KEYSTONE SMALL COMPANY GROWTH FUND II
PROSPECTUS FEBRUARY 20, 1996
Keystone Small Company Growth Fund II (the "Fund") is a mutual fund whose goal
is long-term growth of capital.
The Fund offers three classes of shares. Information on share classes and
their fee and sales charge structures may be found in the Fund's fee table,
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans" and "Fund Shares."
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 February 20, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number provided on this page.
KEYSTONE SMALL COMPANY GROWTH FUND II
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
TABLE OF CONTENTS
Page
Fee Table 2
The Fund 3
Investment Objective and Policies 3
Investment Restrictions 4
Risk Factors 4
Pricing Shares 5
Dividends and Taxes 6
Fund Management and Expenses 6
How to Buy Shares 8
Alternative Sales Options 8
Contingent Deferred Sales Charge and
Waiver of Sales Charges 12
Distribution Plans 14
How to Redeem Shares 14
Shareholder Services 16
Performance Data 19
Fund Shares 19
Additional Information 20
Additional Investment Information (i)
Exhibit A A-1
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.
<PAGE>
FEE TABLE
KEYSTONE SMALL COMPANY GROWTH FUND II
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plans" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- -------------- --------------
<S> <C> <C> <C>
Sales Charge ...................................... 5.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> ................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.25% 0.25% 0.25%
12b-1 Fees ........................................ 0.25% 1.00%<F7> 1.00%<F7>
Other Expenses .................................... 1.45% 1.45% 1.45%
----- ----- -----
Total Fund Operating Expenses
(After Expense Reimbursements) .................. 1.95% 2.70% 2.70%
===== ===== =====
<CAPTION>
EXAMPLES<F8> 1 YEAR 3 YEARS
------ -------
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each period:
<S> <C> <C>
Class A ............................................................................... $76 $115
Class B ............................................................................... $77 $114
Class C ............................................................................... $37 $ 84
You would pay the following expenses on the same investment, assuming no redemption at the
end of each period:
Class A ............................................................................... $76 $115
Class B ............................................................................... $27 $ 83
Class C ............................................................................... $27 $ 84
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.
- ----------
<FN>
<F1> Class B shares convert tax free to Class A shares after eight years. See "Class B shares" for more information.
<F2> Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge for the 24 month
period following the date of purchase. See the "Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales
Charges" sections of this prospectus for an explanation of the charge.
<F5> There is no fee for exchange orders received by the Fund directly from a shareholder over the Keystone Automated Response
Line ("KARL"). (For a description of KARL, see "Shareholder Services.")
<F6> Expense ratios are estimated for the Fund's fiscal period ending May 31, 1996 after giving effect to the reimbursement by
Keystone Investment Management Company ("Keystone") of expenses in accordance with certain voluntary expense limitations.
Until June 30, 1996, Keystone has voluntarily agreed to limit the expenses of the Fund's Class A, B and C shares to 1.95%,
2.70% and 2.70%, respectively, of each such class's average daily net assets. Keystone is under no obligation to maintain these
limits. Absent voluntary expense limitations, it is estimated that expense ratios for the Fund's fiscal period ending May 31,
1996 for its Class A, B and C shares would have been 2.40%, 3.15% and 3.15%, respectively.
<F7> Long-term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by the
National Association of Securities Dealers, Inc. ("NASD").
<F8> 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%.
</TABLE>
<PAGE>
THE FUND
The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust on
December 13, 1995. The Fund is one of more than 30 mutual funds advised by
Keystone Investment Management Company (formerly named Keystone Custodian Funds,
Inc.) ("Keystone"), the Fund's investment adviser.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with long-term
growth of capital. The Fund invests, under normal circumstances, at least 65% of
its total assets in equity securities of companies with small market
capitalizations. For this purpose, companies with small market capitalizations
are those with market capitalization of less than $1 billion at the time of the
Fund's investment. Companies whose capitalization falls outside this range after
the purchase continue to be considered small cap for this purpose.
While the Fund focuses on small cap stocks, it may also invest in other types
of securities without regard to the market capitalization of the issuer and may
be listed on national exchanges or traded over the counter, including other
common stocks, debt securities convertible into common stocks or having common
stock characteristics, and rights and warrants to purchase common stocks. In
addition to its other investment options, the Fund may invest in limited
partnerships, and up to 25% of its assets in foreign securities. The Fund does
not currently intend to invest more than 5% of its assets in foreign securities.
When market conditions warrant, the Fund may adopt a defensive position to
preserve shareholders' capital by investing in money market instruments. 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, including U.S. branches of foreign banks and foreign
branches of U.S. banks; and prime commercial paper, including master demand
notes.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid, securities
which may not be sold or disposed of in the ordinary course of business within
seven days at approximately the value at which the Fund has valued the
investment on its books and (2) limiting its holdings of such securities to
15% of 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 and reverse repurchase agreements,
purchase and sell securities and currencies on a when issued and delayed
delivery basis and purchase or sell securities on a forward commitment basis,
write covered call and put options and purchase call and put options to close
out existing positions and may employ new investment techniques with respect
to such options. The Fund may also enter into currency and other financial
futures contracts and related options transactions for hedging purposes and
not for speculation, and may employ new investment techniques with respect to
such futures contracts and related options.
For further information about the types of investments and investment
techniques available to the Fund, and the risks associated therewith, see the
"Risk Factors" and "Additional Investment Information" sections of this
prospectus and the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its
investment objective since there is uncertainty in every investment.
The investment objective of the Fund cannot be changed without a vote of the
holders of a majority (as defined in the Investment Company Act of 1940 ("1940
Act")) of the Fund's outstanding shares.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions summarized
below, which may not be changed without the vote of a majority (as defined in
the 1940 Act) of the Fund's outstanding shares. These restrictions and certain
other fundamental and nonfundamental 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, except that the Portfolio may borrow from banks for
temporary or emergency purposes, provided that, immediately after any such
borrowing there is asset coverage of at least 300% for all such borrowings, and
the Fund may enter into reverse repurchase agreements.
RISK FACTORS
Like any investment, your investment in the Fund involves some degree of
risk. Before you buy shares of the Fund, you should carefully evaluate your
ability to assume the risks your investment in the Fund poses. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE
IN THE VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN
THE VALUE OF YOUR INVESTMENT.
The Fund seeks to provide long-term growth of capital by investing
principally in equity securities of companies with small market
capitalizations. The Fund is best suited to patient investors who can afford
to maintain their investment 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, including risks of investing in
foreign securities and derivatives, attendant to individual securities or
investment practices are discussed in "Additional Investment Information".
FUND RISKS. Investing in companies with small market capitalizations
involves greater risk than investing in larger companies. Their stock prices
can rise very quickly and drop dramatically in a short period of time. This
volatility results from a number of factors, including reliance by these
companies on limited product lines, markets and financial and management
resources. These and other factors may make small cap companies more
susceptible to setbacks or downturns. These companies may experience higher
rates of bankruptcy or other failures than larger companies. They may be more
likely to be negatively affected by changes in management. In addition, the
stock of small cap companies may be thinly traded.
A need for cash due to large liquidations from the Fund when the prices of
small cap stocks are declining could result in losses to the Fund.
Investing in the Fund involves the risk common to investing in any security,
that is that the value of the securities held by the Fund will fluctuate in
response to changes in economic conditions or public expectations about those
securities. The net asset value of the Fund's shares will change accordingly.
OTHER CONSIDERATIONS. The Fund, which normally invests at least 65% of its
assets in small cap stocks does not, by itself, constitute a balanced
investment plan. The Fund may be appropriate as part of an overall investment
program. Investors may wish to consult their financial advisers when
considering what portion of their total assets to invest in small cap stocks.
Past performance should not be considered representative of results for any
future period of time.
PRICING SHARES
The net asset value of a Portfolio share is computed each day on which the
New York Stock Exchange (the "Exchange") is open as of the close of trading on
the Exchange (currently 4:00 p.m. eastern time for purposes of pricing Fund
shares) except on days when changes in the value of the Portfolio's securities
do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Portfolio is arrived at by determining
the value of the Portfolio's assets, subtracting its liabilities and dividing
the result by the number of its shares outstanding.
Current values for the Fund's securities are generally determined as
follows:
1. securities that are traded on a national securities exchange or on the
over-the-counter National Market System ("NMS") are valued on the basis of
the last sales price on the exchange where primarily traded or NMS prior to
the time of the valuation, provided that a sale has occurred and that this
price reflects current market value according to procedures established by
the Board of Trustees;
2. securities traded in the over-the-counter market, other than NMS, for
which market quotations are readily available, are valued at the mean of the
bid and asked prices at the time of valuation;
3. instruments having maturities of more than sixty days for which market
quotations are readily available are valued at current market value; where
market quotations are not available, such instruments are valued at fair
value as determined by the Board of Trustees;
4. instruments that are purchased with maturities of sixty days or less
(including all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market;
instruments maturing in more than sixty days when purchased that are held on
the sixtieth day prior to maturity are valued at amortized cost (market
value on the sixtieth day adjusted for amortization of premium or accretion
of discount), which, when combined with accrued interest, approximates
market; and which, in either case, reflects fair value as determined by the
Fund's Board of Trustees; and
5. the following securities are valued at prices deemed in good faith to
be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which complete quotations
are not readily available; (b) listed securities or those on NMS if, in the
Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and (c) other assets.
Foreign securities for which market quotations are not readily available are
valued on the basis of valuations provided by a pricing service, approved by
the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
DIVIDENDS AND TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code (the "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at
least 98% of its ordinary income for such calendar year and 98% of its net
capital gains for the one-year period ending on October 31 of such calendar
year. Any taxable dividend declared in October, November or December to
shareholders of record in such a month and paid by the following January 31
will be includable in the taxable income of the shareholder as if paid on
December 31 of the year in which such dividend was declared. If the Fund
qualifies and if it distributes all of its net investment income and net
capital gains, if any, to shareholders, it will be relieved of any federal
income tax liability. The Fund will make distributions from its net investment
income and net capital gains, if any, annually. Because Class A shares bear
most of the costs of distribution of such shares through payment of a front
end sales charge while Class B and Class C shares bear such expenses through a
higher annual distribution fee, expenses attributable to Class B shares and
Class C shares will generally be higher, and income distributions paid by the
Portfolio with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares.
Shareholders receive Fund distributions in the form of additional shares of
that class of shares upon which the distribution is based or, at the
shareholder's option, 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 dividends are taxable as
ordinary income, and net long-term gains dividends are taxable as capital
gains regardless of how long the Fund's shares are held. If Fund shares held
for less than six months are sold at a loss, however, such loss will be
treated for tax purposes as a long-term capital loss to the extent of any
long-term capital gains dividends received. The Fund advises its shareholders
annually as to the federal tax status of all distributions made during the
year.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund'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 Fund's Board of Trustees, Keystone, the
Fund's investment adviser, provides investment advice, management and
administrative services to the Fund.
INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment
companies and private accounts since it was organized in 1932. Keystone is a
wholly-owned subsidiary of Keystone Investments, Inc. ("Keystone
Investments"), located at 200 Berkeley Street, Boston, Massachusetts 02116-
5034.
Keystone Investments is a corporation privately owned by current and former
members of management and certain employees of Keystone and its affiliates.
The shares of Keystone Investments common stock beneficially owned by
management are held in a number of voting trusts, the trustees of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone Management, Inc.,
Keystone, their affiliates and the Keystone Investments Family of Funds.
Pursuant to its Investment Advisory and Management Agreement (the "Advisory
Agreement") with the Fund, Keystone provides investment advisory and
management services to the Fund. Keystone manages the investment and
reinvestment of the Fund's assets, supervises the operation of the Fund,
provides all necessary office space, facilities, equipment and personnel and
arranges, at the request of the Fund, for its employees to serve as officers
or agents of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set forth
below:
AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE OF THE FUND
0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% of the next $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000.
Keystone's fee is computed as of the close of business each business day and
payable daily.
The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must
be approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by
the Fund or Keystone or may be terminated by a vote of shareholders of the
Fund. The Advisory Agreement will terminate automatically upon its
assignment.
PORTFOLIO MANAGER
Keystone's Small Cap Growth Team has been the Fund's Portfolio Manager since
its inception. Members of the team are Christopher R. Ely, Philip C. Fine and
David L. Smith. Mr. Ely is a Senior Vice President and Senior Portfolio Manager
and has more than 15 years' investment experience. Mr. Fine is a Vice President
and Portfolio Manager and has more than 7 years' investment experience. Mr.
Smith is a Vice President and Portfolio Manager and has more than 10 years'
investment experience. Messrs. Ely, Fine and Smith are also Chartered Financial
Analysts.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
management and distribution plan fees discussed herein, the principal expenses
that the Fund is expected to pay include, but are not limited to, expenses of
certain of its Trustees; transfer, dividend disbursing and shareholder
servicing agent expenses; custodian expenses; fees of its independent auditors
and legal counsel to its Trustees; fees payable to government agencies,
including registration and qualification fees attributable to the Fund and its
shares under federal and state securities laws; and certain extraordinary
expenses. In addition, each class will pay all of the expenses attributable to
it. Such expenses are currently limited to Distribution Plan expenses. The
Fund also pays its brokerage commissions, interest charges and taxes.
Until June 30, 1996, Keystone has voluntarily agreed to limit the expenses of
the Fund's Class A, Class B and Class C shares to 1.95%, 2.70%, and 2.70%,
respectively, of each such class's average daily net assets. Thereafter these
expense limitations may be extended on a calendar month by month basis and may
be modified or terminated in the future.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Fund, Keystone may follow a policy of considering as a factor the number
of shares of the Fund sold by such broker-dealer. In addition, broker-dealers
executing portfolio transactions may, from time to time, be affiliated with
the Fund, Keystone, the Fund's principal underwriter, or their affiliates.
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 rate is expected, generally, not to exceed 75%
to 100%. High portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which would be borne directly by the
Fund, as well as additional realized gains and/or losses to shareholders. For
further information about brokerage and distributions, see the statement of
additional information.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a
selling agreement with Keystone Investment Distributors Company (formerly
named Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's
principal underwriter. The Principal Underwriter, a wholly-owned subsidiary of
Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund
by mailing to the Fund c/o Keystone Investor Resource Center, Inc., P.O. Box
2121, Boston, Massachusetts 02106-2121, a completed account application and a
check payable to the Fund, or you may telephone 1-800-343-2898 to obtain the
number of an account to which you can wire or electronically transfer funds
and then send in a completed account application. Subsequent investments in
any amount may be made by check, by wiring Federal funds or by an electronic
funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Principal Underwriter (generally as
of the close of the Exchange on that day) plus, in the case of Class A shares,
the front end sales charge. Orders received by dealers or other firms prior to
the close of the Exchange and received by the Principal Underwriter prior to
the close of its business day will be confirmed at the offering price
effective as of the close of the Exchange on that day. The Fund reserves the
right to determine the net asset value more frequently than once a day if
deemed desirable. Dealers and other financial services firms are obligated to
transmit orders promptly.
Orders for shares received by broker-dealers prior to that day's close of
trading on the Exchange and transmitted to the Fund prior to its close of
business that day will receive the offering price equal to the net asset value
per share computed at the close of trading on the Exchange on the same day
plus, in the case of Class A shares, the front end sales charge. Orders
received by broker-dealers after that day's close of trading on the Exchange
and transmitted to the Fund prior to the close of business on the next
business day will receive the next business day's offering price.
Orders for shares received directly by the Fund from you will receive the
offering price equal to the net asset value per share next computed after the
Fund receives the purchase order plus, in the case of Class A shares, the
front end sales charge.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
The Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a deferred sales charge when they are redeemed
except as follows: Class A shares purchased (1) in an amount equal to or
exceeding $1,000,000 or (2) by a corporate qualified retirement plan or a non-
qualified deferred compensation plan sponsored by a corporation having 100 or
more eligible employees (a "Qualifying Plan"), in either case without a front
end sales charge, will be subject to a contingent deferred sales charge for
the 24 month period following the date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
redeemed during the 72 month period commencing with and including the month of
purchase. Class B shares that have been outstanding for eight years from and
including the month of purchase will automatically convert to Class A shares
without the imposition of a front-end sales charge or exchange fee.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its Distribution Plan or other plan, pays
an annual service fee of 0.25% of the Fund's average daily net assets
attributable to that class. In addition to the 0.25% service fee, the Class B
and C Distribution Plans provide for the payment of an annual distribution fee
of up to 0.75% of the average daily net assets attributable to their
respective classes. As a result, income distributions paid by the Fund with
respect to Class B and Class C shares will generally be less than those paid
with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time
of investment, rather than spreading such cost over time, might consider Class
A shares. Other investors might consider Class B or Class C shares, in which
case 100% of the purchase price is invested immediately, depending on the
amount of the purchase and the intended length of investment.
The Fund will not normally accept any purchase of Class B shares in the
amount of $250,000 or more and will not normally accept any purchase of Class
C shares in the amount of $1,000,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge
as follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED<F1> OFFERING PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ............................... 5.75% 6.10% 5.25%
$50,000 but less than $100,000 .................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ................. 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ................. 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ............... 1.50% 1.52% 1.50%
- ----------
<FN>
<F1> Rounded to the nearest one-hundredth percent.
</TABLE>
----------------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a tax
sheltered annuity plan sponsored by a public educational entity having 5,000
or more eligible employees (a "TSA Plan") will be at net asset value without
the imposition of a front-end sales charge (each such purchase, an "NAV
Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay broker/
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
1.00% of the investment amount up to $2,999,999; plus 0.50% of the investment
amount between $3,000,000 and $4,999,999; plus 0.25% of the investment amount
over $4,999,999.
With the exception of Class A shares acquired by a TSA Plan, Class A shares
acquired in an NAV Purchase are subject to a contingent deferred sales charge
of 1.00% upon redemption during the 24 month period commencing on the date the
shares were originally purchased. Class A shares acquired by a TSA Plan in an
NAV Purchase are not subject to a contingent deferred sales charge.
The sales charge is paid to the Principal Underwriter, which in turn
normally reallows a portion to your broker-dealer. In addition, your broker-
dealer currently will be paid periodic service fees at an annual rate of up to
0.25% of the average daily net asset value of Class A shares maintained by
such recipient outstanding on the books of the Fund for specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A
shares which are included in a broker-dealer or investment adviser managed fee
based program (a "wrap account") with broker dealers or investment advisers
who have entered into special agreements with the Principal Underwriter.
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Keystone America Funds. See Exhibit A to this
prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within
six months after a change in the registered representative's employment, where
the amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front end sales charge, or
(2) was at some time subject to, but did not actually pay, a contingent
deferred sales charge with respect to the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates, where the
amount invested represents redemption proceeds from such unrelated registered
open-end investment company, and the shareholder either (1) paid a front end
sales charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds. This
special net asset value purchase is currently being offered on a calendar month
by month basis and may be modified or terminated in the future.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers), as
service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipients outstanding on the books of
the Fund for specified periods.
Since February 20, 1996 through May 31, 1996 ("Offering Period"), the
Principal Underwriter will reallow to brokers or others a commission based on
the price paid for each Class A Fund share sold, at the following rates: full
reallowance plus an additional .50% for each Class A Fund share sold with
respect to purchases in an amount not exceeding $499,999, and full reallowance
for each Class A Fund share sold with respect to purchases in an amount in
excess of $499,999. Such payments will be made to those dealers and others
selling such shares who pay to their registered representatives making such
sales a portion of the additional amount payable under this special dealer
offer, determined in accordance with their regular payment arrangements with
such persons for sales not made under a special dealer offer.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
The Fund, with certain exceptions, imposes a deferred sales charge on Class
B shares in accordance with the following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period ................... 5.00%
Second twelve month period .................. 4.00%
Third twelve month period ................... 3.00%
Fourth twelve month period .................. 3.00%
Fifth twelve month period ................... 2.00%
Sixth twelve month period ................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by
the Principal Underwriter. Amounts received by the Principal Underwriter under
the Class B Distribution Plans are reduced by deferred sales charges retained
by the Principal Underwriter. See "Contingent Deferred Sales Charges and
Waiver of Sales Charges" below.
Class B shares that have been outstanding for eight years from and including
the month of purchase will automatically convert to Class A shares (which are
subject to a lower Distribution Plan charge) without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to KIRC.) The
Class B shares so converted will no longer be subject to the higher expenses
borne by Class B shares. Because the net asset value per share of Class A shares
may be higher or lower than that of the Class B shares at the time of
conversion, although the dollar value will be the same, a shareholder may
receive more or fewer Class A shares than the number of Class B shares
converted. Under current law, it is the Fund's opinion that such a conversion
will not constitute a taxable event under federal income tax law. In the event
that this ceases to be the case, the Board of Trustees will consider what
action, if any, is appropriate and in the best interests of such Class B
shareholders.
CLASS B DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
(the "Class B Distribution Plan") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under
the Class B Distribution Plan are currently made to the Principal Underwriter
(which may reallow all or part to others, such as dealers) (1) as commissions
for Class B shares sold and (2) as shareholder service fees. Amounts paid or
accrued to the Principal Underwriter under (1) and (2) in the aggregate may
not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus
the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class B share sold. Beginning approximately 12 months after the
purchase of a Class B share, the broker or other party will receive service
fees at an annual rate of 0.25% of the average daily net asset value of such
Class B share maintained by the recipient outstanding on the books of the Fund
for specified periods. See "Distribution Plans" below.
Since February 20, 1996 through May 31, 1996 ("Offering Period"), the
Principal Underwriter will reallow to brokers or others a commission equal to
4.75% of the price paid for each Class B Fund share sold as well as payment in
advance of a shareholder service fee at a rate of 0.25% per annum of the net
asset value of shares maintained by such recipients outstanding on the books of
the Fund for specified periods, as described in the Fund's prospectus. Such
payments will be made to those dealers and others selling such shares who pay to
their registered representatives making such sales a portion of the additional
amount payable under this special dealer offer, determined in accordance with
their regular payment arrangements with such persons for sales not made under a
special dealer offer.
CLASS C SHARES
Class C shares are offered only through dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Fund imposes a deferred sales charge of 1.00% on shares
redeemed within one year after the date of purchase. No deferred sales charge
is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by the Principal Underwriter. See
"Contingent Deferred Sales Charges and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares (the
"Class C Distribution Plan") that provides for expenditures by the Fund at an
annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the distribution of Class C shares. Payments under
the Class C Distribution Plan are currently made to the Principal Underwriter
(which may reallow all or part to others, such as dealers) (1) as commissions
for Class C shares sold and (2) as shareholder service fees. Amounts paid or
accrued to the Principal Underwriter under (1) and (2) in the aggregate may
not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share
sold, plus the first year's service fee in advance in the amount of 0.25% of
the price paid for each Class C share sold, and, beginning approximately
fifteen months after purchase, a commission at an annual rate of 0.75%
(subject to NASD rules -- see "Distribution Plans") plus service fees which
are paid at the annual rate of 0.25%, respectively, of the average daily net
asset value of each Class C share maintained by the recipients outstanding on
the books of the Fund for specified periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of
purchase of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of such shares;
(2) certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than 24
months; (4) Class B shares held for more than 72 months after purchase; or (5)
Class C shares held for more than one year from the date of purchase. Upon
request for redemption, shares not subject to the contingent deferred sales
charge will be redeemed first. Thereafter, shares held the longest will be the
first to be redeemed.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under
an automatic withdrawal plan of up to 1 1/2% per month of the shareholder's
initial account balance; (6) withdrawals consisting of loan proceeds to a
retirement plan participant; (7) financial hardship withdrawals made by a
retirement plan participant; or (8) withdrawals consisting of returns of
excess contributions or excess deferral amounts made to a retirement plan
participant.
The Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone
and certain of their affiliates, to registered representatives of firms with
dealer agreements with the Principal Underwriter and to a bank or trust
company acting as a trustee for a single account.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of Fund shares. In addition, dealers may, from time to time, receive
additional cash payments. The Principal Underwriter may also provide written
information to dealers with whom it has dealer agreements that relates to
sales incentive campaigns conducted by such dealers for their representatives
as well as financial assistance in connection with pre-approved seminars,
conferences and advertising. No such programs or additional compensation will
be offered to the extent they are prohibited by the laws of any state or any
self-regulatory agency such as the NASD. Dealers to whom substantially the
entire sales charge on Class A shares is reallowed may be deemed to be
underwriters as that term is defined under the 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to dealers that satisfy certain criteria
established from time to time by the Principal Underwriter. These conditions
relate to increasing sales of shares of the Keystone funds over specified
periods and certain other factors. Such payments may, depending on the
dealer's satisfaction of the required conditions, be periodic and may be up to
0.25% of the value of shares sold by such dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to
banks and other financial services firms that facilitate transactions in
shares of the Fund for their clients.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax
current restrictions on depository institutions, the Board of Trustees will
consider what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and
Class C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that a Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of
its shares, of which 0.75% may be used to pay such distribution costs and
0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the 12b-1 Distribution Plan, plus
interest at the prime rate plus 1% on such amounts (less any deferred sales
charges paid by shareholders to the Principal Underwriter), remaining unpaid
from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with the Class B
Distribution Plan that exceed current annual payments permitted to be
received by the Principal Underwriter from the Fund. The Principal Underwriter
intends to seek full payment of such charges from the Fund (together with
annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits.
If the Fund's Independent Trustees authorize such payments, the effect would
be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Distribution Plan. If a Distribution Plan is
terminated, the Principal Underwriter will ask the Independent Trustees to
take whatever action they deem appropriate under the circumstances with
respect to payment of such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the period beginning with the Fund's initial public offering through
approximately May 31, 1997. The Fund has agreed not to reduce the rate of
payment of 12b-1 fees in respect of such Class B shares, unless it terminates
such shares' Distribution Plan completely. If it terminates such Distribution
Plan, the Fund may be subject to possible adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class.
The Fund makes no payments in connection with the sale of its shares other
than the fee paid to the Fund's Principal Underwriter.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net asset value upon written
order to the Fund c/o KIRC, and presentation to the Fund of a properly
endorsed share certificate (if certificates have been issued). Your signature
(s) on the written order and certificates must be guaranteed as described
below. In order to redeem by telephone or to engage in telephone transactions
generally, you must complete the authorization in your account application.
Proceeds for shares redeemed on telephonic order will be deposited by wire or
EFT only to the bank account designated in your account application.
The redemption value equals the net asset value per share then determined
and may be more or less than your cost depending upon changes in the value of
the Fund's portfolio securities between purchase and redemption.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case, the Fund will mail the
redemption proceeds upon clearance of the purchase check, which may take 15
days or more. Any delay may be avoided by purchasing shares either with a
certified check or by Federal Reserve or bank wire of funds or by EFT.
Although the mailing of a redemption check or the wiring or EFT of redemption
proceeds may be delayed, the redemption value will be determined and the
redemption processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after the redemption and prior to the release
of the proceeds, no appreciation or depreciation will occur in the value of
the redeemed shares, and no interest will be paid on the redemption proceeds.
If the payment of a redemption has been delayed, the check will be mailed or
the proceeds wired or sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable contingent deferred sales
charge (as described above), will be made within seven days thereafter except
as discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from dealers and will calculate the net asset value on the
same terms as those orders for the purchase of shares received from broker-
dealers and described under "How to Buy Shares." If the Principal Underwriter
has received proper documentation, it will pay the redemption proceeds, less
any applicable deferred sales charge, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for
this service. Your broker-dealer, however, may charge a service fee.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may
waive this requirement, but also may require additional documents in certain
cases. Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you
and process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. You must complete the
Telephone Redemptions section of the application to enjoy telephone redemption
privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation
of your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if
the address and bank account of record have been the same for a minimum period
of 30 days.
If the redemption proceeds are less than $2,500, they will be mailed by
check. If they are $2,500 or more, they will be mailed, wired or sent by EFT
to your previously designated bank account as you direct. If you do not
specify how you wish your redemption proceeds to be sent, they will be mailed
by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No
deferred sales charges are applied to such redemptions.
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,
however, under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder up to the lesser of $250,000 or 1% of the
Fund's net assets in any 90-day period. 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 upon the securities' sale.
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, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares 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.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or
by calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll
free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a
week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange
shares of the Fund for shares of certain other Keystone America Funds and
Keystone Liquid Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone
America Funds and Class A shares of KLT;
Class B shares, except as noted below, may be exchanged for the same type
of Class B shares of other Keystone America Funds and the same type of Class
B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.
Class B shares cannot be exchanged for Class B shares of Keystone Capital
Preservation and Income Fund during the 24 month period commencing with and
including the month of original purchase.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(i) Class A shares acquired in an NAV Purchase or otherwise without a front
end sales charge,
(ii) Class B shares that have been held for less than 72 months or four
years, as the case may
be, or
(iii) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over
to the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone fund for a $10 fee by calling
or writing to Keystone. The exchange fee is waived for individual investors
who make an exchange using KARL. Shares purchased by check are eligible for
exchange after 15 days. If the shares being tendered for exchange are still
subject to a deferred sales charge, such charge will carry over to the shares
being acquired in the exchange transaction. The Fund reserves the right, after
providing the required notice to shareholders, to terminate this exchange
offer or to change its terms, including the right to change the fee for any
exchange.
Orders to exchange a certain class of shares of the Fund for the
corresponding class of shares of KLT will be executed by redeeming the shares
of the Fund and purchasing the corresponding class of shares of KLT at the net
asset value of such shares next determined after the proceeds from such
redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund
prior to 4:00 p.m. eastern time on any day the Fund is open for business will
be executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after 4:00 p.m. eastern time
on any business day will be executed at the respective net asset values
determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes
more than five exchanges of shares of the funds in a year or three in a
calendar quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements
of the fund being acquired. An exchange constitutes a sale for federal income
tax purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the
transfer to take place. For money recently invested, you must allow normal
check clearing time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank
account will be debited to purchase shares in the Fund. You will receive
confirmation from the Principal Underwriter for every transaction.
To change the amount of a Keystone America Money Line or to terminate the
service (which could take up to 30 days), you must write to KIRC and include
account numbers.
RETIREMENT PLANS
The Fund has various retirement plans available to investors, including
Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified Employee
Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"), 403(b) Plans;
401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money Purchase
Plans. For details, including fees and application forms, call toll free 1-
800-247-4075 or write to KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Moreover, because of the effect
of the applicable sales charge, a Class A investor should not make continuous
purchases of the Fund's shares while participating in the Automatic Withdrawal
Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more
shares being purchased when the selected fund's net asset value is relatively
low and fewer shares being purchased when the fund's net asset value is
relatively high and may result in a lower average cost per share than a less
systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in a Keystone America Fund or a money market fund managed or advised
by Keystone. You should designate on the application (1) the dollar amount of
each monthly or quarterly investment (minimum $100) you wish to make and (2)
the fund in which the investment is to be made. Thereafter, on the first day
of the designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and
invested in shares of the designated fund. If you are a Class A investor and
paid a sales charge on your initial purchase, the shares purchased will be
eligible for Rights of Accumulation and the sales charge applicable to the
purchase will be determined accordingly. In addition, the value of shares
purchased will be included in the total amount required to fulfill a Letter of
Intent. If a sales charge was not paid on the initial purchase, a sales charge
will be imposed at the time of subsequent purchases, and the value of shares
purchased will become eligible for Rights of Accumulation and Letters of
Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class
Keystone America Fund shares you may own automatically invested to purchase
the same class of shares of any other Keystone America Fund. You may select
this service on your application and indicate the Keystone America Fund(s)
into which distributions are to be invested. The value of shares purchased
will be ineligible for Rights of Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at
current net asset value.
PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield".
ALL DATA IS BASED ON HISTORICAL EARNINGS AND IS NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. Total return and current yield are computed separately
for each class of shares of the Fund. Total return refers to average annual
compounded rates of return over specified periods determined by comparing the
initial amount invested in a particular class to the ending redeemable value
of that amount. The resulting equation assumes reinvestment of all dividends
and distributions and deduction of the maximum sales charge or applicable
contingent deferred sales charge and all recurring charges, if any, applicable
to all shareholder accounts. The exchange fee is not included in the
calculation.
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.
The Fund may also include comparative performance data for each class of
shares in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc., Standard & Poor's Corporation,
Ibbotson Associates or other industry publications.
FUND SHARES
The Fund currently issues one series of shares, which offers three classes of
shares that participate proportionately based on their relative net asset values
in dividends and distributions and have equal voting, liquidation and other
rights except that (1) expenses related to the distribution of each series or
class of shares or other expenses that the Board of Trustees may designate as
class expenses from time to time, are borne solely by each series or class; (2)
each series or class of shares has exclusive voting rights with respect to its
Distribution Plan; (3) each series or class has different exchange privileges;
and (4) each series or class generally has a different designation. 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 Fund 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 Fund
does not have annual meetings. The Fund will have special meetings, from time
to time, as required under its Declaration of Trust and under the 1940 Act. As
provided in the Fund'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. The Fund is prepared to assist shareholders in communications with one
another for the purpose of convening such a meeting as prescribed by Section
16(c) of the 1940 Act.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the
same address, upon notice to those shareholders, the Fund intends, when an
annual report or a 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.
<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.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of
interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally
referred to as sovereign risk). In addition, evidences of ownership of such
securities may be held outside the U.S., and the Fund may be subject to the
risks associated with the holding of such property overseas. Examples of
governmental actions would be the imposition of currency controls, interest
limitations, withholding taxes, seizure of assets or the declaration of a
moratorium. Various provisions of federal law governing domestic branches do
not apply to foreign branches of domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as
by governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to
direct arrangements between the Fund, as lender, and the issuer, as borrower.
Master demand notes may permit daily fluctuations in the interest rate and
daily changes in the amounts borrowed. The Fund has the right to increase the
amount under the note at any time up to the full amount provided by the note
agreement or to decrease the amount. The borrower may repay up to the full
amount of the note without penalty. Notes purchased by the Fund permit the
Fund to demand payment of principal and accrued interest at any time (on not
more than seven days notice) and to resell the note at any time to a third
party. Notes acquired by the Fund may have maturities of more than one year,
provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals, which normally
will not exceed 31 days, but may extend up to one year. The notes are deemed
to have a maturity equal to the longer of the period remaining to the next
interest rate adjustment or the demand notice period. Because these types of
notes are direct lending arrangements between the lender and borrower, such
instruments are not normally traded and there is no secondary market for these
notes, although they are redeemable and thus repayable by the borrower at face
value plus accrued interest at any time. Accordingly, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and
interest on demand. In connection with master demand note arrangements,
Keystone considers, under standards established by the Board of Trustees,
earning power, cash flow and other liquidity ratios of the borrower and will
monitor the ability of the borrower to pay principal and interest on demand.
These notes are not typically rated by credit rating agencies. Unless rated,
the Fund will invest in them only if, at the time of investment, the issuer
meets the criteria established for commercial paper.
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 creditworthy. Such persons must be registered as U.S.
government securities dealers with an appropriate regulatory organization.
Under such agreements, the bank, primary dealer or other financial institution
agrees upon entering into the contract to repurchase the security at a
mutually agreed upon date and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. Under a repurchase agreement, the
seller must maintain the value of the securities subject to the agreement at
not less than the repurchase price, such value being determined on a daily
basis by marking the underlying securities to their market value. Although the
securities subject to the repurchase agreement might bear maturities exceeding
a year, the Fund intends only to enter into repurchase agreements that provide
for settlement within a year and usually within seven days. Securities subject
to repurchase agreements will be held by the Fund's custodian or in the
Federal Reserve book entry system. The Fund does not bear the risk of a
decline in the value of the underlying security unless the seller defaults
under its repurchase obligation. In the event of a bankruptcy or other default
of a seller of a repurchase agreement, the Fund could experience both delays
in liquidating the underlying securities and losses, including (1) possible
declines in the value of the underlying securities during the period while the
Fund seeks to enforce its rights thereto; (2) possible subnormal levels of
income and lack of access to income during this period; and (3) expenses of
enforcing its rights. The Board of Trustees has established procedures to
evaluate the creditworthiness of each party with whom the Fund enters into
repurchase agreements by setting guidelines and standards of review for
Keystone and monitoring Keystone's actions with regard to repurchase
agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets such as
U.S. government securities or other high grade debt securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that the Fund is obligated to repurchase may decline below the repurchase price.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. The staff of the Securities and Exchange
Commission has taken the position that a fully secured or collateralized reverse
repurchase agreement is not subject to the percentage limitation on borrowing
imposed under Section 18 of the 1940 Act.
FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities issued by issuers
located in certain foreign countries with developed markets as well as those
with emerging markets and the formerly communist countries of Eastern Europe and
the People's Republic of China. For this purpose, countries with emerging
markets are generally those where the per capital income is in the low to middle
ranges as determined by the International Bank for Reconstruction and
Development. At this time, the Fund does not intend to invest more than 5% of
its assets in foreign securities. While investment in foreign securities is
intended to reduce risk by providing further diversification, such investments
involve sovereign risk in addition to the credit and market risks normally
associated with domestic securities.
Investing in securities of foreign issuers generally involves more risk than
investing in securities of domestic issuers for the following reasons: (1) there
may be less public information available about foreign companies than is
available about U.S. companies; (2) foreign companies are not generally subject
to the uniform accounting, auditing and financial reporting standards and
practices applicable to U.S. companies; (3) foreign stock markets have less
volume than the U.S. market, and the securities of some foreign companies are
much less liquid and much more volatile than the securities of comparable U.S.
companies; (4) foreign securities transactions may involve higher brokerage
commissions and generally higher custodian fees; (5) there may be less
government regulation of stock markets, brokers, listed companies and banks in
foreign countries than in the U.S.; (6) the Fund may incur fees on currency
exchanges when it changes investments from one country to another; (7) the
Fund's foreign investments could be affected by expropriation, confiscatory
taxation, nationalization, establishment of currency exchange controls,
political or social instability or diplomatic developments (which would prevent
cash from being brought back to the United States); (8) fluctuations in foreign
exchange rates will affect the value of the Fund's investments, the value of
dividends and interest earned, gains and losses realized on the sale of
securities, net investment income and unrealized appreciation or depreciation of
investments; and (9) interest and dividends on foreign securities may be subject
to withholding taxes in a foreign country that could result in a reduction of
net investment income available for distribution.
Investing in securities of issuers in emerging market countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging market countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and
private property. The typically small size of the markets for securities
issued by companies in emerging markets countries and the possibility of a low
or nonexistent volume of trading in those securities may also result in a lack
of liquidity and in price volatility of those securities. Furthermore,
investing in securities of companies in the formerly communist countries of
Eastern Europe and the People's Republic of China involves additional risks to
those associated with investments in companies in non-formerly communist
emerging markets countries. Specifically, those countries could convert back
to a single economic system, and the claims of property owners prior to the
expropriation by the communist regime could be settled in favor of the former
property owners, in which case the Fund could lose its entire investment in
those countries. These risks are carefully considered by Keystone prior to the
purchase of these securities.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when
issued and delayed delivery basis. When issued or delayed delivery
transactions arise when securities or currencies are purchased or sold by the
Fund with payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the Fund at the
time of entering into the transaction. When the Fund engages in when issued
and delayed delivery transactions, the Fund relies on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the
Fund missing the opportunity to obtain a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. No payment or delivery is made
by the Fund however, until it receives payment or delivery from the other
party to the transaction. A separate account of liquid assets equal to the
value of such purchase commitments will be maintained until payment is made.
When issued and delayed delivery agreements are subject to risks from changes
in value based upon changes in the level of interest rates, currency rates and
other market factors, both before and after delivery. The Fund does not accrue
any income on such securities or currencies prior to their delivery. To the
extent the Fund engages in when issued and delayed delivery transactions, it
will do so consistent with its investment objective and policies and not for
the purpose of investment leverage. The Fund currently does not intend to
invest more than 5% of its assets in when issued or delayed delivery
transactions.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least 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 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on
the securities loaned and simultaneously earns interest on the investment of
the cash loan collateral in U.S. Treasury notes, certificates of deposit,
other high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower,
such loans may be called at any time and will be called so that the securities
may be voted by the Fund if, in the opinion of the Fund, a material event
affecting the investment is to occur. There may be risks of delay in receiving
additional collateral or in recovering the securities loaned or even loss of
rights in the collateral should the borrower of the securities fail
financially. Loans may only be made to borrowers deemed to be of good
standing, under standards approved by the Board of Trustees, when the income
to be earned from the loan justifies the attendant risks.
DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived
from, the value of an underlying asset, reference rate or index. These assets,
rates, and indices may include bonds, stocks, mortgages, commodities, interest
rates, currency exchange rates, bond indices and stock indices. Derivatives
can be used to earn income or protect against risk, or both. For example, one
party with unwanted risk may agree to pass that risk to another party who is
willing to accept the risk, the second party being motivated, for example, by
the desire either to earn income in the form of a fee or premium from the
first party, or to reduce its own unwanted risk by attempting to pass all or
part of that risk to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure
to otherwise inaccessible markets. The Fund is permitted to use derivatives
for one or more of these purposes, although the Fund generally uses
derivatives primarily as direct investments in order to enhance yields and
broaden portfolio diversification. Each of these uses entails greater risk
than if derivatives were used solely for hedging purposes. The Fund uses
futures contracts and related options for hedging purposes. Derivatives are a
valuable tool which, when used properly, can provide significant benefit to
Fund shareholders. Keystone is not an aggressive user of derivatives with
respect to the Fund. However, the Fund may take positions in those derivatives
that are within its investment policies if, in Keystone's judgement, this
represents an effective response to current or anticipated market conditions.
Keystone's use of derivatives is subject to continuous risk assessment and
control from the standpoint of the Fund's investment 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 options and futures,
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
swaps.
While the judicious use of derivatives by experienced investment managers
such as Keystone can be beneficial, derivatives also involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those associated
with stocks and bonds. The use of a derivative requires an understanding not
only of the underlying instrument, but also of the derivative itself, without
the benefit of observing the performance of the derivative under all possible
market conditions. In particular, the use and complexity of derivatives require
the maintenance of adequate controls to monitor the transactions entered into,
the ability to assess the risk that a derivative adds to the Fund's portfolio
and the ability to forecast price, interest rate or currency exchange rate
movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as a
"counterparty") to comply with the terms of the derivative contract. The credit
risk for exchange traded derivatives is generally less than for privately
negotiated derivatives, since the clearing house, which is the issuer or
counterparty to each exchange-traded derivative, provides a guarantee of
performance. This guarantee is supported by a daily payment system (i.e., margin
requirements) operated by the clearing house in order to reduce overall credit
risk. For privately negotiated derivatives, there is no similar clearing agency
guarantee. Therefore, the Fund considers the creditworthiness of each
counterparty to a privately negotiated derivative in evaluating potential credit
risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly large
or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
* 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.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and
put options. By writing a call option, the Fund becomes obligated during the
term of the option to deliver the securities underlying the option upon
payment of the exercise price. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price if the option is exercised. The Fund also may
write straddles (combinations of covered puts and calls on the same underlying
security).
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills.
If the Fund has written options against all of its securities that are
available for writing options, the Fund may be unable to write additional
options unless it sells a portion of its portfolio holdings to obtain new
securities against which it can write options. If this were to occur, higher
portfolio turnover and correspondingly greater brokerage commissions and other
transaction costs may result. The Fund does not expect, however, that this
will occur.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits
and maintains with its custodian in a segregated account liquid assets having
a value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call
or put option, which it retains whether or not the option is exercised. By
writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and, by writing a put option,
the Fund might become obligated to purchase the underlying security for more
than its current market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously
written put or call options of the same series.
If the Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund generally will write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option
at any particular time, and, for some options, no secondary market may exist.
In such event, it might not be possible to effect a closing transaction in a
particular option.
Options on some securities are relatively new, and it is impossible to
predict the amount of trading interest that will exist in such options. There
can be no assurance that viable markets will develop or continue. The failure
of such markets to develop or continue could significantly impair the Fund's
ability to use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options in which the Fund will trade are generally
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any exchange, but traded in the over-the-
counter market. Options traded in the over-the-counter market involve the
additional risk that securities dealers participating in such transactions
could fail to meet their obligations to the Fund. The use of options traded in
the over-the-counter market may be subject to limitations imposed by certain
state securities authorities. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the Securities and Exchange Commission is of the view that the
premiums that the Fund pays for the purchase of unlisted options and the value
of securities used to cover unlisted options written by the Fund are
considered to be invested in illiquid securities or assets for the purpose of
calculating whether the Fund is in compliance with its policies on illiquid
securities.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into securities,
currency or index based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies 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 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 or currencies declines and to fall when the
value of such securities or currencies increases. Thus, the Fund sells futures
contracts in order to offset a possible decline in the value of its securities
or currencies. 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 or
currencies increases and to fall when the value of such securities or
currencies 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 or favorable exchange rate for currencies 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
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, interest rate or exchange rate risk, unanticipated
changes in interest rates, exchange rates or market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone correctly predicts interest or exchange rate 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 or currencies positions
may be caused by differences between the futures and securities or currencies
markets or by differences between the securities or currencies underlying the
Fund's futures position and the securities or currencies 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.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Fund may invest in securities of foreign issuers.
When the Fund invests in foreign securities, they usually will be denominated
in foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell.
The Fund intends to use these contracts to hedge the U.S. dollar value of a
security it already owns, particularly if the Fund expects a decrease in the
value of the currency in which the foreign security is denominated. Although
the Fund will attempt to benefit from using forward contracts, the success of
its hedging strategy will depend on Keystone's ability to accurately predict
the future exchange rates between foreign currencies and the U.S. dollar. The
value of the Fund's investments denominated in foreign currencies will depend
on the relative strength of those currencies and the U.S. dollar, and the Fund
may be affected favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and the U.S. dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund. Although the Fund does not currently intend to do
so, the Fund may also purchase and sell options related to foreign currencies.
The Fund does not intend to enter into foreign currency transactions for
speculation or leverage.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Keystone America Funds. Only Class A shares
subject to an initial or deferred sales charge are eligible for inclusion in
reduced sales charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her
spouse and children under the age of 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501 (c)(3) or
(13) of the Internal Revenue Code; a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal
Revenue Code; or other organized groups of persons, whether incorporated or
not, provided the organization has been in existence for at least six months
and has some purpose other than the purchase of redeemable securities of a
registered investment company at a discount. In order to qualify for a lower
sales charge, all orders from an organized group will have to be placed
through a single investment dealer or other firm and identified as originating
from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may
combine concurrent direct purchases of Class A shares of two or more of the
"Eligible Funds," as defined below. For example, if a Purchaser concurrently
invested $75,000 in one of the other "Eligible Funds" and $75,000 in the Fund,
the sales charge would be that applicable to a $150,000 purchase, i.e., 3.75%
of the offering price, as indicated in the Sales Charge Schedule in the
prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the
Fund's Class A shares, a Purchaser is entitled to accumulate current purchases
with the current value of previously purchased Class A shares of the Fund and
Class A shares of certain other eligible funds that are still held in (or
exchanged for shares of and are still held in) the same or another eligible
fund ("Eligible Fund(s)"). The Eligible Funds are the Keystone America Funds
and Keystone Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the
next lower sales charge of 3.75% of the offering price as indicated in the
Sales Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be
granted subject to confirmation of the Purchaser's holdings. The Right of
Accumulation may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount
specified on the application, as described in this prospectus. The Letter of
Intent does not obligate the Purchaser to purchase, nor the Fund to sell, the
amount indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated
on the application. The Letter of Intent may be back-dated up to ninety days
so that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not
apply toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to
the difference between the sales charge paid and the sales charge applicable
to purchases actually made. Out of the initial purchase (or subsequent
purchases, if necessary) 5% of the dollar amount specified on the application
will be held in escrow by KIRC in the form of shares registered in the
Purchaser's name. The escrowed shares will not be available for redemption,
transfer or encumbrance by the Purchaser until the Letter of Intent is
completed or the higher sales charge paid. All income and capital gains
distributions on escrowed shares will be paid to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser
will be notified and the escrowed shares will be released. If the intended
investment is not completed, the Purchaser will be asked to remit to the
Principal Underwriter any difference between the sales charge on the amount
specified and on the amount actually attained. If the Purchaser does not
within 20 days after written request by the Principal Underwriter or his
dealer pay such difference in sales charge, KIRC will redeem an appropriate
number of the escrowed shares in order to realize such difference. Shares
remaining after any such redemption will be released by KIRC. Any redemptions
made by the Purchaser during the thirteen-month period will be subtracted from
the amount of the purchases for purposes of determining whether the Letter of
Intent has been completed. In the event of a total redemption of the account
prior to completion of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption and the balance will be
forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and
appoints KIRC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC
that a Letter of Intent is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
Small Company Growth Fund II
[logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[recycle logo]
KEYSTONE
SMALL COMPANY GROWTH
FUND II
[logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE SMALL COMPANY GROWTH FUND II
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 20, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Small Company Growth Fund II (the "Fund") dated February 20, 1996. A copy of the
prospectus may be obtained from Keystone Investment Distributors Company
(formerly named Keystone Distributors, Inc.) (the "Principal Underwriter"), the
Fund's principal underwriter, 200 Berkeley Street, Boston, Massachusetts
02116-5034.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Objective and Policies 2
Investment Restrictions 2
Distributions and Taxes 6
Valuation of Securities 7
Brokerage 8
Sales Charges 9
Distribution Plans 13
Trustees and Officers 16
Investment Adviser 20
Principal Underwriter 22
Declaration of Trust 23
Standardized Total Return and Yield Quotations 25
Additional Information 25
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-13
#10160695
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company. The
Fund's investment objective is to provide shareholders with long-term growth of
capital. It is the Fund's policy to invest its assets as fully as practicable.
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INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide shareholders with
long-term growth of capital. It is expected that under ordinary circumstances at
least 65% of its total assets will be invested in equity securities of companies
with small market capitalization. For this purpose, companies with small market
capitalizations are generally those with market capitalization of less than $1
billion at the time of the Fund's investment. Companies whose capitalization
falls outside this range after the purchase continue to be considered small cap
for this purpose.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The investment objective of the Fund is fundamental and may not be
changed without approval of a majority (as defined in the Investment Company Act
of 1940 ("1940 Act")) of the Fund's outstanding voting shares (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).
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the vote of a majority of the Fund's
outstanding voting shares. Unless otherwise stated, all references to Fund
assets are in terms of current market value.
The Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; 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 except from banks for temporary or emergency purposes,
provided that, immediately after any such borrowing there is asset coverage of
at least 300% for all such borrowings, and the Fund may enter into 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 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.
OTHER FUNDAMENTAL POLICIES
Notwithstanding any other investment policy or restriction, the Fund
may invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment objective,
policies and restrictions as the Fund.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the non-fundamental policies set forth below,
which may be changed without shareholder approval.
The Fund may not do the following:
(1) borrow money except for temporary or emergency purposes (not for
leveraging or investment), and it will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding;
(2) (a) sell securities short (except by selling futures contracts or
writing covered options), unless it owns, or by virtue of ownership of other
securities has the right to obtain without additional consideration securities
identical in kind and amount to the securities sold short; or (b) purchase
securities on margin, except for such short-term credits as are necessary for
the clearance of transactions, and provided that the Fund may make initial and
variation so-called "margin" payments in connection with purchases or sales of
futures contracts or of options on futures contracts or forwards or other
similar instruments;
(3) pledge, mortgage, or hypothecate its assets, except that the Fund
may pledge not more than one-third of its total assets (taken at current value)
to secure borrowings made in accordance with its investment restrictions on
borrowings, and provided that the Fund may make initial and variation margin
payments in connection with purchases or sales of futures contracts or of
options on futures contracts or forwards or other similar instruments;
(4) purchase the securities of any other investment company, except by
purchase in the open market subject only to customary broker's commissions and
provided that any such purchase will not result in duplication of sales charges
or management fees, and except in connection with any merger, consolidation, or
reorganization;
(5) invest in oil, gas, or other mineral leases or development programs
(except the Fund may invest in companies that own or invest in such interests);
or
(6) invest in real estate limited partnerships.
(7) (a) write covered options, unless the securities underlying such
options are listed on a national securities exchange and the options are issued
by the Options Clearing Corporation; provided, however, that the securities
underlying such options may be traded on an automated quotations system
("NASDAQ") of the National Association of Securities Dealers, Inc. ("NASD") if
and to the extent permitted by applicable state regulations; or (b) purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Fund's net assets; included within that amount, but not to exceed 2% of the
value of the Fund's net assets, may be warrants that are not listed on the New
York or American Stock Exchanges; warrants acquired by the Fund at any time in
units or attached to securities are not subject to this restriction.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has undertaken to certain state
securities authorities that the Fund will not:
(1) purchase securities of issuers which the Company is restricted
from selling to the public without registration under the Securities Act of 1933
if by any reason thereof the value of its aggregate investment in such classes
of securities will exceed 10% of its total assets;
(2) purchase securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three years if by
reason thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets;
(3) invest in puts, calls, straddles, spreads, and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets;
(4) purchase or hold the securities of any issuer if the officers,
directors or trustees of the Fund, its advisor's or managers owning beneficially
more than 1/2 of 1% of the securities of an issuer together own beneficially
more than 5% of the securities of that issuer; and
(5) convert to the Master Fund/Feeder Fund structure without the prior
approval of shareholders.
These undertakings will remain in effect as long as the relevant
State(s) require(s) and shares of the Fund are registered in that State(s).
OTHER NON-FUNDAMENTAL POLICIES
It is the position of the staff of the Securities and Exchange
Commission (sometimes referred to herein as the "SEC" or the "Commission") that
investment (including holdings of debt securities) of more than 25% of the value
of the Fund's assets in any one industry or group of industries represents
concentration, it being understood that securities issued by the U.S. government
or state governments or political subdivisions thereof are excluded from the
calculation because these issuers are not considered by the staff of the
Commission to be members of any industry.
In order to permit the sale of Fund shares in certain states or foreign
countries, the Fund may make commitments more restrictive than the investment
restrictions described above. Should the Fund determine that any such commitment
is no longer in the best interests of the Fund, it may revoke the commitment by
terminating sales of its shares in the state or country involved.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund distributes to its shareholders dividends from net investment
income and net realized long-term and short-term capital gains annually in
shares or, at the option of the shareholder, in cash. (Distributions of ordinary
income maybe eligible in whole or in part for the corporate 70% dividends
received deduction.) Shareholders who have not opted, prior to the record date
for any distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the day on the record date after adjustment for the distribution. Net
asset value is used in computing the number of shares in both gains and income
distribution reinvestments. Account statements and/or checks as appropriate will
be mailed to shareholders by the 15th of the appropriate month. Unless the Fund
receives instructions to the contrary from a shareholder before the record date,
it will assume that the shareholder wishes to receive that distribution and
future gains and income distributions in shares. Instructions continue in effect
until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of the period of time Fund shares have been held by the
shareholder. However, if such shares are held less than six months and redeemed
at a loss, the shareholder will recognize a long-term capital loss on such
shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
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VALUATION OF SECURITIES
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Current values for the Fund's securities are generally determined as
follows:
(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;
(2) securities traded in the over-the-counter market, other than on
NMS, for which market quotations are readily available, are valued at the mean
of the bid and asked prices at the time of valuation;
(3) instruments having maturities of more than sixty day for which
market quotations are readily available, are valued at current market value;
where market quotations are not available, such instruments are valued at fair
value as determined by the Board of Trustees;
(4) instruments purchased with maturities of sixty days or less
(including all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market; instruments
maturing in more than sixty days when purchased that are held on the sixtieth
day prior to maturity are valued at amortized cost (market value on the sixtieth
day adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market; and which, in either case,
reflects fair value as determined by the Board of Trustees; and
(5) the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which complete quotations are
not readily available; (b) listed securities or those on NMS if, in the Fund's
opinion, the last sales price does not reflect a current market value or if no
sale occurred; and (c) other assets.
Foreign securities for which market quotations are not readily
available are valued on the basis of valuations provided by a pricing service,
approved by the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
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BROKERAGE
- --------------------------------------------------------------------------------
It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by management in determining the
overall reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund or Keystone is considered to be in
addition to and not in lieu of services required to be performed by Keystone
under its Investment Advisory and Management Agreement with the Fund. The cost,
value and specific application of such information are indeterminable and cannot
practicably allocated among the Fund and other clients of Keystone who may
indirectly benefit from the availability of such information. Similarly, the
Fund may indirectly benefit from information made available as a result of
transactions effected for such other clients. Under the Investment Advisory and
Management Agreement, Keystone is permitted to pay higher brokerage commissions
for brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone does follow such a
practice, they will do so on a basis which is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark up or reflect a dealer's mark down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities for the Fund in order
to take advantage of the lower purchase price available to members of such a
group.
Neither Keystone nor the Fund intend to place securities transactions
with any particular broker-dealer or group thereof. The Fund's Board of
Trustees, however, has determined that the Fund may follow a policy of
considering sales of shares as a factor in the selection of broker-dealers to
execute portfolio transactions, subject to the requirements of best execution,
including best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
from those of the other funds and investment accounts managed by Keystone. It
may frequently develop that the same investment decision is made for more than
one fund. Simultaneous transactions are inevitable when the same security is
suitable for the investment objective of more than one account. When two or more
funds or accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
In no instance are portfolio securities purchased from or sold to
Keystone, the Principal Underwriter or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.
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SALES CHARGES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares. Class A shares are offered
with a maximum sales charge of 5.75% payable at the time of purchase ("Front End
Load Option"). Class B shares are subject to a contingent deferred sales charge
payable upon redemption during the 72 month period following the month of
purchase. ("Back End Load Option"). Class B shares that have been outstanding
eight years from and including the month of purchase will automatically convert
to Class A shares without imposition of a front end sales charge or exchange
fee. (Conversion of Class B shares represented by stock certificates will
require the return of the stock certificates to Keystone Investor Resource
Center, Inc, the Fund's transfer and dividend disbursing agent ("KIRC").) Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Funds as well as a table of
applicable sales charges for Class A shares; a discussion of reduced sales
charges that may apply to subsequent purchases; and a description of applicable
contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plan"), a contingent deferred sales charge
may be imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares (1) in an amount
equal to or exceeding $1,000,000, and/or (2) purchased by a corporate qualified
retirement plan or a non-qualified deferred compensation plan sponsored by a
corporation having 100 or more eligible employees (a "Qualifying Plan"), in
either case without a front-end sales charge, will be subject to a contingent
deferred sales charge of 1.00% during the 24 month period following the date of
purchase. The contingent deferred sales charge will be retained by the Principal
Underwriter. See "Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
The Fund, with certain exceptions, will impose a deferred sales charge
as a percentage of net asset value or net cost of Class B shares redeemed during
succeeding twelve-month periods following the month of purchase as follows: 5%
during the first period; 4% during the second period; 3% during the third
period; 3% during the fourth period; 2% during the fifth period, and 1% during
the sixth period. No deferred sales charge is imposed on amounts redeemed
thereafter.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plan are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales charges and
Waiver of Sales Charges" below.
CLASS C SHARES
With certain exceptions, the Fund will impose a deferred sales charge
of 1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of such shares;
(2) certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held more than 72 months after the month of purchase; or (5) Class C shares held
for more than one year from the date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase of the shares of the fund exchanged into is
assumed to be the year shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Fund also may be sold, to the extent permitted by
applicable law, regulations, interpretations or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, Keystone Investments, Inc. (formerly named Keystone Group, Inc.)
("Keystone Investments"), Keystone Management, certain of their subsidiaries and
affiliates or the Principal Underwriter and who have been such for not less than
ninety days; (2) a pension and profit-sharing plan established by such
companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees and sales representatives; or
(3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge is charged on purchases of shares of the Fund
by a bank or trust company in a single account in the name of such bank or trust
company as trustee, if the initial investment in shares of the Fund or any Fund
in the Keystone Investments Family of Funds, purchased pursuant to this waiver
is at least $500,000 and any commission paid at the time of such purchase is not
more than 1% of the amount invested.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no contingent
deferred sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
REDEMPTION OF SHARES
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder up to the lesser of
$250,000 or 1% of the Fund's assets in any 90 day period.
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1.
DISTRIBUTION PLANS IN GENERAL
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1% of the aggregate average daily net asset value
of its shares, of which 0.75% may be used to pay such distribution costs and
0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the 12b-1 Plan, plus interest at the
prime rate plus 1% on such amounts (less any contingent deferred sales charges
paid by shareholders to the Principal Underwriter).
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
may expend daily amounts at an annual rate, which is currently limited to 0.25%
of the Fund's average daily net asset value attributable to Class A shares, to
finance any activity which is primarily intended to result in the sale of Class
A shares, including, without limitation, expenditures consisting of payments to
the principal underwriter of the Fund (currently the Principal Underwriter) to
enable the Principal Underwriter to pay or to have paid to others (dealers) who
sell Class A shares a service or other fee, at such intervals as the Principal
Underwriter may determine, in respect of Class A shares maintained by any such
recipients and outstanding on the books of the Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.25% of the average net asset value of Class A shares maintained by such
others outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
may expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class B shares to finance any activity
which is primarily intended to result in the sale of Class B shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter of the Fund (currently the Principal Underwriter) (1) to enable the
Principal Underwriter to pay to others (dealers) commissions in respect of Class
B shares sold since inception of the Distribution Plan; and (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipients and outstanding on the books of the
Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
The Principal Underwriter intends, but its not obligated, to continue
to pay or accrue distribution charges incurred in connection with its Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Fund would be within the permitted limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by the Class B Distribution Plan. If the Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during a two-year period ending approximately May 31, 1997. The Fund has
agreed not to reduce the rate of payment of 12b-1 fees in respect of such Class
B shares unless it terminates such shares' Distribution Plan completely. If it
terminates such Distribution Plan, the Fund may be subject to possible adverse
distribution consequences.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the principal underwriter of the Fund
(currently the Principal Underwriter) (1) to enable the Principal Underwriter to
pay to others (dealers) commissions in respect of Class C shares sold since
inception of the Distribution Plan; and (2) to enable the Principal Underwriter
to pay or to have paid to others a service fee, at such intervals as the
Principal Underwriter may determine, in respect of Class C shares maintained by
any such recipients and outstanding on the books of the Fund for specified
periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
and outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
Each of the Distribution Plans may be terminated at any time by a vote
of the Rule 12b-1 Trustees, or may be terminated with respect to the Fund by
vote of a majority of the outstanding voting shares of the respective class of
the Fund.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by the
Trustees, including the Rule 12b-1 Trustees.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan, and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by the Distribution Plan as
stated above.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
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TRUSTEES AND OFFICERS
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The Trustees and Officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President and Chief Executive Officer of
Keystone Investments, Keystone, Keystone Management and Keystone Software,
Inc. ("Keystone Software"); President, Chief Executive Officer and Trustee
or Director of all other funds in the Keystone Investments Family of Funds;
Chairman of the Board and Director of Keystone Institutional Company, Inc.
("Keystone Institutional") (formerly named Keystone Investment Management
Corporation) and Keystone Fixed Income Advisors ("KFIA"); Director and
President of Keystone Asset Corporation, Keystone Capital Corporation and
Keystone Trust Company; Director of the Principal Underwriter, KIRC and
Fiduciary Investment Company, Inc. ("FICO"); Director of Boston Children's
Services Association; Trustee of Anatolia College, Middlesex School, and
Middlebury College; Member, Board of Governors, New England Medical Center;
former Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"); former Director and Vice President, Robert Van
Partners, Inc. and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Professor, Finance Department,
George Washington University; President, Amling & Company (investment
advice); Member, Board of Advisers, Credito Emilano (banking); and former
Economics and Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Investment Counselor to
Appleton Partners, Inc.; former Managing Director, Seaward Management
Corporation (investment advice) and former Director, Executive Vice
President and Treasurer, State Street Research & Management Company
(investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of all
other funds in the Keystone Investments Family of 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; former Chairman of the Board and Chief
Executive Officer of Keystone Investments; and former Chief Executive
Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Executive Director, Coalition
of Essential Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business, Adelphi
University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; former Group Vice President,
Textron Corp.; and former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Director of Phoenix Total Return
Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman of the Board, Director
and Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chief Executive Officer,
Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates
(environmental consulting); President, Oldways Preservation and Exchange
Trust (education); and former Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Of Counsel, Keyser,
Crowley & Meub, P.C.; Member, Governor's (VT) Council of Economic Advisers;
Chairman of the Board and Director, Central Vermont Public Service
Corporation and Hitchcock Clinic; Director, Vermont Yankee Nuclear Power
Corporation, Vermont Electric Power Company, Inc., Grand Trunk Corporation,
Central Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union
Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont; former
Director and President, Associated Industries of Vermont; former Chairman
and President, Vermont Marble Company; former Director of Keystone; and
former Director and Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director, Commerce
and Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman, Environmental Warranty,
Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas Corporation, Trust Company of
Connecticut, Hartford Hospital, Old State House Association and Enhanced
Financial Services, Inc.; Member, Georgetown College Board of Advisors;
Chairman, Board of Trustees, Hartford Graduate Center; Trustee,
Kingswood-Oxford School and Greater Hartford YMCA; former Director,
Executive Vice President and Vice Chairman of The Travelers Corporation;
and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; President, Nassau County Bar
Association; former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; Director,
Senior Vice President, Chief Financial Officer and Treasurer of Keystone
Investments, the Principal Underwriter, Keystone Asset Corporation,
Keystone Capital Corporation, Keystone Trust Company; Treasurer of Keystone
Institutional and FICO; Treasurer and Director of Keystone Management,
Keystone Software; Vice President and Treasurer of KFIA; Director of KIRC;
former Treasurer and Director of Hartwell Keystone; former Treasurer of
Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other funds in the Keystone Investments Family of Funds; and President of
Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in the
Keystone Investments Family of Funds; Vice President of Keystone
Investments, Keystone, the Principal Underwriter, FICO and Keystone
Software; and former controller of Keystone Investments and certain of its
affiliated operating companies.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other funds in the Keystone Investments
Family of Funds; Senior Vice President, General Counsel and Secretary of
Keystone; Senior Vice President, General Counsel, Secretary and Director of
the Principal Underwriter, Keystone Management and Keystone Software;
Senior Vice President and General Counsel of Keystone Institutional; Senior
Vice President, General Counsel and Director of FICO and KIRC;Vice
President and Secretary of KFIA; Senior Vice President, General Counsel and
Secretary of Keystone Investments, Keystone Asset Corporation, Keystone
Capital Corporation and Keystone Trust Company; former Senior Vice
President and Secretary of Hartwell Keystone and Robert Van Partners, Inc.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Hartwell Keystone, the Principal Underwriter and KIRC.
Mr. Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
Annual retainers and meeting fees paid by all Funds in the Keystone
Investments Family of Funds (which includes 32 mutual funds) for the calendar
year ended December 31, 1995, totalled approximately $450,716. As of February 5,
1996, the Trustees and officers beneficially owned less than 1% of the Fund's
then outstanding Class A, Class B or Class C shares.
The address of all the Fund's Trustees and officers and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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INVESTMENT ADVISER
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Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and
former members of management and certain employees of Keystone and its
affiliates. The shares of Keystone Investments common stock beneficially owned
by management are held in a number of voting trusts, the trustees of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to an Investment Advisory and
Management Agreement with the Fund (the "Advisory Agreement"), and subject to
the supervision of the Fund's Board of Trustees, Keystone manages and
administers the Fund's operation and manages the investment and reinvestment of
the Fund's assets in conformity with the Fund's investment objective and
restrictions. The Advisory Agreement stipulates that Keystone shall provide
office space, all necessary office facilities, equipment and personnel in
connection with its services under the Advisory Agreement and pay or reimburse
the Fund for the compensation of officers and trustees of the Fund who are
affiliated with the investment adviser as well as pay all expenses of Keystone
incurred in connection with the provision of its services. All charges and
expenses, other than those specifically referred to as being borne by Keystone,
will be paid by the Fund, including, but not limited to, custodian charges and
expenses; bookkeeping and auditors' charges and expenses; transfer agent charges
and expenses; fees of Independent Trustees; brokerage commissions; brokers' fees
and expenses; issue and transfer taxes; costs and expenses under the
Distribution Plans; taxes and trust fees payable to governmental agencies; the
cost of share certificates; fees and expenses of the registration and
qualification of the Fund and its shares with the SEC or under state or other
securities laws, expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the Fund; expenses of shareholders' and Trustees' meetings;
charges and expenses of legal counsel for the Fund and for the Trustees of the
Fund on matters relating to the Fund; charges and expenses of filing annual and
other reports with the SEC and other authorities; and all extraordinary charges
and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set
forth below:
Aggregate Net Asset Value
Annual Management Fee of the shares of the Fund
- --------------------------------------------------------------------------------
0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% of the next $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000.
Keystone's fee is computed as of the close of business each business day and
payable daily.
As a continuing condition of registration of shares in a state,
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of certain percentages of the Fund's
average daily net assets. However, Keystone is not required to make such
reimbursements to an extent which would result in the Fund's inability to
qualify as a regulated investment company under provisions of the Internal
Revenue Code. This condition may be modified or eliminated in the future.
The Fund is subject to certain annual state expense limitations imposed
on each of its Funds, the most restrictive of which is currently:
2.50% of the first $30 million of a Fund's average net assets;
2.00% of the next $70 million of a Fund's average net assets;
and 1.50% of a Fund's average net assets over $100 million.
Until June 30, 1996, Keystone has voluntarily agreed to limit the
expenses of the Fund's Class A, Class B and Class C shares to 1.95%, 2.70%, and
2.70%, respectively, of each such class's average daily net assets. Thereafter,
expense limitations may be extended on a calendar month-by-month basis and may
be modified or terminated in the future. Keystone will not be required to make
any such reimbursement to the extent it would result in the Fund's inability to
qualify as a regulated investment company under the provisions of the Internal
Revenue Code.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority (as
defined in the 1940 Act) of the outstanding shares, and such renewal has been
approved by the vote of a majority of the Independent Trustees cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty on 60 days' written notice by the
Fund's Board of Trustees or by a vote of a majority of outstanding shares. The
Advisory Agreement will terminate automatically upon its "assignment" as that
term is defined in the 1940 Act.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with Keystone Investment Distributors Company, a
wholly-owned subsidiary of Keystone.
The Principal Underwriter, located at 200 Berkeley Street, Boston,
Massachusetts, 02116-5034, is a Delaware corporation. The Principal Underwriter,
as agent, currently has the right to obtain subscriptions for and to sell shares
of the Fund to the public. In so doing, the Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from brokers, dealers and others, acting as principals, for sales of
shares. No such representative, dealer or broker has any authority to act as
agent for the Fund. The Principal Underwriter has not undertaken to buy or to
find purchasers for any specific number of shares. The Principal Underwriter may
receive payments from the Fund pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Fund's Declaration of Trust, By-Laws, current prospectus and
statement of additional information. All orders are subject to acceptance by the
Fund and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Underwriting Agreement, the Fund is not liable to
anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with registration of its shares with the Commission and
auditing and filing fees in connection with registration of its shares under the
various state "blue-sky" laws.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may use its
discretion in providing to selected dealers promotional materials and selling
aids, including, but not limited to, personal computers, related software and
Fund data files.
The Principal Underwriter has agreed that it will, in all respects,
duly conform to all state and federal laws applicable to the sale of the shares.
The Principal Underwriter has also agreed that it will indemnify and hold
harmless the Fund and each person who has been, is or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party that arises out of or is alleged to arise
out of any misrepresentation or omission to state a material act on the part of
the Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
The Underwriting Agreements will remain in effect as long as their
terms and continuance are approved by a majority of the Fund's Independent
Trustees at least annually at a meeting called for that purpose, and if their
continuance is approved annually by vote of a majority of Trustees, or by vote
of a majority of the outstanding shares of the Fund.
The Underwriting Agreements may be terminated by the Fund, without
penalty, on 60 days' written notice by the Board of Trustees or by a vote of a
majority of the Fund's outstanding shares. The Underwriting Agreements will
terminate automatically upon their "assignment," as that term is defined in the
1940 Act.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated December 13, 1995. The Fund is similar in most
respects to a business corporation. The principal distinction between the Fund
and a corporation relates to the shareholder liability described below. A copy
of the Declaration of Trust (the "Declaration of Trust") is filed as an exhibit
to the Registration Statement of which this statement of additional information
is a part. This summary is qualified in its entirety by reference to the
Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues three classes of shares, but may issue additional classes or series of
shares.
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 Fund were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
(1) the Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for obligations of the Fund and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (2) because the Declaration of
Trust provides for indemnification out of the Fund's property for any
shareholder held personally liable for the obligations of the Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Fund does not hold annual meetings.
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 the Fund have equal
voting rights except that each class of shares has exclusive voting rights with
respect to its respective Distribution Plan. No amendment may be made to the
Declaration of Trust which adversely affects any class of shares without the
approval of a majority of the shares of that class. Shares have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees to be elected
at a meeting and, in such event, the holders of the remaining 50% or less of the
shares voting will not be able to elect any Trustees.
After an 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 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 malfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
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Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten years periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added and the maximum sales
charge and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund does not presently
intend to advertise current yield.
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ADDITIONAL INFORMATION
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State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is custodian of all securities and cash of the Fund (the
"Custodian"). The Custodian performs no investment management functions for the
Fund but, in addition to its custodial services, is responsible for accounting
and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the Independent Auditors of the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone Custodian Funds, Inc. and acts as
transfer agent and dividend disbursing agent for the Fund.
As of February 5, 1996, Keystone Investment Management Company owned of
record 100% of the outstanding Class A shares of the Fund.
As of February 5, 1996, Keystone Investment Management Company owned of
record 100% of the outstanding Class B shares of the Fund.
As of February 5, 1996, Keystone Investment Management Company owned of
record 100% of the outstanding Class C shares of the Fund.
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 dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office in Washington, D.C. upon
payment of the fee prescribed by the rules and regulations promulgated by the
SEC.
The Fund is one of 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
The Keystone America Fund Family consists of the following Funds having the
various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term capital growth by
investing primarily in equity securities with small market capitalizations.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada), and Latin America (Mexico and countries in South and Central
America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
<PAGE>
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APPENDIX
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COMMON AND PREFERRED STOCK RATINGS
S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others,
Standard & Poor's Corporation (S&P) believes that earnings and dividend
performance is the end result of the interplay of these factors and that, over
the long run, the record of this performance has a considerable bearing on
relative quality. S&P rankings, however, do not reflect all of the factors,
tangible or intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicity. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
MOODY'S COMMON STOCK RANKINGS
Moody's presents a concise statement of the important characteristics
of a company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and
long-term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long-term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten year comparative
statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. aa: An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
3. a: An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater then in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. baa: An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be questionable
over any great length of time.
5. ba: An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. b: An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
7. caa: An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. ca: An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in AAA securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by Standard & Poor's Corporation, PRIME-1 by Moody's Investors Service, Inc.
or F-1 by Fitch Investors Service, Inc. These ratings and other money market
instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash requirements. The
issuer's long-term senior debt is rated "A" or better, although in some cases
"BBB" credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Government include
a variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the United States Government or its
agencies or instrumentalities include direct obligations of the United States
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board and Federal National Mortgage
Association.
Some obligations of United States Government agencies and
instrumentalities, such as Treasury bills and Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the United States; others, such as securities of Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; still others,
such as bonds issued by the Federal National Mortgage Association, a private
corporation, are supported only by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in the securities issued by
such an instrumentality only when Keystone determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. United States Government securities will not include international
agencies or instrumentalities in which the United States Government, its
agencies or instrumentalities participate, such as the World Bank, the Asian
Development Bank or the Inter-American Development Bank, or issues insured by
the Federal Deposit Insurance Corporation.
OPTIONS TRANSACTIONS
The Fund is authorized to write (i.e., sell) covered call options and
to purchase call options to close out covered call options previously written. A
call option obligates a writer to sell, and gives a purchaser the right to buy,
the underlying security at the stated exercise price at any time until the
stated expiration date.
The Fund will only write call options which are covered, which means
that the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund will receive a premium for writing a call
option, but will give up, until the expiration date, the opportunity to profit
from an increase in the underlying security's price above the exercise price.
The Fund will retain the risk of loss from a decrease in the price of the
underlying security. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked options which the Fund will not do) but capable of
enhancing the Fund's total returns.
The premium received by the Fund for writing a covered call option will
be recorded as a liability in the Fund's statement of assets and liabilities.
This liability will be adjusted daily to the option's current market value,
which will be the latest sale price at the time as of which the net asset value
per share of the Fund is computed (the close of the New York Stock Exchange),
or, in the absence of such sale, at the latest bid quotation. The liability will
be extinguished upon expiration of the option, the purchase of an identical
option in a closing transaction or delivery of the underlying security upon
exercise of the option.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation (OCC),a
clearing corporation which assumes responsibility for the completion of options
transactions.
The Fund will purchase call options only to close out a covered call
option it has written. When it appears that a covered call option written by the
Fund is likely to be exercised, the Fund may consider it appropriate to avoid
having to sell the underlying security. Or, the Fund may wish to extinguish a
covered call option which it has written in order to be free to sell the
underlying security to realize a profit on the previously written call option or
to write another covered call option on the underlying security. In all such
instances, the Fund can close out the previously written call option by
purchasing a call option on the same underlying security with the same exercise
price and expiration date. (The Fund may, under certain circumstances, also be
able to transfer a previously written call option.) The Fund will realize a
short-term capital gain if the amount paid to purchase the call option plus
transaction costs is less than the premium received for writing the covered call
option. The Fund will realize a short-term capital loss if the amount paid to
purchase the call option plus transaction costs is greater than the premium
received for writing the covered call option.
A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.
If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
In the past the Fund has qualified for, and elected to receive, the
special tax treatment afforded regulated investment companies under Subchapter M
of the Internal Revenue Code. Although the Fund intends to continue to qualify
for such tax treatment, in order to do so it must, among other things, derive
less than 30% of its gross income from gains from the sale or other disposition
of securities held for less than three months. Because of this, the Fund may be
restricted in the writing of call options where the underlying securities have
been held less than three months, in the writing of covered call options which
expire in less than three months, and in effecting closing purchases with
respect to options which were written less than three months earlier. As a
result, the Fund may elect to forego otherwise favorable investment
opportunities and may elect to avoid or delay effecting closing purchases or
selling portfolio securities, with the risk that a potential loss may be
increased or a potential gain may be reduced or turned into a loss.
Under the Internal Revenue Code of 1954, as amended, gain or loss
attributable to a closing transaction and premiums received by the Fund for
writing a covered call option which is not exercised may constitute short-term
capital gain or loss. Under provisions of the Tax Reform Act of 1986, effective
for taxable years beginning after October 22, 1986, a gain on an option
transaction which qualifies as a "designated hedge" transaction under Treasury
regulations may be offset by realized or unrealized losses on such designated
transaction. The netting of gain against such losses could result in a reduction
in gross income from options transactions for purposes of the 30 percent test.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
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 or
change in interest rates, 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
currency or other 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
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the 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).
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
(GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
INDEX BASED FUTURES CONTRACTS
A. 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.
B. OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
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 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.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency or other financial futures contracts are similar
to options on stocks except that an option on a currency 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
currency or other 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 currency or other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency or other
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 currency or other 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 interest rate or 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 CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described 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 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.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Fund may invest in securities of foreign
issuers. When the Fund invests in foreign securities they usually will be
denominated in foreign currencies and the Fund temporarily may hold funds in
foreign currencies. Thus, the Fund's share value will be affected by changes in
exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to engage in currency futures contracts only for
hedging purposes, and not for speculation. The Fund may enter into currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc, and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark, French Francs and Swiss
Francs, C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and
1,000,000 for the Peso. In contrast to forward currency exchange contracts which
can be traded at any time, only four value dates per year are available, the
third Wednesday of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the United States and Europe. On the Philadelphia
Stock Exchange, for example, contracts for half the size of the corresponding
futures contracts on the Chicago Board - Options Exchange are traded with up to
nine months maturity in marks, sterling, yen, Swiss francs, French francs and
Canadian dollars. Options can be exercised at any time during the contract life,
and require a deposit subject to normal margin requirements. Since a futures
contract must be exercised, the Fund must continually make up the margin
balance. As a result, a wrong price move could result in the Fund losing more
than the original investment, as it cannot walk away from the futures contract
as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency 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 foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency 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 foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments,
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short
term and lending longer term to benefit from the normal tendency of interest
rates to be higher for longer maturities. However in foreign exchange trading,
while the maturity pattern of interest rates for one currency is important, it
is the differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworthiness of each other party. The Fund does not intend to trade more
than 5% of its net assets under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone difference between
the U.S. and foreign nations. If the Fund sells small sterling it generally must
pay pounds to a counterparty earlier in the day than it will be credited with
dollars in New York. In the intervening hours, the buyer can go into bankruptcy
or can be declared insolvent. Thus, the dollars may never be credited to the
Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents, or limits on inflows of investment funds from abroad. Governments
take such measures for example to improve control over the domestic banking
system, or to influence the pattern of receipts and payments between residents
and foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payments interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years, or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and control on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed, and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
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ADDITIONAL INFORMATION REGARDING DERIVATIVE INSTRUMENTS
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Derivatives have been variously defined to include forwards, futures,
options, mortgage-backed securities, other asset-backed securities and
structured securities, such as interest rate swaps, equity swaps, index swaps,
currency swaps and caps and floors. These basic vehicles can also be combined to
create more complex products, called hybrid derivatives. Options, fututes and
forwards are discussed elsewhere in the Fund's prospectus and statement of
additional information. The following discussion addresses mortgage backed and
other asset-backed securities, structured securities and other instruments.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund, if allowed, may also invest in fixed rate and adjustable rate
collateralized mortgage obligations ("CMOs"), including CMOs with rates that
move inversely to market rates that are issued by and guaranteed as to principal
and interest by the U.S. government, its agencies or instrumentalities. The
principal governmental issuer of CMOs is FNMA. In addition, FHLMC issues a
significant number of CMOs. The Fund, if permitted to invest in CMOs, will not
invest in CMOs that are issued by private issuers. CMOs are debt obligations
collateralized by Mortgage Securities in which the payment of the principal and
interest is supported by the credit of, or guaranteed by, the U.S. government or
an agency or instrumentality of the U.S. government. The secondary market for
CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying Mortgage Securities used as collateral to create
classes with different interest rates, maturities and payment schedules. Instead
of interest and principal payments on the underlying Mortgage Securities being
passed through or paid pro rata to each holder (e.g., the Fund), each class of a
CMO is paid from and secured by a separate priority payment of the cash flow
generated by the pledged Mortgage Securities.
Most CMO issues have at least four classes. Classes with an earlier
maturity receive priority on payments to assure the early maturity. After the
first class is redeemed, excess cash flow not necessary to pay interest on the
remaining classes is directed to the repayment of the next maturing class until
that class is fully redeemed. This process continues until all classes of the
CMO issue have been paid in full. Among the CMO classes available are floating
(adjustable) rate classes, which have characteristics similar to ARMS, and
inverse floating rate classes whose coupons vary inversely with the rate of some
market index. The Fund, if allowed to purchase CMOs, may purchase any class of
CMO other than the residual (final) class.
INTEREST-RATE SWAP CONTRACTS
Interest rate swaps are over-the-counter ("OTC") agreements between
parties and counterparties to make periodic payments to each other for a stated
time, generally entered into for the purpose of changing the nature or amount of
interest being received on debt securities held by one or both parties. The
calculation of these payments is based on an agreed-upon amount called the
"notional amount." The notional amount is not typically exchanged in swaps
(except in currency swaps). The periodic payments may be fixed or floating.
Floating payments change (positively or inversely) with fluctuations in interest
or currency rates or equity or commodity prices, depending on the swap
contract's terms.
Swaps may be used to hedge against adverse changes in interest rates,
for instance. Thus, if permitted by its investment policies, the Fund may have a
portfolio of debt instruments (ARM's, for instance) the floating interest rates
of which adjust frequently because they are tied positively to changes in market
interest rates. The Fund would then be exposed to interest rate risk because a
decline in interest rates would reduce the interest receipts on its portfolio.
If the investment adviser believed interest rates would decline, the Fund, if
permitted by its investment policies, could enter into an interest rate swap
with another financial institution to hedge the interest rate risk. In the swap
contract, the Fund would agree to make payments based on a floating interest
rate in exchange for receiving payments based on a fixed interest rate.
Thereafter, if interest rates declined, the Fund's fixed rate receipts on the
swap would offset the reduction in its portfolio receipts. If interest rates
rose, the higher rates the Fund could obtain from new portfolio investments
(assuming sale of existing investments) would offset the higher rates it paid
nder the swap agreement.
EQUITY SWAP CONTRACTS
The counterparty to an equity swap contract would typically be a bank,
investment banking firm or broker/dealer. For example, the counterparty would
generally agree to pay the Fund the amount, if any, by which the notional amount
of the equity swap contract would have increased in value if such notional
amount had been invested in the stocks comprising the S&P 500 Index in
proportion to the composition of the Index, plus the dividends that would have
been received on those stocks. The Fund would agree to pay to the counterparty a
floating rate of interest (typically the London Inter Bank Offered Rate) on the
notional amount of the equity swap contract plus the amount, if any, by which
that notional amount would have decreased in value had it been invested in such
index stocks. Therefore, the return to the Fund on any equity swap contract
should be the gain or loss on the notional amount plus dividends on the stocks
comprising the S&P 500 Index less the interest paid by the Fund on the notional
amount. If permitted by its investment policies, the Fund will only enter into
equity swap contracts on a net basis, i.e., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under equity swap contracts may be made at the
conclusion of the contract or periodically during its term.
If permitted by its investment policies, the Fund may also from time to
time enter into the opposite side of equity swap contracts (i.e., where the Fund
is obligated to pay the increase (net of interest) or received the decrease
(plus interest) on the contract) to reduce the amount of the Fund's equity
market exposure consistent with the Fund's investment objective(s) and policies.
These positions are sometimes referred to as "reverse equity swap contracts."
Equity swap contracts will not be used to leverage the Fund. Since the
SEC considers equity swap contracts and reverse equity swap contracts to be
illiquid securities, the Fund will not invest in equity swap contracts or
reverse equity swap contracts if the total value of such investments together
with that of all other illiquid securities that the Fund owns would exceed the
Fund's limitations on investments in illiquid securities.
The Fund does not believe that its obligations under equity swap
contracts or reverse equity swap contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of the Fund's
obligations over its respective entitlement with respect to each equity swap
contract and each reverse equity swap contract will be accrued on a daily basis
and an amount of cash, U. S. Government Securities or other liquid high quality
debt securities having an aggregate market value at lease equal to the accrued
excess will be maintained in a segregated account by the Fund's Custodian.
CURRENCY SWAPS, INDEX SWAPS AND CAPS AND FLOORS
A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of reference indices. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds an
agree-upon interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser to receive payments of interest on
a notional principal amount from the party selling such interest rate floor. If
permitted by the Fund's investment policies, the investment adviser expects to
enter into these types of transactions on behalf of the Fund primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date rather than for speculative purposes.
Accordingly, if permitted by the Fund's investment policies, the Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors unless it owns securities or other instruments
providing the income stream the Fund may be obligated to pay. Caps and floors
require segregation of assets with a value equal to the Fund's net obligation,
if any.
SPECIAL RISKS OF SWAPS, CAPS AND FLOORS
As with futures, options, forward contracts, and mortgage backed and
other asset-backed securities, the use of swap, cap and floor contracts exposes
the Fund to additional investment risk and transaction costs. These risks
include operational risk, market risk and credit risk.
Operational risk includes, among others, the risks that the investment
adviser will incorrectly analyze market conditions or will not employ
appropriate strategies and monitoring with respect to these instruments or will
be forced to defer closing out certain hedged positions to avoid adverse tax
consequences.
Market risk includes, among others, the risks of imperfect correlations
between the expected values of the contracts, or their underlying bases, and
movements in the prices of the securities or currencies being hedged, and the
possible absence of a liquid secondary market for any particular instrument at
any time. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively more illiquid. Nevertheless, a secondary market for swaps
is never assured, and caps and floors, which are more recent innovations for
which standardized documentation has not yet been fully developed, are much less
liquid than swaps.
Credit risk is primarily the risk that counterparties may be financially unable
to fulfill their contracts on a timely basis, if at all. If there is a default
by the counterparty to any such contract, the Fund will be limited to
contractual remedies pursuant to the agreements related to the transaction.
There is no assurance that contract counterparties will be able to meet contract
obligations or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed in
or prevented from obtaining payments owed to it pursuant to such contracts. The
Fund will closely monitor the credit of swap counterparties in order to minimize
this risk. The Fund will not enter into any equity swap contract or reverse
equity swap contract unless, at the time of entering into such transaction, the
unsecured senior debt of the counterparty is rated at least A by Moody's or S&P.
<PAGE>
EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or seller by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller.)
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security
holds on a share for share basis a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills, or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
broker-dealer carrying the writer's position or to the broker-dealer holds on a
share for share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written, or, if less than the exercise price of the put written, the
difference is maintained by the writer in cash, U.S. Treasury bills, or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange, in the
Netherlands, the European Options Exchange, and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for options transactions are published in various
financial publications.
COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago, Chicago Mercantile Exchange,
International Monetary Market, (a division of the Chicago Mercantile Exchange),
the Kansas City Board of Trade and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlying security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation or
broker the number of shares of the underlying security covered by the option at
the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. A put option gives a holder the right to sell to
a Clearing Corporation the number of shares of the underlying security covered
by the put at the stated exercise price by the filing of an exercise notice
prior to the expiration time of the option. The Fund will sell ("write") and
purchase puts only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer and
writer or their agents in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise price and expiration date.
STOCK INDEX. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the common stocks so included.
INDEX BASED FUTURES CONTRACT. An index based futures contract is a
bilateral agreement pursuant to which a party agrees to buy or deliver at
settlement an amount of cash equal to $500 times the difference between the
closing value of an index on the expiration date and the price at which the
futures contract is originally struck. Index based futures are traded on
Commodities Exchanges. Currently index based futures contracts can be purchased
or sold with respect to the Standard & Poor's Corporation (S&P) 500 Stock Index
and S&P 100 Stock Index on the Chicago Mercantile Exchange, the New York Stock
Exchange Composite Index on the New York Futures Exchange and the Value Line
Stock Index and Major Market Index on the Kansas City Board of Trade.
UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
KEYSTONE SMALL COMPANY GROWTH FUND II
STATEMENT OF NET ASSETS
FEBRUARY 5, 1996
ASSETS:
Cash $100,000
Prepaid registration 60,000
Organizational expenses (Note 2) 19,800
--------
Total assets 179,800
LIABILITIES:
Accrued expenses 79,800
--------
NET ASSETS $100,000
========
Net asset represented by: (Note 3)
Class A Shares: Net assets equivalent to
$10.00 per share for 4,000 shares $ 40,000
Class B Shares: Net assets equivalent to
$10.00 per share for 3,000 shares 30,000
Class C Shares: Net assets equivalent to
$10.00 per share for 3,000 shares 30,000
--------
Total net assets $100,000
========
Net asset value and redemption price per share:
Class A $10.00
========
Class B $10.00
========
Class C $10.00
========
Offering price per share:
Class A (Including 5.75% sales charge) $10.61
========
Class B $10.00
========
Class C $10.00
========
See Notes to Statement of Net Assets
<PAGE>
KEYSTONE SMALL COMPANY GROWTH FUND II
NOTES TO STATEMENT OF NET ASSETS
FEBRUARY 5, 1996
1. Keystone Small Company Growth Fund II ("Fund") was organized on
December 13,1995, and had no operations prior to February 5, 1996 other than
organizational matters and activities in connection with the purchase of 10,000
shares of the Fund by Keystone Investment Management Company ("KIMCO"). The Fund
is a mutual fund whose goal is long-term growth of capital.
KIMCO is a wholly-owned subsidiary of Keystone Investments, Inc.
("Keystone"), a corporation privately owned by current and former members of
management and certain employees of Keystone and its affiliates.
The Fund currently offers three classes of shares. Class A shares are
sold subject to a maximum sales charge of 5.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable on
redemption which varies depending on when shares were purchased and how long
they have been held. Class C shares are sold subject to a contingent deferred
sales charge payable on redemption within the year of purchase. Class C shares
are available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company, the Fund's principal
underwriter.
2. In the event any of the initial shares are redeemed by any holder
thereof during the five year amortization period, redemption proceeds will be
reduced by any unamortized organizational expenses in the same proportion as the
number of initial shares of the Fund being redeemed bears to the number of
initial shares of the Fund outstanding at the time of the redemption.
3. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value.
4. Pursuant to its Investment Management and Advisory Agreement with
the Fund, Keystone provides investment advisory and management services to the
Fund. Keystone manages the investment and reinvestment of the Fund's assets,
supervises the operation of the Fund, provides all necessary office space
facilities, equipment and personnel and arranges, at the request of the Fund,
for its employees to serve as officers or agents of the Fund.
The management fee is determined by applying percentage rates, that
start at 0.70% and decline as net assets increase to 0.35% per annum, to the net
asset value of the Fund.
5. The Fund bears some of the cost of selling its shares under
Distribution Plans adopted with respect to its Class A, Class B and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A shares
to pay the expenses of the distribution of Class A shares.
The Class B and Class C Distribution Plans provide for payments at an
annual rate of up to 1.00% of the average daily net asset value of Class B or
Class C shares, of which 0.75% may be used to pay such expenses and 0.25% may be
used to pay shareholder service fees.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholder
Keystone Small Company Growth Fund II
We have audited the accompanying statement of net assets of Keystone Small
Company Growth Fund II as of February 5, 1996. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit of a statement of net assets includes examining, on a
test basis, evidence supporting the amounts and disclosures in that statement of
net assets. An audit of a statement of net assets also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of net assets presentation. We believe that
our audit of the statement of net assets provides a reasonable basis for our
opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Keystone Small Company
Growth Fund II at February 5, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 7, 1996
