<PAGE>
KEYSTONE AMERICA HARTWELL
EMERGING GROWTH FUND, INC.
PROSPECTUS DECEMBER 10, 1996
AS SUPPLEMENTED JANUARY 1, 1997
Keystone America Hartwell Emerging Growth Fund, Inc. (the "Fund") is a non-
diversified, open-end management investment company, commonly known as a
mutual fund.
The Fund's investment objective is capital appreciation. The Fund pursues this
objective by investing primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
The Fund offers Class A, B and C shares. Information on share classes and
their fee and sales charge structures may be found in the "Expense Information,"
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans and Agreements" and "Fund
Shares" sections of this prospectus.
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 December 10, 1996, as supplemented, 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 AMERICA HARTWELL EMERGING
GROWTH FUND, INC.
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 INSURED OR OTHERWISE PROTECTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
TABLE OF CONTENTS
Page
Expense Information 2
Financial Highlights 3
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 7
Risk Factors 7
Pricing Shares 8
Dividends and Taxes 9
Fund Management and Expenses 9
Distribution Plans and Agreements 12
How to Buy Shares 15
Alternative Sales Options 16
Contingent Deferred Sales Charge and Waiver of Sales Charges 19
How to Redeem Shares 20
Shareholder Services 21
Performance Data 23
Fund Shares 24
Additional Information 24
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>
EXPENSE INFORMATION
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
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 Agreements"; 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(1) OPTION(2)
-------------- --------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ........... 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load ............................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original declining to 1.00% in year and 0.00%
purchase price or redemption proceeds, as the sixth year and thereafter
applicable) 0.00% thereafter
Exchange Fee ...................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(as a percentage of average net assets)
Management Fees ................................... 0.99%(7) 0.99%(6) 0.99%(6)
12b-1 Fees ........................................ 0.20% 1.00%(7) 1.00%(7)
Other Expenses .................................... 0.47% 0.47% 0.47%
---- ---- ----
Total Fund Operating Expenses ..................... 1.66% 2.46% 2.46%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 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:
Class A ................................................................... $64 $ 97 $133 $235
Class B ................................................................... $75 $107 $151 $251
Class C ................................................................... $35 $ 77 $131 $280
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A ................................................................... $64 $ 97 $133 $235
Class B ................................................................... $25 $ 77 $131 $251
Class C ................................................................... $25 $ 77 $131 $280
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ----------
(1) Class B shares purchased after January 1, 1997, convert tax free to Class A shares after seven years. See "Class B Shares"
for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with Evergreen
Keystone Distributor, Inc., the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of $1,000,000 or more are not subject to a sales charge
at the time of purchase, but may be subject to a contingent deferred sales charge. 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.
(5) Expense ratios are for the year ended September 30, 1996. Total Fund Operating Expenses include indirectly paid expenses.
(6) The Fund pays a basic advisory fee which is subject to adjustment up or down by up to 1/2 of 1% of the average daily net
asset value during the latest 12 months depending upon the performance of the Fund relative to the Standard and Poor's Index
of 500 stocks. See "Fund Management and Expenses."
(7) 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").
(8) 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>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information with respect to
the Fund. The financial information for the fiscal years ended September 30,
1991 through September 30, 1996 have been audited by KPMG Peat Marwick LLP, the
Fund's independent auditors. The financial information for the fiscal years
ended September 30, 1987 through September 30, 1990 were audited by other
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report of KPMG Peat Marwick LLP,
in the Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are incorporated by reference into the statement of
additional information. Additional information about the Fund's performance is
contained in its Annual Report, which will be made available upon request and
without charge.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR $ 26.28 $ 21.41 $ 28.56 $ 20.80 $ 22.91 $ 14.13 $ 15.96 $ 11.56 $ 24.37 $ 14.94
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.30) (0.38) (0.37) (0.34) (0.26) (0.22) (0.29) (0.21) (0.20) (0.23)
Net gain (loss) on
investments ...... 2.89 8.14 (4.43) 8.10 0.05 9.13 (1.45) 4.61 (6.03) 9.66
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....... 2.59 7.76 (4.80) 7.76 (0.21) 8.91 (1.74) 4.40 (6.23) 9.43
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS FROM
Net realized gain on
investments ...... (0.25) (2.89) (2.35) 0 (1.90) (0.13) (0.09) 0 (6.58) 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (0.25) (2.89) (2.35) 0 (1.90) (0.13) (0.09) 0 (6.58) 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE END
OF YEAR .......... $ 28.62 $ 26.28 $ 21.41 $ 28.56 $ 20.80 $ 22.91 $ 14.13 $ 15.96 $ 11.56 $ 24.37
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(A) .... 9.96% 37.20% (17.86%) 37.31% (1.12%) 63.51% (10.95%) 38.06% (16.40%) 63.12%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ... 1.66%(b) 1.81%(b) 1.80% 1.60% 1.63% 1.70% 2.50% 2.40% 2.40% 1.90%
Net investment loss (1.10%) (1.58%) (1.62%) (1.34%) (1.18%) (1.18%) (1.80%) (1.60%) (1.70%) (1.20%)
Portfolio turnover
rate ............. 134% 164% 156% 155% 152% 137% 96% 136% 110% 224%
Average commission
rate paid ........ $0.0453 N/A N/A N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF
YEAR (THOUSANDS) $89,726 $111,791 $120,689 $195,708 $152,714 $72,602 $21,855 $25,131 $23,596 $41,440
Per share calculations based on weighted average shares outstanding.
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid expenses. Excluding indirectly paid expenses, the
expense ratio would have been 1.64% and 1.78% for the years ended September 30, 1996 and 1995, respectively.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
AUGUST 2, 1993
YEAR ENDED SEPTEMBER 30, (DATE OF INITIAL
------------------------------- PUBLIC OFFERING)
1996 1995 1994 TO SEPTEMBER 30, 1993
---- ---- ---- ---------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR ...... $25.69 $21.22 $28.56 $26.69
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.49) (0.56) (0.49) (0.05)
Net gain (loss) on investments ......... 2.78 7.92 (4.50) 1.92
------ ------ ------ ------
Total from investment operations ..... 2.29 7.36 (4.99) 1.87
------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net realized gain on investments ....... (0.25) (2.89) (2.35) 0
------- ------- ------- -------
Total distributions ...... (0.25) (2.89) (2.35) 0
------ ------ ------ ------
NET ASSET VALUE END OF YEAR ............ $27.73 $25.69 $21.22 $28.56
====== ====== ====== ======
TOTAL RETURN(a) .... 9.01% 35.61% (18.58%) 7.01%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ... 2.46%(c) 2.58%(c) 2.49% 3.70%(b)
Net investment loss .................. (1.89%) (2.34%) (2.27%) (3.42%)(b)
Portfolio turnover rate ................ 134% 164% 156% 155%
Average commission rate paid ........... $0.0453 N/A N/A N/A
NET ASSETS END OF YEAR (THOUSANDS) ..... $ 6,953 $6,970 $3,801 $ 823
</TABLE>
Per share calculations based on weighted average shares outstanding.
(a) Excluding applicable sales charges.
(b) Annualized.
(c) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.43% and 2.55% for the years ended September 30, 1996 and 1995,
respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains significant financial information with respect
to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. The table appears in the Fund's Annual Report and should
be read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the Fund's
Annual Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
AUGUST 2, 1993
YEAR ENDED SEPTEMBER 30, (DATE OF INITIAL
------------------------------- PUBLIC OFFERING)
1996 1995 1994 TO SEPTEMBER 30, 1993
---- ---- ---- ---------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR ....... $25.80 $21.26 $28.56 $26.69
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.50) (0.56) (0.47) (0.08)
Net gain (loss) on investments .......... 2.84 7.99 (4.48) 1.95
------ ------ ------ ------
Total from investment operations ...... 2.34 7.43 (4.95) 1.87
------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net realized gain on investments ........ (0.25) (2.89) (2.35) 0
------ ------ ------ ------
Total distributions ................... (0.25) (2.89) (2.35) 0
------ ------ ------ ------
NET ASSET VALUE END OF YEAR ............. $27.89 $25.80 $21.26 $28.56
====== ====== ====== ======
TOTAL RETURN(A) ......................... 9.17% 35.89% (18.42%) 7.01%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ........................ 2.46%(c) 2.58%(c) 2.47% 3.09%(b)
Net investment loss ................... (1.90%) (2.37%) (2.25%) (2.80%)(b)
Portfolio turnover rate ................. 134% 164% 156% 155%
Average commission rate paid ............ $0.0453 N/A N/A N/A
NET ASSETS END OF YEAR (THOUSANDS) ...... $ 2,368 $2,400 $1,679 $ 297
</TABLE>
Per share calculations based on weighted average shares outstanding.
(a) Excluding applicable sales charges.
(b) Annualized.
(c) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.43% and 2.55% for the years ended September 30, 1996 and 1995,
respectively.
<PAGE>
THE FUND
The Fund is a non-diversified, open-end management investment company,
commonly known as a mutual fund. The Fund was incorporated in New York on April
8, 1968 and began operations on September 10, 1968. The Fund is one of more than
thirty funds advised and managed by Keystone Investment Management Company
("Keystone"), the Fund's investment adviser. Keystone has retained the services
of J.M. Hartwell Limited Partnership ("Hartwell") to provide the Fund with
subadvisory services, subject to the supervision of the Fund's Board of
Directors and Keystone.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is capital appreciation.
The Fund's investment objective is not fundamental and may be changed without
the vote of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 ("1940 Act")) which means the lesser of (1) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (2) more than 50% of the outstanding shares (a "1940
Act Majority").
If the Fund's investment objective is changed and a shareholder determines
that the Fund is no longer an appropriate investment, the shareholder may redeem
his shares, but may be subject to a contingent deferred sales charge upon
redemption.
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective.
PRINCIPAL INVESTMENTS
In seeking to achieve its investment objective, the Fund's investment advisers
select for investment not only those few companies whose unique characteristics
or proprietary advantages, they believe, offer the best prospects for well above
average increases in revenues and earnings, but also those companies that tend
to be grouped in industries that, from time to time, are judged to be less
likely to be affected by the business cycle and to have strong prospects for
revenue growth. The Fund's advisers continuously monitor these companies and
their industries to make certain the companies retain the characteristics that
led to their selection in the first place.
The Fund seeks to achieve its objective through a program based on
substantially full investment in equity securities of companies in a relatively
early stage of development that are principally traded in the over-the-counter
("OTC") market (emerging growth companies). Such emerging growth companies are
small to medium-sized companies (generally under $500 million in market
capitalization) that the Fund's advisers believe have strong potential for (1)
earnings growth over time that is well above the growth rate of the economy and
(2) becoming more widely recognized as growth companies.
Under normal conditions, at least 65% of the value of the Fund's assets will
be invested in common stocks and other securities convertible into or
exchangeable for common stocks of emerging growth companies. The percentage of
assets invested in such issues may exceed 90% under favorable conditions.
OTHER ELIGIBLE INVESTMENTS
While it is anticipated that equity securities will constitute all or most of
the Fund's investment portfolio, the Fund may also invest in convertible
preferred stocks and debt securities when it appears desirable in light of the
Fund's objective.
Although it is not the policy of the Fund to invest in securities of companies
with no operating history, as much as 10% of the value of the Fund's net assets
may be invested in securities of companies with an operating history of less
than three years (unseasoned companies). Furthermore, investments in the
securities of unseasoned companies may involve an even greater degree of risk
than investments in securities of companies with longer operating histories.
In addition, in pursuing its objective, the Fund may also invest in foreign
securities and American Depository Receipts whose underlying securities are
issued by issuers located in developed countries as well as emerging markets
countries. For this purpose, countries with emerging markets are generally those
where the per capita income is in the low to middle ranges, as determined, from
time to time, by the International Bank for Reconstruction and Development
(World Bank).
When, in the judgment of the Fund's advisers, a defensive or conservative
posture is appropriate, the Fund may hold a portion of its assets in short-term
U.S. Government obligations, cash or cash equivalents. The adoption of such
defensive or conservative positions does not constitute a change in the Fund's
investment objective.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid, securities that may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of total assets.
The Fund may invest in restricted 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 Directors has adopted
guidelines and procedures pursuant to which the liquidity of the Fund's Rule
144A securities is determined by Keystone and the Board of Directors 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 Directors will consider what action, if any, is appropriate.
The Fund may enter into repurchase agreements for the purpose of investing
cash balances held by the Fund.
For further information about the types of investments and investment
techniques available to the Fund, and the associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus and
the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restriction summarized below, which may
not be changed without the vote of a 1940 Act Majority of the Fund's outstanding
shares. This restriction and certain other fundamental and nonfundamental
restrictions are set forth in the statement of additional information.
The Fund may not borrow, except from banks for temporary, extraordinary
emergency purposes not in excess of 33 1/3% of its total assets.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of risk.
Before you buy shares of the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
Certain risks related to the Fund are discussed below. In addition to the
risks discussed in this section, specific risks attendant to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.
FUND RISKS
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.
The Fund, which is non-diversified, 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 such a non-diversified fund.
Investing in a non-diversified fund, as opposed to a diversified fund, may
result in a greater degree of exposure to the economic movements of the
particular market sector in which the Fund invests.
Investing in small to medium sized emerging growth companies involves greater
risk than investing in larger established companies. The stock prices of
emerging growth companies 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 to medium sized 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 to medium sized companies may be thinly traded.
A need for cash due to large liquidations from the Fund when the prices of
emerging growth company stocks are declining could result in losses to the Fund.
PRICING SHARES
The Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock Exchange (the
"Exchange") is open. However, the Fund does not compute its net asset value on
days when changes in the value of the Fund's portfolio securities do not affect
the current net asset value of its shares. The Exchange 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 Fund is arrived at by determining the value of the Fund's
assets, subtracting its liabilities and dividing the result by the number of its
shares outstanding.
Current values for the Fund's portfolio securities are determined as follows:
1. securities traded on a national securities exchange or reported on the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
National Market are valued at the last sales price, if a sale has occurred and
if such price reflects fair value in the opinion of the Fund;
2. securities traded on a national securities exchange or reported on the
NASDAQ National Market for which no sale has occurred are valued at the mean
of the closing bid and asked prices or at fair value, as determined in good
faith by, or under the direction of, the Fund's Board of Directors;
3. short-term instruments with mixed or remaining maturities of sixty days
or less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which approximates market
value;
4. short-term instruments with greater than sixty days to maturity are
valued at current market value, or if quotations are not readily available,
a fair value;
5. other securities, including unlisted securities, for which prices are
available are valued at the last reported bid price; and
6. securities for which prices are unavailable, are valued at fair value,
as determined in good faith by, or under the direction of, the Fund's Board
of Directors.
DIVIDENDS AND TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company (a "RIC") under the Internal Revenue Code (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 RIC 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 October 31 of such calendar year.
If the Fund qualifies as a RIC and if it distributes all of its net investment
income and net capital gains, if any, to shareholders, it will be relieved of
any federal income tax liability.
The Fund will make distributions from its net investment income and net
capital gains, if any, annually. 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.
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 than
those expenses attributable to Class A shares and income distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares.
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. 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. 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 the dividend was declared. Dividends
and distributions may also be subject to state and local taxes.
The Fund advises its shareholders annually as to the federal tax status of all
distributions made during the year.
FUND MANAGEMENT AND EXPENSES
BOARD OF DIRECTORS
Subject to the authority of the Fund's Board of Directors, Keystone provides
investment advice, management and administrative services to the Fund.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"). Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments is a wholly-owned subsidiary of First Union National Bank of North
Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the U.S. based on total
assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG"),
together with Lieber & Company and Evergreen Asset Management Corp. ("Evergreen
Asset"), wholly-owned subsidiaries of FUNB, manage or otherwise oversee the
investment of over $50 billion in assets belonging to a wide range of clients,
including the Evergreen Family of Funds.
Pursuant to its Investment Management and Advisory Agreement with the Fund
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund and provides all
necessary office space, facilities, equipment.
For services rendered under the Advisory Agreement, the Fund pays Keystone a
basic monthly fee at the following annual rates of the Fund's average daily net
asset value during the latest 12 months: 1% of such net assets up to and
including $100,000,000; 0.90% of such net assets over $100,000,000 up to
and including $200,000,000; 0.80% of such net assets over $200,000,000 up to and
including $300,000,000; 0.70% of such net assets over $300,000,000 up to
and including $400,000,000; and 0.65% of such net assets over $400,000,000.
Under the Advisory Agreement, the basic management fee may be increased or
decreased by an incentive adjustment of up to 1/2 of 1% of the average daily net
asset value of the Fund during the latest 12 months. The incentive adjustment is
based on the Fund's performance relative to the Standard and Poor's Index of 500
Stocks (S&P 500).
A fee of 1% or more is higher than the fees paid by most other investment
companies.
The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only so long as such continuance is
specifically approved at least annually by the Fund's Board of Directors or by
vote of shareholders 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
the Fund's Independent Directors (Directors who are not "interested persons" of
the Fund, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the Fund's Distribution Plans or any agreement related
thereto), 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 or Keystone or may be terminated by a vote of
shareholders of the Fund. The Advisory Agreement will terminate automatically
upon its assignment.
SUBADVISER
Keystone has entered into a Sub-Investment Advisory Agreement with Hartwell
(the "Sub-advisory Agreement"). Hartwell, located at 515 Madison Avenue, New
York, New York 10022, is a majority-owned subsidiary of JMH Management
Corporation. Under the Sub-advisory Agreement, Hartwell provides the Fund and
Keystone with investment research, advice, information and recommendations
concerning securities to be acquired, held or sold by the Fund. For its services
for each calendar month, Hartwell receives from Keystone, after calculation of
the monthly fee due Keystone, 40% of Keystone's basic monthly management fee and
60% of Keystone's incentive adjustment, provided that Hartwell's total fee will
always equal at least 25% of the combined total fee paid by the Fund. The Fund
has no responsibility to pay Hartwell's fee.
The Sub-advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only so long as such
continuance is specifically approved at least annually by the Fund's Board of
Directors or by vote of shareholders of the Fund. In either case, the terms of
the Sub-advisory Agreement and continuance thereof must be approved by the vote
of a majority of Independent Directors in person at a meeting called for the
purpose of voting on such approval. The Sub-advisory Agreement may be terminated
at any time, without penalty, by the Fund's Board of Directors or a majority of
the Fund's outstanding shares, on 60 days' written notice to Hartwell. The
Sub-advisory Agreement automatically terminates upon its assignment.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"),
which is not affiliated with First Union, is now the Fund's principal
underwriter (the "Principal Underwriter"). EKD replaces Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Fund's principal underwriter. EKIS may no longer act as
principal underwriter of the Fund due to regulatory restrictions imposed by the
Glass-Steagall Act upon national banks such as FUNB and their affiliates, that
prohibit such entities from acting as the underwriters or distributors of mutual
fund shares. While EKIS may no longer act as principal underwriter of the Fund
as discussed above, EKIS may continue to receive compensation from the Fund or
the Principal Underwriter in respect of underwriting and distribution services
performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to .75% of the average daily net assets of the Fund,
subject to certain restrictions. Both EKD and Furman Selz are located at 230
Park Avenue, New York, New York 10169.
SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to the Fund
pursuant to a sub-administration agreement. For its services under that
agreement, Furman Selz receives a fee from Keystone at the maximum annual rate
of .01% of the average daily net assets of the Fund.
It is expected that on or about January 2, 1997, Furman Selz will transfer
EKD, and its related mutual fund distribution and administration business, to
BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
PORTFOLIO MANAGER
Adrian S. Dawes has been the Fund's portfolio manager since April 1996. Mr.
Dawes is a Hartwell Vice President and Portfolio Manager and has 11 years of
experience in growth stock investing.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and distribution plan fees discussed in this prospectus, the principal expenses
that the Fund is expected to pay include, but are not limited to, fees of its
Independent Directors; transfer, dividend disbursing and shareholder servicing
agent expenses; custodian expenses; fees of its independent auditors; fees of
legal counsel to its Independent Directors; fees payable to government agencies,
including registration and qualification fees of 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.
For the fiscal year ended September 30, 1996, the Fund paid or accrued
$1,066,413 in management fees, which represented 0.99% of the Fund's average
daily net assets. Of such amount, $411,286 was paid or accrued to Hartwell.
For the fiscal year ended September 30, 1996, the Fund paid or accrued
$291,584 to Evergreen Keystone Service Company (formerly Keystone Investor
Resource Center, Inc.) ("EKSC") for services rendered as the Fund's transfer
agent and dividend disbursing agent and $20,900 to Keystone Investments for
certain accounting services. EKSC, located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034, is a wholly-owned subsidiary of Keystone.
For the fiscal year ended September 30, 1996, the Fund's Class A, Class B and
Class C shares paid 1.66%, 2.46% and 2.46%, respectively, of their average net
assets in expenses (including indirectly paid expenses).
SECURITIES TRANSACTIONS
Under policies established by the Board of Directors, the Fund's advisers
select broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Fund, the advisers may consider the number of shares of the Fund sold by the
broker-dealer. In addition, broker-dealers executing portfolio transactions,
from time to time, may be affiliated with the Fund, Keystone, Hartwell, the
Principal Underwriter or their affiliates. The Fund may pay higher commissions
to broker-dealers that provide research services. Keystone and/or Hartwell may
use these services in advising the Fund as well as in advising their other
clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended September 30,
1995 and 1996 were 164% and 134%, respectively. High portfolio turnover may
involve correspondingly greater brokerage commissions and other transactions
costs, which would be borne directly by the Fund, as well as additional realized
gains and/or losses to shareholders.
For further information about brokerage and distributions, see the statement
of additional information.
CODE OF ETHICS
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
DISTRIBUTION PLANS AND AGREEMENTS
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 broker-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 recipient and outstanding on the books
of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") 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 Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as broker-dealers) and to EKIS,
the predecessor to the Fund's Principal Underwriter, (1) as commissions for
Class B shares sold, (2) as shareholder service fees and (3) as interest.
Amounts paid or accrued to the Principal Underwriter or EKIS in the aggregate
may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party will also receive service fees at an annual rate of
0.25% of the value of Class B shares maintained by the recipient and outstanding
on the books of the Fund for specified periods. See "Distribution Plans
Generally" 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) and to EKIS, the predecessor
to the Fund's Principal Underwriter, (1) as commissions for Class C shares sold,
(2) as shareholder service fees, and (3) as interest. Amounts paid or accrued to
the Principal Underwriter or EKIS in the aggregate may not exceed the annual
limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers 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 Generally") plus service fees which are paid at the
annual rate of 0.25%, respectively, of the value of Class C shares maintained by
the recipient and outstanding on the books of the Fund for specified periods.
See "Distribution Plans Generally" below.
DISTRIBUTION PLANS GENERALLY
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 the 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 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 contingent deferred sales charges
("CDSCs") paid by shareholders to the Principal Underwriter) remaining unpaid
from time to time.
In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. 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 adverse distribution consequences.
The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of the Fund will be
provided by FUNB or its affiliates.
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. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).
Unpaid distribution costs at September 30, 1996 were: $259,257 for Class B
shares purchased prior to June 1, 1995 (5.71% of net class assets for such Class
B shares); $173,625 for Class B shares purchased on or after June 1, 1995 (7.19%
of net class assets for such Class B shares); and $202,256 for Class C shares
(8.75% of net class assets).
Broker-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.
DISTRIBUTION AGREEMENTS
The Fund has entered into principal underwriting agreements with the Principal
Underwriter (each a "Distribution Agreement") with respect to each class.
Pursuant to its Distribution Agreements, the Fund will compensate the Principal
Underwriter for its services as distributor at an annual rate that may not
exceed .25 of 1% of the Fund's average daily net assets attributable to Class A
shares, .75 of 1% of the Fund's average daily net assets attributable to the
Class B shares, subject to certain restrictions, and .75 of 1% of the Fund's
average daily net assets attributable to the Class C shares.
The Fund may also make payments under its Distribution Plans, in amounts of up
to .25 of 1% of its average daily net assets on an annual basis, attributable to
Class A, B and C shares, respectively, to compensate organizations, which may
include, among others, the Principal Underwriter and Keystone or their
respective affiliates, for services rendered to shareholders and/or the
maintenance of shareholder accounts.
The Fund may not pay any distribution or servicing fees during any fiscal
period in excess of NASD limits. Since the Principal Underwriter's compensation
under the Distribution Agreements is not directly tied to the expenses incurred
by the Principal Underwriter, the amount of compensation received by it under
the Distribution Agreements during any year may, subject to certain conditions,
be more than its actual expenses and may result in a profit to the Principal
Underwriter. Distribution expenses incurred by the Principal Underwriter in one
fiscal year that exceed the level of compensation paid to the Principal
Underwriter for that year may be paid from distribution fees received from a
Fund in subsequent fiscal years.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund ("Advances"). The Principal Underwriter
intends to seek full reimbursement for such Advances 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.
In states where the Principal Underwriter is not registered as a
broker-dealer, shares of the Fund will only be sold through other broker-dealers
or other financial institutions that are registered.
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
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to those broker-dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such
broker-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. Broker-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 broker-dealers including, from time to time, to
First Union Brokerage Services, Inc., an affiliate of Keystone, 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
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 1.00% of the value of shares sold by such broker-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.
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 broker-dealers pursuant to state laws.
EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository institutions
(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.
The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB, are
subject to and in compliance with the aforementioned laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone Investments or its affiliates
from performing the services required under the investment advisory contract or
from acting as agent in connection with the purchase of shares of a fund by its
customers. In such event, it is expected that the Trustees would identify, and
call upon each Fund's shareholders to approve, a new investment adviser. If this
were to occur, it is not anticipated that the shareholders of any Fund would
suffer any adverse financial consequences.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of the Fund by mailing to the Fund, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Fund. You may also 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, by direct deposit or by an
electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at the public
offering price, which is 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 applicable sales charge. Orders received by broker-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.
Broker-dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received other than as stated above will receive the public
offering price, which is equal to the net asset value per share next determined
(generally, the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable.
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 EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by the Fund:
CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions, Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a CDSC during the month of purchase and the 12-month period
following the month of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are, with certain exceptions, subject to a
CDSC if redeemed during month of purchase and the 72-month period following the
month of purchase. Class B shares purchased after January 1, 1997, that have
been outstanding for seven years after 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 purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are subject to a CDSC if they are redeemed
during the month of purchase and the 12-month period following the month of
purchase. Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Principal Underwriter.
Each class of shares, pursuant to its Distribution 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 $500,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- --------------------------------------------------------------------------------
Less than $50,000 ......... 4.75% 4.99% 4.25%
$50,000 but less than
$100,000 .................. 4.50% 4.71% 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% 2.00%
$500,000 but less than
$1,000,000 ................ 2.00% 2.04% 1.75%
- ----------
*Rounded to the nearest one-hundredth percent.
----------------------------------------------
Purchases of the Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions 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 respect to purchases of the Fund's Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.
Purchases of the Fund's Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.
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 value of Class A shares maintained by such recipient and outstanding on the
books of the Fund for specified periods.
Upon written notice to broker-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
that are offered in connection with certain fee based programs, such as wrap
accounts sponsored or managed by broker-dealers, investment advisers, or others
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 30
days after a change in the registered representative's employment when 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 CDSC 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 30
days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when 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 CDSC
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 B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, the Fund, with
certain exceptions, imposes a CDSC on Class B shares redeemed as follows:
CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
Month of purchase and first twelve-month
period following the month of purchase ................ 5.00%
Second twelve-month period following the month
of purchase ........................................... 4.00%
Third twelve-month period following the month
of purchase ........................................... 3.00%
Fourth twelve-month period following the month
of purchase ........................................... 3.00%
Fifth twelve-month period following the month
of purchase ........................................... 2.00%
Sixth twelve-month period following the month
of purchase ........................................... 1.00%
No CDSC is imposed on amounts redeemed thereafter.
When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plan are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after 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 EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, 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
interest of such Class B shareholders.
CLASS C SHARES
Class C shares are offered only through broker-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 CDSC of 1.00% on shares redeemed during the month
of purchase and the 12-month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to you. The CDSC is retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any CDSC 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.
With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost 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 12 months after the month of purchase;
(4) Class B shares held for more than 72 months after the month of purchase; or
(5) Class C shares held for more than one year after the month of purchase. Upon
request for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC 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 CDSC 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 the Systematic Income Plan of up to 1.0% 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 CDSC to certain Directors, Trustees,
officers and employees of the Fund, Keystone, the Principal Underwriter and
certain of their affiliates and to members of the immediate families of such
persons; 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. See the statement of additional information.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Fund, c/o EKSC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Fund. 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
telephone order will be deposited by wire or EFT only to the bank account
designated in your account application.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-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 CDSC, 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.
The redemption value equals the net asset value per share adjusted for
fractions of a cent 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. A CDSC may be imposed by the Fund at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the CDSC 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, by
Federal Reserve or bank wire of funds, by direct deposit 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 CDSC (as described above),
will be made within seven days thereafter except as discussed herein.
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 EKSC'S POLICIES. The Fund or EKSC may waive this
requirement or 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 EKSC 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 REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to engage
in telephone transactions generally, you must complete the appropriate sections
of the Fund's application.
In order to insure that instructions received by EKSC 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 you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer 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 CDSCs are
applied to such redemptions.
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, EKSC, 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. EKSC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, EKSC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that EKSC
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 EKSC 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
If you have obtained the appropriate prospectus, you 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 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.
The exchange of Class B shares and Class C shares will not be subject to a
CDSC. However, if the shares being tendered for exchange are
(1) Class A shares acquired without a front-end sales charge,
(2) Class B shares that have been held for less than 72 months, or
(3) Class C shares that have been held for less than one year,
and are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction.
You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for exchange
are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction. The Fund reserves the right to terminate
this exchange offer or to change its terms, including the right to charge for
exchanges.
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. 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.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $25 per month or $75 per quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call EKSC. Please
include your account numbers. Termination may take up to 30 days.
RETIREMENT PLANS
The Fund has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) 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 EKSC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income 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 $75 and may be as much as 1.0% per month
or 3.0% per quarter of the total net asset value of the Fund shares in your
account when the Systematic Income Plan was opened. Fixed withdrawal payments
are not subject to a CDSC. 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 a Systematic Income 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 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. See Exhibit A -- "Reduced Sales Charges" at
the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
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. See Exhibit A --
"Reduced Sales Charges" at the back of the prospectus.
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. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIODS OF TIME. 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 Class A, B and C shares that participate in
dividends and distributions and have equal voting, liquidation and other rights
except that (1) expenses related to the distribution of each 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 class; (2) each class of shares has
exclusive voting rights with respect to its Distribution Plan; (3) each class
has different exchange privileges; and (4) each 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 transferable, redeemable and freely assignable
as collateral. The Fund is authorized to issue additional 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 Declaration of Trust of the Fund, 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. Shareholders may be eligible for
shareholder communication assistance in connection with the special meeting.
ADDITIONAL INFORMATION
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon written notice to those shareholders, the Fund intends, when an
annual report or semi-annual report of the Fund is required to be furnished, to
mail one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<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.
FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities principally traded
in securities markets outside the United States. 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. Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. There may be less publicly available information about a
foreign company, particularily emerging market country companies, than about a
U.S. company, and foreign companies may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those
applicable to U.S. companies. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Investments in foreign securities may also be subject to other risks different
from those affecting U.S. investments, including local political or economic
developments, expropriation or nationalization of assets, imposition of
withholding taxes on dividend or interest payments and currency blockage (which
would prevent cash from being brought back to the United States).
Investing in securities of foreign issuers generally involves greater 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; (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;
(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 markets 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 markets 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. These risks are carefully
considered by Keystone prior to purchase of these securities.
AMERICAN DEPOSITARY RECEIPTS
The Fund may purchase American Depositary Receipts ("ADRs"). ADRs are
negotiable certificates issued by a United States ("U.S.") bank representing the
right to receive securities of a foreign issuer deposited in that bank or a
foreign correspondent bank. The Fund may invest in ADRs representing securities
of issuers located in developed countries as well as the emerging markets
countries. Although the ADRs in which the Fund invests are typically listed on a
major U.S. exchange, there are variations as to marketability.
Investing in ADRs carries almost all of the risks of investing in the
underlying foreign securities themselves, and therefore, an investment in the
Fund involves greater risk than investing in a fund with a portfolio consisting
solely of securities issued by domestic companies.
ZERO COUPON BONDS
A zero coupon (interest) "stripped" bond represents ownership in serially
maturing interest or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. These bonds mature on the payment
dates of the interest on principal which they represent. Each zero coupon bond
entitles the holder to receive a single payment at maturity. There are no
periodic interest payments on a zero coupon bond. Zero coupon bonds are offered
at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights and
privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individally against the issuer and are not required to act in concert with other
holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds or
coupon zero coupon bond (either initially or in the secondary market) is treated
as if the buyer had purchased a corporate obligation issued on the purchase date
with an original issue discount equal to the excess of the amount payable at
maturity over the purchase price. The purchaser is required to take into income
each year as ordinary income an allocaable portion of such discounts determined
on a "constant yield" method. Any such income increases the holder's tax basis
for the zero coupon bond, and any gain or loss on a sale of the zero coupon
bonds relative to the holder's basis, as so adjusted, is a capital gain or loss.
If the holder owns coupon bonds and coupon zero bonds representing separate
interests in the coupon (interest) payments and the principal payments from the
same underlying issue of securities, a special basis allocation rule (requiring
the aggregate basis to be allocated among the items sold and retained based on
their relative fair market value at the time of sale) may apply to determine the
gain or loss on a sale of any such zero coupon bonds.
If and when the Fund invests in zero coupon bonds, the Fund does not expect to
have enough zero coupon bonds to have a material effect on dividends. The Fund
has undertaken to a state securities authority to disclose that zero coupon
securities pay no interest to holders prior to maturity, and the interest on
these securities is reported as income to the Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income producing securities with cash used to
make such distributions and its current income ultimately may be reduced as a
result.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements; i.e., the Fund purchases a
security subject to the Fund's obligation to resell and the seller's obligation
to repurchase that security at an agreed upon price and date, such date usually
being not more than seven days from the date of purchase. The resale price is
based on the purchase price plus an agreed upon current market rate of interest
that (for purposes of the transaction) is generally unrelated to the coupon rate
or maturity of the purchased security. A repurchase agreement imposes an
obligation on the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security. The value of the
underlying security is at least equal to the amount of the agreed upon resale
price and marked to market daily to cover such amount. The Fund may enter into
such agreements only with respect to U.S. government and foreign government
securities, which may be denominated in U.S. or foreign currencies. The Fund may
enter into such repurchase agreements with foreign banks and securities dealers
approved in advance by the Fund's Directors. Whether a repurchase agreement is
the purchase and sale of a security or a collateralized loan has not been
definitively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. It does not presently appear
possible to eliminate all risks involved in repurchase agreements. These risks
include the possibility of an increase in the market value of the underlying
securities or inability of the repurchaser to perform its obligation to
repurchase coupled with an uncovered decline in the market value of the
collateral, including the underlying securities, as well as delay and costs to
the Fund in connection with enforcement or bankruptcy proceedings. Therefore, it
is the policy of the Fund to enter into repurchase agreements only with large,
well-capitalized banks that are members of the federal Reserve System and with
primary dealers in U.S. government securities (as designated by the Federal
Reserve Board) whose creditworthiness has been reviewed and found satisfactory
by the Fund's advisers.
<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 a 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. EKSC 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 EKSC, 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 EKSC 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, EKSC 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 EKSC. 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 EKSC 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 EKSC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
HEGF-P Sup. 1/97
9.5M [recycle logo]
540106
---------------------------------------
KEYSTONE
AMERICA
[graphic omitted]
HARTWELL EMERGING
GROWTH FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 10, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
America Hartwell Emerging Growth Fund, Inc. (the "Fund") dated December 10,
1996, as supplemented. You may obtain a copy of the prospectus from the Fund's
principal underwriter, Evergreen Keystone Distributor, Inc., or your
broker-dealer. Evergreen Keystone Distributor, Inc. is located at 230 Park
Avenue, New York, New York 10169.
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TABLE OF CONTENTS
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Page
The Fund .............................................................. 2
Investment Methods .................................................... 2
Investment Restrictions ............................................... 4
Distributions and Taxes ............................................... 4
Valuation of Securities ............................................... 5
Brokerage ............................................................. 6
Sales Charges ......................................................... 7
Distribution Plans .................................................... 10
Investment Adviser .................................................... 13
Directors and Officers ................................................ 16
Principal Underwriter ................................................. 19
Sub-administrator ..................................................... 21
Capital Stock ......................................................... 21
Standardized Total Return and Yield Quotations ........................ 22
Additional Information ................................................ 23
Financial Statements .................................................. 25
Appendix .............................................................. A-1
<PAGE>
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THE FUND
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The Fund is a non-diversified open-end investment company, commonly
known as a mutual fund. The Fund's investment objective is capital appreciation.
The Fund was incorporated in New York on April 8, 1968 and began operations on
September 10, 1968.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Keystone has retained the services of J.M. Hartwell Limited
Partnership ("Hartwell") to provide the Fund with sub-advisory services.
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD" or the "Principal Underwriter") is the Fund's principal
underwriter. Evergreen Keystone Investment Services, Inc. (formerly Keystone
Investment Distributors Company) ("EKIS") is the predecessor to the Principal
Underwriter. See "Investment Adviser" and "Principal Underwriter" below.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
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INVESTMENT METHODS
- -------------------------------------------------------------------------------
The Fund considers a number of factors when selecting investments,
including the growth prospects for a company's products, the economic outlook
for its industry, its new product development, its operating management
capabilities, utilization and reinvestment of earnings, the relationship between
the price of the security and estimated fundamental values, and an analysis of
the market, economic and political environments. Before a company is selected
for the Fund's portfolio, it is subjected to a 20-point test developed by
Hartwell. The test includes such objective criteria as position in the
marketplace (normally only companies ranking first or a close second will be
considered), average gross profit margin (will normally average at least 45%
over three years), ratio of long-term debt to total capital (will generally be
under 25%), as well as more subjective criteria, including breadth of product
line, proprietary product position, distribution strength, and pricing
flexibility.
In determining the companies in which to actually invest, the Fund
considers a number of additional criteria including the following:
Growth: The annual growth rate over the next two to three years is
estimated by the Fund's advisers to be at least 1 1/2 times
that of the market as a whole.
Valuation: Total market capitalization should not be more than twice
the projected revenues and the anticipated growth rate
should be at least twice the price earnings ratio.
Generally, the Fund will sell a stock if its current price-earnings
multiple exceeds its growth rate by more than one-half. The Fund considers
selling a stock if it experiences a price erosion of 15%. The Fund will sell a
stock whenever the reasons for which it was purchased are no longer valid or if
its fundamentals begin to deteriorate. The Fund will not invest for management
or control.
No assurance can be given that the Fund's objective will be realized.
The Fund's shares may increase or decrease in value depending upon many factors
that might produce fluctuations in the value of securities held by the Fund.
Factors generally affecting security values include changes in earnings,
dividends, growth outlook, operating gains or losses, general market conditions,
or economic and political conditions.
The Fund will normally invest in common stocks of the emerging growth
category and other securities convertible into or exchangeable for such common
stocks having, in the opinion of its advisers, a potential for appreciation.
Emerging growth stocks are stocks of newer, smaller companies primarily traded
in the over-the-counter market. The emphasis of the Fund on investment in
emerging growth stocks inherently involves greater risk than is associated with
investment in stocks of larger, more established companies traded on national
exchanges.
OTHER METHODS
Although the Fund is permitted to employ the other investment methods
enumerated below, it does not currently engage in such practices and does not
intend to do so.
The Fund's policies permit it to borrow from banks and to engage in
margin transactions for the purpose of making leveraged investments, subject to
regulatory restrictions, and provided that the Fund maintains an asset coverage,
including the amount of borrowings, of at least 300% of such borrowings. The
Fund may also engage in short sale transactions in securities listed on one or
more national securities exchanges and in unlisted securities registered under
Section 12(g) of the Securities Exchange Act of 1934 or securities that are
subject to other restrictions against sale or transfer ("restricted securi-
ties"), but does not currently do so. The Fund is also permitted to make short
sales, "sales against the box," to purchase and sell warrants and puts and calls
written by others (option contracts), to engage in margin transactions with
brokers, to invest up to 15% of its net assets in illiquid securities and to
make short-term investments for trading purposes, but does not currently do so.
NATURE OF INVESTMENT OBJECTIVE
Except as otherwise specified in the prospectus or statement of
additional information, the investment objective, policies and methods of the
Fund are not fundamental and may be changed without the vote of a majority of
the Fund's outstanding shares when, in the judgment of the Fund's Board of
Directors, such changes are advisable. If the Fund's investment objective is
changed and a shareholder determines that the Fund is no longer an appropriate
investment, the shareholder may redeem his shares but may be subject to a
contingent deferred sales charge upon redemption. Fundamental policies may not
be changed without the vote of a majority of the Fund's outstanding voting
shares (as defined in the Investment Company Act of 1940 (the "1940 Act"), which
means the lesser of (1) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares).
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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 shares (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act")). Unless otherwise stated, all references to the Fund's assets
are in terms of current market value.
The Fund may not do the following:
(1) act as underwriter of securities issued by other persons, except
insofar as the Fund may technically be deemed to be an underwriter by virtue of
the disposition of a particular block of securities;
(2) make loans, except that the purchase of bonds, debentures or other
debt securities issued by publicly held companies and the purchase of
convertible debt securities or debt securities with warrants, rights or options
attached or other such securities shall not be deemed to be the making of loans;
(3) invest in real estate (including interests in real estate investment
trusts whose securities are not readily marketable), commodities or commodity
contracts;
(4) borrow money, except that the Fund may borrow from a bank as a
temporary measure for extraordinary or emergency purposes not in excess of 33
1/3% of its total assets;
(5) concentrate its investments by investing 25% or more of the total
value of its assets in the securities of issuers in any particular industry or
group of industries; and
(6) invest more than 10% of the value of the Fund's net assets in
securities of companies with an operating history of less than three years.
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DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The Fund will make distributions from net investment income and net
capital gains, if any, annually in shares or, at the option of the shareholder,
in cash. Distributions are taxable whether received in cash or additional
shares. (Distributions of ordinary income may be eligible in whole or in part
for the corporate 70% dividends received deduction.) Shareholders who have not
opted, prior to the ex-dividend date for any distribution, to receive cash will
receive a number of distributed shares determined on the basis of the the amount
of the distribution and 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 within seven days after the Fund pays the
distribution. 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 how long the shareholder has held the Fund shares. If
such shares are held less than six months and redeemed at a loss, however, 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 its
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
- -------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) securities traded on a national securities exchange or reported on
the National Association of Securities Dealers Automated Quotation System
(NASDAQ) National Market are valued at the last sales price, if a sale has
occurred and if such price reflects fair value in the opinion of the Fund;
(2) securities traded on a national securities exchange or reported on
the NASDAQ National Market for which no sale has occurred are valued at the mean
of the closing bid and asked prices or at fair value, as determined in good
faith by, or under the direction of, the Fund's Board of Directors;
(3) short-term instruments with initial or remaining maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount), which approximates market
value;
(4) short-term instruments with greater than sixty days to maturity are
valued at current market value, or if quotations are not readily available, at
fair value;
(5) other securities, including unlisted securities, for which prices
are available are values at the last reported bid price; and
(6) securities for which prices are unavailable, are valued at fair
value, as determined in good faith by, or under the direction of, the Fund's
Board of Directors.
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BROKERAGE
- -------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund, Keystone
seeks the best execution of orders at the most favorable prices. Keystone
determines whether a broker has provided the Fund with best execution and price
in the execution of a securities transaction by evaluating, among other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large block is
involved;
4. the broker's readiness to execute potentially difficult transactions
in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and
trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between the Fund and its other clients 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 Keystone's other clients. Under the Advisory
Agreement, Keystone is permitted to pay higher brokerage commissions for
brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities transactions
with any particular broker. The Fund's Board of Directors has determined,
however, that the Fund may consider sales of Fund shares as a factor in the
selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
BROKERAGE COMMISSIONS
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.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase prices,
the Fund may participate, if and when practicable, in group bidding for the
direct purchase from an issuer of certain securities.
The advisers make investment decisions for the Fund independently from
those of their other clients. It may frequently develop, however, that the
advisers will make the same investment decision for more than one client.
Simultaneous transactions are inevitable when the same security is suitable for
the investment objective of more than one account. When two or more clients are
engaged in the purchase or sale of the same security, the advisers will each
allocate the transactions according to a formula that is equitable to each
client. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Directors will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Directors may change, modify or eliminate any of the foregoing practices.
For the fiscal years ended September 30, 1994, 1995, and 1996 the Fund
paid $257,916, $75,720, and $34,048, respectively, in brokerage commissions.
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SALES CHARGES
- -------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to the Principal Underwriter or its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
Redemption Timing CDSC Rate
Month of purchase and the first twelve-month
period following the month of purchase .............. 5.00%
Second twelve-month
period following the month of purchase .............. 4.00%
Third twelve-month
period following the month of purchase .............. 3.00%
Fourth twelve-month
period following the month of purchase .............. 3.00%
Fifth twelve-month
period following the month of purchase .............. 2.00%
Sixth twelve-month
period following the month of purchase .............. 1.00%
Thereafter ............................................... 0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after 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 certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's
transfer and dividend disbursing agent.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC 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. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
Waiver of Sales Charges
Purchases of the Fund's Class A shares made after January 1, 1997, (i)
in the amount of $1 million or more; (ii) by a corporate or certain other
qualified retirement plan or a non-qualified deferred compensation plan or a
Title 1 tax sheltered annuity or TSA plan sponsored by an organization having
100 or more eligible employees (a "Qualifying Plan") or a TSA plan sponsored by
a public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan"); or (iii) by (a) institutional investors, which may
include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of the Fund may also 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, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (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 or CDSC is imposed on purchases or redemptions
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 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
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 CDSC 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 a Systematic Income Plan of up to 1.0% 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.
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DISTRIBUTION PLANS
- -------------------------------------------------------------------------------
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 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Directors, including a majority of the Directors who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Directors").
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 1.00% 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 Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
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 that 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 to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient 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 broker-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 and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide 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 that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (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 recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or others
a commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party may also 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 and outstanding on the books of the Fund for specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances 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 Directors authorize such
reimbursements of Advances, 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 Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. 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 Plans, the Fund
may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
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 and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (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 recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers 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, broker-dealers 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%,
respectively, of the average daily net asset value of each Class C share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
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
Independent Directors quarterly. The Independent Directors 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 such
Distribution Plan as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Directors, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Directors to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
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 votes of
the majority of both (1) the Fund's Directors and (2) the Independent Directors
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Directors to
the discretion of the Independent Directors.
The Independent Directors of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
Listed below are the amounts paid by each class of shares under its
respective Distribution Plan to the Principal Underwriter for the fiscal year
ended August 31, 1996. For more information, see "Distribution Plans."
Class B Shares
Class B Shares Sold Sold on or after
Class A Shares Prior to June 1, 1995 June 1, 1995 Class C Shares
- -------------- --------------------- ---------------- --------------
$185,509 $47,939 $21,303 $23,074
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
Subject to the general supervision of the Fund's Board of Directors,
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, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, the Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of the Fund on December 9, 1996,
and became effective on December 11, 1996.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of the
Fund's Board of Directors, Keystone furnishes to the Fund investment advisory,
management and administrative services, office facilities, and equipment in
connection with its services for managing the investment and reinvestment of the
Fund's assets. Keystone pays for all of the expenses incurred in connection with
the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Directors; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Directors' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Directors of
the Fund on matters relating to the Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
For the services provided by Keystone, the Fund pays a basic monthly
management fee of 1/12 of 1% of that portion of the Fund's average daily net
asset value during the latest 12 months, up to and including $100,000,000 (an
annual rate of 1%), 1/12 of 0.90% of that portion over $100,000,000 up to and
including $200,000,000 (an annual rate of 0.90%), 1/12 of 0.80% of that portion
over $200,000,000 up to and including $300,000,000 (an annual rate of 0.80%),
1/12 of 0.70% of that portion over $300,000,000 up to and including $400,000,000
(an annual rate of 0.70%) and 1/12 of 0.65% of that portion over $400,000,000
(an annual rate of 0.65%). The basic management fee is accrued daily and paid
monthly.
The basic management fee payable by the Fund to Keystone is subject to
an incentive adjustment, calculated monthly, depending upon the performance of
the Fund relative to the Standard & Poor's 500 Index (the "Index"), on the basis
of 1/12 of the results during the latest 12 months (a moving average method).
The incentive adjustment, if any, is added to or subtracted from the monthly
basic management fee, and is payable after the close of each month on the basis
of the latest 12 months' results. The incentive adjustment is accrued as
incurred for the purpose of calculating the redemption price and offering price
per share. The incentive adjustment for the Fund is calculated each month as
follows:
(1) The sum of the net asset value of a share of the Fund at the end of
the last 12-month period, plus the value per share during such period of all
cash distributions made and capital gain taxes paid or payable on undistributed
realized long-term capital gains (treated as reinvested in shares of the Fund on
the record date of such distribution or the date on which provision for such
taxes is made, as the case may be) is compared to the net asset value per share
of the Fund at the beginning of the period and the difference is expressed as a
percentage (the "Fund's percentage change").
(2) The Fund's percentage change is compared to the percentage change in
the Index, which change is determined by adding to the level of the Index at the
end of the period, in accordance with Commission guidelines, the value of cash
distributions on securities that comprise the Index, treated as reinvested in
the Index based on a monthly value supplied by Standard & Poor's and comparing
such adjusted level with the level of the Index at the beginning of the period.
(3) If the Fund's percentage change during such period shows a relative
performance more than 5 percentage points better or worse than that of the
Index, the excess over 5 percentage points is the "excess performance
differential," and the incentive adjustment is an amount equal to 5% of this
"excess performance differential" multiplied by the net asset value of the Fund
averaged daily over the 12-month period and divided by 12. The incentive
adjustment for any month, however, may not exceed 1/12 of 1/2 of 1% of the
average net asset value for any 12-month period (equivalent on an annual basis
to an adjustment of 1/2 of 1%). A percentage change in a share of the Fund which
is no greater than 5 percentage points better or worse than the percentage
change in the Index results in no incentive adjustment.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Directors of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Directors 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
Directors 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.
The Advisory Agreement permits Keystone to enter into an agreement with
J.M. Hartwell Limited Partnership ("Hartwell"), or another investment adviser,
pursuant to which Hartwell or such other investment adviser will furnish an
investment program for the Fund and will furnish to the Fund and Keystone from
time to time, as needed, investment research, advice, information and
recommendations concerning securities to be acquired, held or sold by the Fund.
During the fiscal year ended September 30, 1994, the Fund paid or
accrued to Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), which served
as the Fund's investment adviser prior to January 30, 1995, $1,452,834, which
represented 0.97% of the Fund's average daily net assets.
During the period from October 1, 1994 through January 30, 1995, the
Fund paid or accrued to Hartwell Keystone $223,747, and during the period from
January 31, 1995 through September 30, 1995, the Fund paid or accrued to
Keystone $419,530, which in the aggregate represented 0.84% of the Fund's
average daily net assets.
During the fiscal year ended September 30, 1996, the Fund paid or
accrued to Keystone $1,066,413, which represented 0.99% of the Fund's average
daily net assets.
SUB-ADVISER
Pursuant to the terms of the Advisory Agreement, Keystone has entered
into a Sub-investment Advisory Agreement (the "Sub-advisory Agreement") with
Hartwell under which Keystone has delegated certain of its investment advisory
functions, except for certain administrative and management services, to
Hartwell. Under the Sub-advisory Agreement, Hartwell furnishes to the Fund and
Keystone from time to time, as needed, investment research, advice, information
and recommendations concerning securities to be acquired, held or sold by the
Fund.
Hartwell, located at 515 Madison Avenue, New York, New York 10022, was
organized in 1994 and is a majority-owned subsidiary of JMH Management
Corporation.
For its services for each calendar month, Hartwell receives promptly
from Keystone after calculation of the monthly fee due Keystone under the
Advisory Agreement, 40% of Keystone's basic monthly management fee, as described
above, on all assets and 60% of Keystone's incentive adjustment as described
above on all assets, provided that Hartwell's total fee will always equal at
least 25% of the combined total fee paid by the Fund. The Fund has no
responsibility to pay Hartwell's fee.
The Sub-advisory Agreement automatically renews for successive one-year
periods unless either party to the agreement has given the other party at least
sixty days' written notice of its intention to terminate the agreement at the
end of the contract period then in effect; provided, however, that the
continuation of the Sub-advisory Agreement for more than two years shall be
subject to the receipt of annual approvals of the Fund's Board of Directors or
shareholders in accordance with the 1940 Act and the rules thereunder. The
Sub-advisory Agreement may be terminated at any time, without penalty, by the
Fund's Board of Directors or a majority of the Fund's outstanding shares, on 60
days' written notice to Hartwell. The Sub-advisory Agreement will automatically
terminate upon its "assignment," as defined in the 1940 Act.
For the fiscal years ended September 30, 1994 and for the period from
October 31, 1994 through January 30, 1995, Hartwell Management Company, Inc.,
Hartwell's predecessor which served as the Fund's sub-adviser prior to January
30, 1995, received $500,516 and $89,914 from Hartwell Keystone for its services
under its Sub-advisory Agreement.
For the period from January 31, 1995 through September 30, 1995,
Hartwell, the Fund's sub-adviser since January 31, 1995, received $296,954 from
Keystone for its services under the Sub-advisory Agreement.
For the fiscal year ended September 30, 1996, Hartwell received $411,286
from Keystone for its services under the Sub-advisory Agreement.
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
- -------------------------------------------------------------------------------
Directors and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
FREDERICK AMLING: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Professor, Finance Department, George
Washington University; President, Amling & Company
(investment advice); and former Member, Board of
Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of all the Evergreen funds other than
Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward
Management Corporation (investment advice).
FOSTER BAM: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of all the Evergreen funds other than
Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and accessories),
Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation
hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Director of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families 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; and
former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential
Schools, Brown University.
CHARLES F. CHAPIN: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; and former Director, Peoples Bank (Charlotte,
NC).
K. DUN GIFFORD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments and Keystone.
JAMES S. HOWELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman and Trustee of the Evergreen funds;
former Chairman of the Distribution Foundation for
the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
LEROY KEITH, JR.: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Chief Executive
Officer, Carson Products Company; Director of Phoenix
Total Return Fund and Equifax, Inc.; Trustee of
Phoenix Series Fund, Phoenix Multi-Portfolio Fund,
and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
F. RAY KEYSER, JR.: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman and Of Counsel, Keyser, Crowley &
Meub, P.C.; Member, Governor's (VT) Council of
Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation
and Lahey Hitchcock Clinic; Director, Vermont Yankee
Nuclear Power Corporation, Grand Trunk Corporation,
Grand Trunk Western Railroad, Union Mutual Fire
Insurance Company, New England Guaranty Insurance
Company, Inc., and the Investment Company Institute;
former Director and President, Associated Industries
of Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONELL: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; former Vice
President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal
Credit Union.
*WILLIAM WALT PETTIT: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; and Partner in
the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Vice Chair and former 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.
RUSSELL A. SALTON, III MD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; Medical
Director, U.S. Health Care/Aetna Health Services; and
former Managed Health Care Consultant; former
President, Primary Physician Care.
MICHAEL S. SCOFIELD: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; and Attorney,
Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman, Environmental Warranty, Inc.
(Insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Greater Hartford YMCA;
former Director, Vice Chairman and Chief Investment
Officer, The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing Director
and Consultant, Russell Miller, Inc.
*ANDREW J. SIMONS: Director of the Fund; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; Adjunct Professor of Law
and former Associate Dean, St. John's University
School of Law; Adjunct Professor of Law, Touro
College School of Law; and former President, Nassau
County Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Investments Families of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
* This Director may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Director.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS. See "Sub-administrator."
During the fiscal year ended September 30, 1996, no Director or officer
received any direct remuneration from the Fund. Annual retainers and meeting
fees paid by all funds in the Keystone Investments Families of Funds (which
includes more than thirty mutual funds) for the calendar year ended December 31,
1995 totaled approximately $450,716. As of November 26, 1996, the Directors and
officers beneficially owned less than 1% of the Fund's then outstanding Class A,
Class B and Class C shares, respectively.
Except as set forth above, the address of all of the Fund's Directors
and officers and the address of the Fund is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
- -------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- -------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, 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 public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses 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 Agreements, 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 the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with 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 Director or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of 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.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (I) by a vote of a
majority of the Fund's Independent Directors, and (ii) by vote of a majority of
the Fund's Directors, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Directors or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
For each of the Fund's last three fiscal years, the table below lists
the aggregate dollar amounts of underwriting commissions (front-end sales
charges, plus distribution fees, plus CDSCs) Paid with respect to the public
distribution of the Fund's shares. The table also indicates the aggregate dollar
amount of underwriting commissions retained by the Principal Underwriter. For
more information, see "Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Underwriting Commissions
Fiscal Year Ended Aggregate Dollar Amount of Retained by the Principal
August 31, Underwriting Commissions Underwriter
- ----------------- -------------------------- --------------------------
1996 $232,935 $34,642
1995 $332,596 $8,902
1994 $505,370 $0
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SUB-ADMINISTRATOR
- -------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund. Furman Selz is
located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
- -------------------------------------------------------------------------------
CAPITAL STOCK
- -------------------------------------------------------------------------------
The Fund is authorized to issue 90,000,000 shares of common stock, par
value $1.00 per share, consisting of the following classes of shares:
Class A 30,000,000
Class B 30,000,000
Class C 30,000,000
Each share represents an equal proportionate interest in the Fund with
each other share of that class. Upon liquidation, shares are entitled to a pro
rata share in the net assets of the Fund based on the relative net asset value
of each class of shares. Each share of the Fund is entitled to one vote. Classes
of shares of the Fund have equal voting rights except that each class of shares
has exclusive voting rights with respect to its Distribution Plan.
Fund shares are fully paid and non-assessable when issued and have no
preemptive, conversion or exchange rights. Shareholders are entitled to redeem
their shares as set forth under "How to Redeem Shares" in the prospectus. The
shares are transferable without restriction. The Fund does not issue
certificates for fractional shares.
Fund shares have non-cumulative voting rights, which means that the
holders of more than 50% of shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. In such an event, the
holders of the remaining shares so voting are not able to elect any Directors.
- -------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- -------------------------------------------------------------------------------
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 year 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.
The cumulative total returns of Class A shares of the Fund for the five
and ten year periods ended September 30, 1996 were 58.65% and 334.96%,
respectively. The compounded average annual rates of return for Class A shares
of the Fund for the one, five and ten year periods ended September 30, 1996 were
3.64%, 9.67% and 15.84%, respectively.
The cumulative total return for Class B shares of the Fund for the
period August 2, 1993 (commencement of operations) through September 30, 1996
("Life of the Fund") was 25.81%. The compounded average annual rates of return
for Class B shares of the Fund for the one year period ended September 30, 1996
and the Life of the Fund were 5.01% and 7.53%, respectively.
The cumulative total return for Class C shares of the Fund for the
period August 2, 1993 (commencement of operations) through September 30, 1996
was 29.50%. The compounded average annual rates of return for Class C shares of
the Fund for the one year period ended September 30, 1996 and the Life of the
Fund were 9.17% and 8.51%, respectively.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized 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
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian ("Custodian") of all securities and cash
of the Fund. 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 for the Fund.
EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
As of November 21, 1996, MLPF& S for the Sole Benefit of its Customers,
Attn: Fund Administration, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL
32246-6484, owned 20.102% of the Fund's Class A outstanding shares.
As of November 21, 1996, MLPF& S for the Sole Benefit of its Customers,
Attn: Fund Administration, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL
32246-6484, owned 11.909% of the Fund's Class B outstanding shares.
As of November 21, 1996, MLPF& S for the Sole Benefit of its Customers,
Attn: Fund Administration, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL
32246-6484, owned 27.118% of the Fund's Class C outstanding shares; Lavedna
Ellingson, Douglas Ellinston JT WROS, 8510 McClintock, Tempe, AZ 85284-2527,
owned 10.234% of the Fund's Class C outstanding shares; and Painewebber FBO,
John T. Frankfurth, 13093 S.E. Green Turtle Way, Tequesta, FL 33469-1574, owned
6.181% of the Fund's Class C outstanding shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
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.
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
Commission which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the Rules and Regulations
promulgated by the Commission.
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.
In addition to the fund, the Keystone America Fund Family consists of the
following Funds having the various investment objectives described below:
KEYSTONE BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.
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 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 GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND (formerly, Keystone Strategic
Development Fund) - Seeks long-term capital growth by investing primarily in
equity securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
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 SMALL CAPITALIZATION GROWTH FUND II - Seeks long term growth of
capital.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of four 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 STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds.
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.
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission:
Schedule of Investments as of September 30, 1996;
Financial Highlights for each of the years in the ten-year period ended
September 30, 1996 for Class A shares; and each of the years in the
three-year period then ended and the period from August 2, 1993 to
September 30, 1993 for Class B and Class C shares;
Statement of Assets and Liabilities as of September 30, 1996;
Statement of Operations for the year ended September 30, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended September 30, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated November 1, 1996.
A copy of the Fund's Annual report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02121-5034, or by calling EKSC toll free at 1-800-343-2898.
<PAGE>
- -------------------------------------------------------------------------------
APPENDIX
- -------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK RATINGS
A. 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, 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 cyclicality. 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.
B. 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
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue that 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 that 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 that 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 that 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 that 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 that 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 that 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 that 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.
