(2)
13 Subscription Agreement(1)
16 Schedules for computation of performance
quotation(2)
17 Financial Data Schedule (Filed as Exhibit 27)(2)
19 Powers of Attorney(4)
- ------------------
1 Incorporated by reference to Pre-Effective Amendment No. 2.
2 Filed herewith.
3 Incorporated by reference herein to Registrant's 24f-2 Notice.
4 Incorporated by reference herein to Post-Effective Amendment No. 2.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
AGREEMENT made the 11th day of December, 1996, by and between KEYSTONE
INSTITUTIONAL TRUST, a Massachusetts business trust (the "Fund"), and KEYSTONE
INVESTMENT MANAGEMENT COMPANY, a Delaware corporation (the "Adviser").
WHEREAS, the Fund and the Adviser wish to enter into an Agreement setting
forth the terms on which the Adviser will perform certain services for the
Fund.
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Fund and the Adviser agree as follows:
1. The Fund hereby employs the Adviser to manage and administer the
operation of the Fund, to supervise the provision of services to the Fund by
others, and to manage the investment and reinvestment of the assets of the
Fund in conformity with the Fund's investment objectives and restrictions as
may be set forth from time to time in the Fund's then current prospectus and
statement of additional information, if any, and other governing documents,
all subject to the supervision of the Board of Trustees of the Fund, for the
period and on the terms set forth in this Agreement. The Adviser hereby
accepts such employment and agrees during such period, at its own expense, to
render the services and to assume the obligations set forth herein, for the
compensation provided herein. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
2. The Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of the Fund with broker-dealers selected
by the Adviser. In executing portfolio transactions and selecting broker-
dealers, the Adviser will use its best efforts to seek best execution on
behalf of the Fund. In assessing the best execution available for any
transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker-
dealer, and the reasonableness of the commission, if any (all for the specific
transaction and on a continuing basis). In evaluating the best execution
available, and in selecting the broker-dealer to execute a particular
transaction, the Adviser may also consider the brokerage and research services
(as those terms are used in Section 28(e) of the Securities Exchange Act of
1934 (the "1934 Act") provided to the Fund and/or other accounts over which
the Adviser or an affiliate of the Adviser exercises investment discretion.
The Adviser is authorized to pay a broker-dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Fund which is in excess of the amount of commission another broker-dealer
would have charged for effecting that transaction if, but only if, the Adviser
determines in good faith that such commission was reasonable in relation to
the value of the brokerage and research services provided by such broker-
dealer viewed in terms of that particular transaction or in terms of all of
the accounts over which investment discretion is so exercised.
3. The Adviser, at its own expense, shall furnish to the Fund office space
in the offices of the Adviser or in such other place as may be agreed upon by
the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Fund, for members of the Adviser's organization to serve
without salaries from the Fund as officers or, as may be agreed from time to
time, as agents of the Fund. The Adviser assumes and shall pay or reimburse
the Fund for: (1) the compensation (if any) of the Trustees of the Fund who
are affiliated with the Adviser or with its affiliates, or with any adviser
retained by the Adviser, and of all officers of the Fund as such, and (2) all
expenses of the Adviser incurred in connection with its services hereunder.
The Fund assumes and shall pay all other expenses of the Fund, including,
without limitation: (1) all charges and expenses of any custodian or
depository appointed by the Fund for the safekeeping of its cash, securities
and other property; (2) all charges and expenses for bookkeeping and auditors;
(3) all charges and expenses of any transfer agents and registrars appointed
by the Fund; (4) all fees of all Trustees of the Fund who are not affiliated
with the Adviser or any of its affiliates, or with any adviser retained by the
Adviser; (5) all brokers' fees, expenses and commissions and issue and
transfer taxes chargeable to the Fund in connection with transactions
involving securities and other property to which the Fund is a party; (6) all
costs and expenses of distribution of its shares incurred pursuant to a Plan
of Distribution adopted under Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"); (7) all taxes and trust fees payable by the Fund to
Federal, state or other governmental agencies; (8) all costs of certificates
representing shares of the Fund; (9) all fees and expenses involved in
registering and maintaining registrations of the Fund and of its shares with
the Securities and Exchange Commission (the "Commission") and registering or
qualifying its shares under state or other securities laws, including, without
limitation, the preparation and printing of registration statements,
prospectuses and statements of additional information for filing with the
Commission and other authorities; (10) expenses of preparing, printing and
mailing prospectuses and statements of additional information to shareholders
of the Fund; (11) all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing notices, reports and proxy materials to
shareholders of the Fund; (12) all charges and expenses of legal counsel for
the Fund and for Trustees of the Fund in connection with legal matters
relating to the Fund, including, without limitation, legal services rendered
in connection with the Fund's existence, trust and financial structure and
relations with its shareholders, registrations and qualifications of
securities under Federal, state and other laws, issues of securities, expenses
which the Fund has herein assumed, whether customary or not, and extraordinary
matters, including, without limitation, any litigation involving the Fund, its
Trustees, officers, employees or agents; (13) all charges and expenses of
filing annual and other reports with the Commission and other authorities; and
(14) all extraordinary expenses and charges of the Fund. In the event that the
Adviser provides any of these services or pays any of these expenses, the Fund
will promptly reimburse the Adviser therefor.
The services of the Adviser to the Fund hereunder are not to be deemed
exclusive, and the Adviser shall be free to render similar services to others.
4. As compensation for the Adviser's services to the Fund during the
period of this Agreement, the Fund will pay to the Adviser a fee at the annual
rate of:
AGGREGATE NET ASSET VALUE
MANAGEMENT FEE OF THE SHARES OF THE FUND
- ------------------------------------------------------------------------------
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 payable daily.
A pro rata portion of the Fund's fee shall be payable in arrears at the
end of each day or calendar month as the Adviser may from time to time specify
to the Fund. If and when this Agreement terminates, any compensation payable
hereunder for the period ending with the date of such termination shall be
payable upon such termination. Amounts payable hereunder shall be promptly
paid when due.
5. The Adviser may enter into an agreement to retain, at its own expense,
a firm or firms ("SubAdviser") to provide the Fund all of the services to be
provided by the Adviser hereunder, if such agreement is approved as required
by law. Such agreement may delegate to such SubAdviser all of Adviser's
rights, obligations and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the performance of
this Agreement, except a loss resulting from the Adviser's willful
misfeasance, bad faith, gross negligence or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though also
an officer, Director, partner, employee, or agent of the Adviser, who may be
or become an officer, Trustee, employee or agent of the Fund, shall be deemed,
when rendering services to the Fund or acting on any business of the Fund
(other than services or business in connection with the Adviser's duties
hereunder), to be rendering such services to or acting solely for the Fund and
not as an officer, Director, partner, employee, or agent or one under the
control or direction of the Adviser even though paid by it. The Fund agrees to
indemnify and hold the Adviser harmless from all taxes, charges, expenses,
assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Act of 1933, the 1934 Act, the 1940
Act, and any state and foreign securities and blue sky laws, as amended from
time to time) and expenses, including (without limitation) attorneys' fees and
disbursements, arising directly or indirectly from any action or thing which
the Adviser takes or does or omits to take or do hereunder provided that the
Adviser shall not be indemnified against any liability to the Fund or to its
shareholders (or any expenses incident to such liability) arising out of a
breach of fiduciary duty with respect to the receipt of compensation for
services, willful misfeasance, bad faith, or gross negligence on the part of
the Adviser in the performance of its duties, or from reckless disregard by it
of its obligations and duties under this Agreement.
7. The Fund shall cause its books and accounts to be audited at least once
each year by a reputable independent public accountant or organization of
public accountants who shall render a report to the Fund.
8. Subject to and in accordance with the Trust Agreement/Declaration of
Trust of the Fund, the Articles of Incorporation of the Adviser and the
governing documents of any SubAdviser, it is understood that Trustees,
Directors, officers, agents and shareholders of the Fund or any Adviser are or
may be interested in the Adviser (or any successor thereof) as Directors and
officers of the Adviser or its affiliates, as stockholders of Keystone
Investments, Inc. or otherwise; that Directors, officers and agents of the
Adviser and its affiliates or stockholders of Keystone Investments, Inc. are
or may be interested in the Fund or any Adviser as Trustees, Directors,
officers, shareholders or otherwise; that the Adviser (or any such successor)
is or may be interested in the Fund or any SubAdviser as shareholder, or
otherwise; and that the effect of any such adverse interests shall be governed
by said Trust Agreement/Declaration of Trust of the Fund, Articles of
Incorporation of the Adviser and governing documents of any SubAdviser.
9. This Agreement shall continue in effect after December 10, 1998, only
so long as (1) such continuance is specifically approved at least annually by
the Board of Trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund, and (2) such renewal has been
approved by the vote of a majority of Trustees of the Fund who are not
interested persons, as that term is defined in the 1940 Act, of the Adviser or
of the Fund, cast in person at a meeting called for the purpose of voting on
such approval.
10. On sixty days' written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Fund or by vote of the holders of a majority of the
outstanding voting securities of the Fund; and on sixty days' written notice
to the Fund, this Agreement may be terminated at any time without the payment
of any penalty by the Adviser. This Agreement shall automatically terminate
upon its assignment (as that term is defined in the 1940 Act). Any notice
under this Agreement shall be given in writing, addressed and delivered, or
mailed postage prepaid, to the other party at the main office of such party.
11. This Agreement may be amended at any time by an instrument in writing
executed by both parties hereto or their respective successors, provided that
with regard to amendments of substance such execution by the Fund shall have
been first approved by the vote of the holders of a majority of the
outstanding voting securities of the Fund and by the vote of a majority of
Trustees of the Fund who are not interested persons (as that term is defined
in the 1940 Act) of the Adviser, any predecessor of the Adviser, or of the
Fund, cast in person at a meeting called for the purpose of voting on such
approval. A "majority of the outstanding voting securities of the Fund" shall
have, for all purposes of this Agreement, the meaning provided therefor in the
1940 Act.
12. Any compensation payable to the Adviser hereunder for any period other
than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the day and year first above written.
KEYSTONE INSTITUTIONAL TRUST
By: /s/ George S. Bissell
--------------------------------------
Name: GEORGE S. BISSELL
Title: Chairman of the Board
KEYSTONE INVESTMENT MANAGEMENT
COMPANY
By: /s/ Rosemary D. Van Antwerp
--------------------------------------
Name: ROSEMARY D. VAN ANTWERP
Title: Senior Vice President
KEYSTONE INSTITUTIONAL TRUST
DISTRIBUTION AGREEMENT
AGREEMENT made as of this 1st day of January, 1997 by and between
KEYSTONE INSTITUTIONAL TRUST, a Massachusetts business trust ("Trust"), and
Evergreen Keystone Distributor, Inc., a Delaware corporation
("Distributor").
WHEREAS, the Trust wishes to arrange for the sale of shares of bene
ficial interest ("Shares") of the Trust and its series of shares named Keystone
Institutional Small Capitalization Growth Fund and each series of shares
subsequently issued by the Trust (each singly a "Fund" or collectively "Funds");
and
The Distributor wishes to act as a principal underwriter of the Shares:
NOW, THEREFORE, in consideration of the mutual promises and under
takings herein provided for, the Trust and the Distributor hereby agree as
follows:
1. The Trust appoints the Distributor to act as principal under writer
of the Shares as an independent contractor in such states as the Trust may from
time to time designate and on the terms and conditions herein contained. Except
as the Trust may from time to time agree, the Distributor will act as agent for
the Trust and not as principal.
2. The Distributor will have the right to obtain subscriptions for and
to sell Shares as agent of the Trust and in so doing may retain and employ
representatives to promote distribution of the Shares and may obtain orders from
brokers or dealers or others for sales of Shares to them. No such
representative, dealer or broker shall have any authority to act as agent for
the Trust. The Distributor does not undertake hereby to buy or to find
purchasers for any specific number of Shares.
3. All subscriptions and sales of Shares by the Distributor hereunder
shall be at the net asset value of the Shares in accordance with the provisions
of the Declaration of Trust, By-laws and the current prospectus and statement of
additional information of the Trust. All orders shall be subject to acceptance
by the Trust, and the Trust reserves the right in its sole discretion to reject
any order received. The Trust shall not be liable to anyone for failure to
accept any order.
4. Payment for Shares shall be in cash, check, money order or Federal
Funds received by the Distributor within three (3) days after notice of
acceptance of the purchase order and notice of the amount of the applicable
public offering price has been given to the purchaser. If such payment is not
received within such three-day period, the Trust reserves the right, without
further notice, forthwith to cancel its acceptance of any such order. The Trust
shall pay such issue taxes as may be required by law in connection with the
issue of the Shares.
5. Nothing herein shall prevent the Trust from issuing, or issuing and
selling, or transferring Shares to holders of Shares as dividends or as
distributions of realized capital gains through one or more other principal
underwriters or otherwise for not less than net asset value.
6. The Distributor shall not make, or permit any representative, broker
or dealer to make, in connection with any sale or solicitation of a sale of the
Shares, any representations concerning the Shares except those contained in the
then current prospectus and statement of additional information covering the
Shares and in printed information approved by the Trust as information
supplemental to such prospectus and statement of additional information. Copies
of the then effective prospectus and statement of additional information and any
such printed supplemental information will be supplied by the Trust to the
Distributor in reasonable quantities upon request.
7. The Distributor covenants and agrees 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 hereafter be a Trustee or officer of the Trust 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, which
arises out of or is alleged to arise out of any misrepresentation or omission to
state a material fact, on the part of the Distributor or any other person for
whose acts the Distributor 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 term "expenses" includes amounts paid in
satisfaction of judgments or in settlement. The foregoing right of
indemnification shall be in addition to any other rights to which the Trust or
any such Trustee or officer may be entitled as a matter of law.
8. The Trust agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by the Distributor for
the purpose of qualifying the Shares for sale under the so-called "blue sky"
laws of any state or for registering and maintaining the registration of the
Trust and of the Shares under the Securities Act of 1933 and the Investment
Company Act of 1940. The Distributor shall bear the expenses of preparing,
printing and distributing advertising and sales literature and prospectuses used
by it (apart from expenses of registering Shares under the Securities Act and
Investment Company Act, qualifying Shares for sale under the so-called "blue
sky" laws of any state and the preparation and printing of prospectuses and
statements of additional information and reports required to be filed with the
Securities and Exchange Commission by such Acts and the direct expenses of the
issuance of Shares).
9. This Agreement shall continue in effect for two years from the date
set forth above and from year to year thereafter if its terms and its
continuance are approved annually by a vote of a majority of the Trustees who
are not parties to this Agreement or "interested persons" of any such party cast
in person at a meeting called for the purpose of voting on such approval and if
such continuance is also approved annually by the Board of Trustees of the Trust
or by a vote of a majority of the outstanding voting Shares of the Trust;
provided, however, that (1) this Agreement may at any time be terminated without
the payment of any penalty by the Trust on 60 days' written notice to the
Distributor, (2) this Agreement shall immediately terminate in the event of its
assignment (within the meaning of the Investment Company Act of 1940) and (3)
this Agreement may be terminated by the Distributor on 90 days' written notice
to the Trust. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office of
such party. This Agreement may be amended at any time by mutual consent of the
parties.
10. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts.
11. A copy of the Declaration of Trust of the Trust is on file with the
Secretary of The Commonwealth of Massachusetts and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Trust as Trustees
and not individually and that the obligations of this instrument are not binding
upon the Trustees or holders of shares of the Trust individually but are binding
only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE INSTITUTIONAL TRUST
By: /s/ George S. Bissell
--------------------------
George S. Bissell
Chairman
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
By: /s/ J. David Huber
--------------------------
Name: J. David Huber
Title: President
FORM OF SUB-ADMINISTRATOR AGREEMENT
This Sub-Administrator Agreement is made as of this 1st day of
January, 1997 between Keystone Investment Management Company, a Delaware
corporation (herein called "KIMCO"), and BISYS Fund Services, Inc., a Delaware
limited liability corporation (herein called "BISYS").
WHEREAS, KIMCO has been appointed as investment adviser to
certain open-end management investment companies, or to one or more separate
investment series thereof, listed on Schedule A, as the same may be amended from
time to time to reflect additions or deletions of such companies or series,
which are registered under the Investment Company Act of 1940 (the "Funds");
WHEREAS, in its capacity as investment adviser to the Funds,
KIMCO has the obligation to provide, or engage others to provide, certain
administrative services to the Funds; and
WHEREAS, KIMCO desires to retain BISYS as Sub-Administrator to
the Funds for the purpose of providing the Funds with personnel to act as
officers of the Funds and to provide certain administrative services in addition
to those provided by KIMCO ("Sub-Administrative Services"), and BISYS is willing
to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
1. Appointment of Sub-Administrator. KIMCO hereby appoints BISYS as
Sub-Administrator for the Funds on the terms and conditions set forth in this
Agreement and BISYS hereby accepts such appointment and agrees to perform
the services and duties set forth in Section 2 of this Agreement in
consideration of the compensation provided for in Section 4 hereof.
2. Services and Duties. As Sub-Administrator, and subject to the supervision and
control of KIMCO and the Trustees or Directors of the Funds, BISYS will
hereafter provide facilities, equipment and personnel to carry out the following
Sub-Administrative services to assist in the operation of the business and
affairs of the Funds:
(a) provide individuals reasonably acceptable to the Funds for
nomination, appointment or election as officers of the Funds and who
will be responsible for the management of certain of each Fund's
affairs as determined from time to time by the Trustees or Directors of
the Funds;
(b) review filings with the Securities and Exchange Commission and
state securities authorities that have been prepared on behalf of the
Funds by the administrator and take such actions as may be reasonably
requested by the administrator to effect such filings;
(c) verify, authorize and transmit to the custodian, transfer agent and
dividend disbursing agent of each Fund all necessary instructions for
the disbursement of cash, issuance of shares, tender and receipt of
portfolio securities, payment of expenses and payment of dividends; and
(d) advise the Trustees or Directors of the Funds on matters
concerning the Funds and their affairs.
BISYS may, in addition, agree in writing to perform additional
Sub-Administrative Services for the Funds. Sub-Administrative Services shall not
include investment advisory services or any duties, functions, or services to be
performed for the Funds by their distributor, custodian or transfer agent
pursuant to their agreements with the Funds.
3. Expenses. BISYS shall be responsible for expenses incurred in providing
office space, equipment and personnel as may be necessary or convenient to
provide the Sub-Administrative Services to the Funds. KIMCO and/or the Funds
shall be responsible for all other expenses incurred by BISYS on behalf of the
Funds pursuant to this Agreement at the direction of KIMCO, including without
limitation postage and courier expenses, printing expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees or Directors who are not BISYS employees, and
trade association dues.
4. Compensation. For the Sub-Administrative Services provided, KIMCO hereby
agrees to pay and BISYS hereby agrees to accept as full compensation for
its services rendered hereunder a sub-administrative fee,calculated daily and
payable monthly at an annual rate based on the aggregate average daily net
assets of the Funds, or separate series thereof, set forth on Schedule A and
determined in accordance with the table below.
Aggregate Daily Net Assets of Funds For
Which KIMCO, Evergreen Asset Management
Sub-Administrative Corp., First Union National Bank of North
Fee as a % of Carolina or any Affiliates Thereof Serve as
Average Annual Investment Adviser or Administrator And For
Daily Net Assets Which BISYS Serves as Sub-Administrator
.0100% on the first $7 billion
.0075% on the next $3 billion
.0050% on the next $15 billion
.0040% on assets in excess of $25 billion
5. Indemnification and Limitation of Liability of BISYS. The duties of BISYS
shall be limited to those expressly set forth herein or later agreed to in
writing by BISYS, and no implied duties are assumed by or may be asserted
against BISYS hereunder. BISYS shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
2
<PAGE>
modified hereby. (As used in this Section, the term "BISYS" shall include
partners, officers, employees and other agents of BISYS as well as BISYS itself)
So long as BISYS acts in good faith and with due diligence and without
negligence, KIMCO shall indemnify BISYS and hold it harmless from any and all
actions, suits and claims, and from any and all losses, damages, costs, charges,
reasonable counsel fees and disbursements, payments, expenses and liabilities
(including reasonable investigation expenses) arising directly or indirectly out
of BISYS' actions taken or nonactions with respect to the performance of
services hereunder. The indemnity and defense provisions set forth herein shall
survive the termination of this Agreement for a period of three years.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case KIMCO may be asked to indemnify or hold Furman
Selz harmless, KIMCO shall be fully and promptly advised of all pertinent facts
concerning the situation in question, and it is further understood that Furman
Selz will use all reasonable care to identify and notify KIMCO promptly
concerning any situation which presents or appears likely to present the
probability of such a claim for indemnification against KIMCO.
KIMCO shall be entitled to participate at its own expense or, if it so
elects, to assume the defense of any suit brought to enforce any claims subject
to this indemnity provision. If KIMCO elects to assume the defense of any such
claim, the defense shall be conducted by counsel chosen by KIMCO and
satisfactory to BISYS, whose approval shall not be unreasonably withheld. In the
event that KIMCO elects to assume the defense of any suit and retain counsel,
BISYS shall bear the fees and expenses of any additional counsel retained by it.
If KIMCO does not elect to assume the defense of a suit, it will reimburse BISYS
for the reasonable fees and expenses of any counsel retained by BISYS.
BISYS may apply to KIMCO at any time for instructions and may consult
counsel for KIMCO or its own counsel and with accountants and other experts with
respect to any matter arising in connection with BISYS' duties, and BISYS shall
not be liable or accountable for any action taken or omitted by it in good faith
in accordance with such instruction or with the opinion of such counsel,
accountants or other experts.
Any person, even though also an officer, director, partner, employee or
agent of BISYS, who may be or become an officer, trustee, employee or agent of
the Funds, shall be deemed, when rendering services to a Fund or acting on any
business of a Fund (other than services or business in connection with the
duties of BISYS hereunder) to be rendering such services to or acting solely for
the Fund and not as an officer, director, partner, employee or agent or one
under the control or direction of BISYS even though paid by BISYS.
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
3
<PAGE>
6. Duration and Termination.
(a) The initial term of this Agreement (the "Initial Term") shall
commence on the date this Agreement is executed by both parties, shall continue
until April 30, 1998, and shall continue in effect for a Fund from year to year
thereafter, provided it is approved, at least annually, by a vote of a majority
of Directors/Trustees of the Funds, including a majority of the disinterested
Directors/Trustees. Notwithstanding the foregoing, this Agreement shall only
become effective if (i) Keystone Investments, the parent of KIMCO, has
previously been acquired by First Union National Bank of North Carolina, and
(ii) the Funds have appointed Evergreen Funds Distributor, Inc. as their
Principal Underwriter. In the event of any breach of this Agreement by either
party, the non-breaching party shall notify the breaching party in writing of
such breach and upon receipt of such notice, the breaching party shall have 45
days to remedy the breach except in the case of a breach resulting from fraud or
other acts which materially and adversely affects the operations or financial
position of the Funds. In the event any material breach is not remedied within
such time period, the nonbreaching party may immediately terminate this
Agreement.
Notwithstanding the foregoing, after such termination for so long as
BISYS, with the written consent of KIMCO, in fact continues to perform any one
or more of the services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by KIMCO upon such termination shall
be immediately due and payable upon and notwithstanding such termination. BISYS
shall be entitled to collect from KIMCO, in addition to the compensation
described herein, all costs reasonably incurred in connection with BISYS's
activities in effecting such termination, including without limitation, the
delivery to the Funds and/or their designees of each Fund's property, records,
instruments and documents, or any copies thereof. To the extent that BISYS may
retain in its possession copies of any Fund documents or records subsequent to
such termination which copies had not been requested by or on behalf of a Fund
in connection with the termination process described above, BISYS will provide
such Fund with reasonable access to such copies; provided, however, that, in
exchange therefor, KIMCO shall reimburse BISYS for all costs reasonably incurred
in connection therewith.
(b) Subject to (c) below, this Agreement may be terminated at any time,
without payment of any penalty, on sixty (60) day's prior written notice by
KIMCO, or by BISYS and, with respect to one or more of the Funds a vote of
a majority of such Fund's or Funds' Directors/Trustees.
(c) If, during the first six months this Agreement is in effect it is
terminated for a Fund or Funds in accordance with (b) above, for any reason
other than a material breach of this Agreement, the merger of a Fund or Funds
for which KIMCO, Evergreen Asset Management Corp., First Union National Bank of
North Carolina or any affiliates thereof act as investment adviser, or any other
event that leads to the termination of the existence of a Fund or Funds, and
BISYS is replaced as sub-administrator, then KIMCO shall make a one-time
cash payment to BISYS equal to the unpaid balance due BISYS for the
first six-months this Agreement in effect, assuming for
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
4
<PAGE>
purposes of calculation of the payment that the asset level of each Fund on the
date BISYS is replaced will remain constant for the balance of such term.
Once this Agreement has been in effect for more than six months from the
commencement date, this paragraph (c) shall be null, void and of no further
effect.
7. Amendment. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
8. Notices. Notices of any kind to be given to KIMCO hereunder by BISYS shall be
in writing and shall be duly given if delivered to KIMCO at the following
address: Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116 ATT: General Counsel. Notices of any kind to be given to
BISYS hereunder by EAMC or the Funds shall be in writing and shall be duly given
if delivered to BISYS at 3435 Stelzer Road, Columbus, Ohio 43219 Attention:
George O. Martinez, Senior Vice President.
9. Limitation of Liability. BISYS is hereby expressly put on notice of the
limitations of liability as set forth in the Declarations of Trust of the Funds
that are Massachusetts business trusts or series thereof and agrees that the
obligations pursuant to this Agreement of a particular Fund be limited solely to
the assets of that particular Fund, and BISYS shall not seek satisfaction of any
such obligation from the assets of any other Fund, the shareholders of any Fund,
the Trustees, officers, employees or agents of any Fund, or any of them.
10. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Section 5 hereof, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by New York law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
By______________________________________
its:____________________________________
Attest:________________________
BISYS FUND SERVICES, INC.
By______________________________________
its_____________________________________
Attest:________________________
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
6
<PAGE>
SCHEDULE A
SUB-ADMINISTRATOR AGREEMENT
Keystone America Hartwell Emerging Growth Fund ("Emerging Growth")
Keystone Balanced Fund II ("Balanced Fund")
Keystone Capital Preservation and
Income Fund ("Capital Preservation and Income")
Keystone Emerging Markets Fund ("Emerging Markets")
Keystone Fund For Total Return ("Total Return")
Keystone Fund of the Americas ("Fund of the Americas")
Keystone Global Opportunities Fund ("GlobalOpportunities")
Keystone Global Resources and Development Fund ("GlobalResources")
Keystone Government Securities Fund ("Government Securities")
Keystone Intermediate Term Bond Fund ("Intermediate Term")
Keystone Liquid Trust("Liquid Trust") Keystone Omega Fund ("Omega")
Keystone Small Company Growth Fund II ("Small Company Growth")
Keystone State Tax Free Fund ("State Tax Free")
- Florida Tax Free Fund ("Florida Tax Free")
- Massachusetts Tax Free Fund ("Massachusetts Tax Free")
- Pennsylvania Tax Free Fund ("Pennsylvania Tax Free")
- New York Insured Tax Free Fund ("New York Insured")
Keystone State Tax Free Fund-Series II ("State Tax Free II")
- California Insured Tax Free Fund ("California Insured")
- Missouri Tax Free Fund ("Missouri Tax Free")
Keystone Strategic Income Fund ("Strategic Income")
Keystone Tax Free Income Fund ("Tax Free Income")
Keystone Quality Bond Fund (B-1) ("B-1") Keystone
Diversified Bond Fund (B-2) ("B-2")
Keystone High Income Bond Fund (B-4) ("B-4")
Keystone Balanced Fund (K-1) ("K-1")
Keystone Strategic Growth Fund (K-2)("K-2")
Keystone Growth and Income Fund (S-1) ("S-1")
Keystone Mid-Cap Growth Fund (S-3) ("S-3")
Keystone Small Company Growth Fund (S-4) ("S-4")
Keystone Institutional Adjustable Rate Fund ("Adjustable Rate")
Keystone Institutional Trust ("Institutional")
Keystone International Fund Inc. ("International")
Keystone Precious Metals Holdings, Inc. ("Precious Metals")
Keystone Tax Free Fund ("Tax Free")
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Institutional Trust
We consent to the use of our report dated March 31, 1997 incorporated
by reference herein and to the reference to our firm under the caption
"Financial Highlights" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
June 24, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
SMALL CAP 28-Feb-97 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
no load -6.55% -4.97% 4.24% 14.46% 12.18% N/A N/A N/A N/A
Beg dates 01/31/97 12/31/96 02/29/96 12/28/96 12/28/95
Beg Value (no load) 12,248 12,045 10,980 10,000 10,000
End Value 11,446 11,446 11,446 11,446 11,446
TIME 1.18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE INSTITUTIONAL SMALL CAP GROWTH FUND CLASS A
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 3,044,156
<INVESTMENTS-AT-VALUE> 2,897,785
<RECEIVABLES> 66,573
<ASSETS-OTHER> 15,568
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,979,926
<PAYABLE-FOR-SECURITIES> 63,787
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,007
<TOTAL-LIABILITIES> 91,794
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,651,354
<SHARES-COMMON-STOCK> 256,052
<SHARES-COMMON-PRIOR> 212,943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 383,149
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (146,371)
<NET-ASSETS> 2,888,132
<DIVIDEND-INCOME> 2,178
<INTEREST-INCOME> 4,939
<OTHER-INCOME> 0
<EXPENSES-NET> (16,599)
<NET-INVESTMENT-INCOME> (9,482)
<REALIZED-GAINS-CURRENT> 398,376
<APPREC-INCREASE-CURRENT> (462,663)
<NET-CHANGE-FROM-OPS> (73,769)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (35,700)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 43,108
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 2,944
<NET-CHANGE-IN-ASSETS> 442,231
<ACCUMULATED-NII-PRIOR> 36,922
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (7,313)
<GROSS-ADVISORY-FEES> (13,266)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (16,599)
<AVERAGE-NET-ASSETS> 2,493,265
<PER-SHARE-NAV-BEGIN> 11.65
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.28
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
