<PAGE>
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PROSPECTUS OCTOBER 31, 1996
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KEYSTONE LIQUID TRUST
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
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Keystone Liquid Trust (the "Fund") is a money market mutual fund that seeks
high current income from short- term securities while preserving capital and
maintaining liquidity.
The Fund currently offers Class A, B, and C shares. Information on share
classes and their fee and sales charge structures may be found in the "Fee
Table," "How to Buy Shares," "Alternative Sales Options," "Contingent Deferred
Sales Charge and Waiver of Sales Charges," "Distribution Plans," 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 October 31, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number provided on this page.
WHILE THE FUND INTENDS TO MAINTAIN A NET ASSET VALUE PER SHARE OF $1.00, THERE
IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO. SHARES OF THE FUND ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Fee Table ......................................... 2 Contingent Deferred Sales Charge and
Financial Highlights .............................. 3 Waiver of Sales Charges ..................... 14
Fund Description .................................. 6 Distribution Plans ............................ 15
Investment Objective and Policies ................. 6 How to Redeem Shares .......................... 16
Investment Restrictions ........................... 7 Shareholder Services .......................... 18
Pricing Shares .................................... 8 Performance Data .............................. 19
Dividends and Taxes ............................... 8 Fund Shares ................................... 20
Fund Management and Expenses ...................... 9 Additional Information ........................ 20
How to Buy Shares ................................. 11 Additional Investment Information............... (i)
Alternative Sales Options ......................... 12
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<PAGE>
FEE TABLE
KEYSTONE LIQUID TRUST
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of shares of the Fund will
bear directly or indirectly. For more complete descriptions of the various
costs and expenses, see the following sections of this prospectus: "Fund
Management and Expenses"; "How to Buy Shares"; "Alternative Sales Options";
"Contingent Deferred Sale Charge and Waiver of Sales Charges"; "Distribution
Plans"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
NO LOAD BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ........... None None None
(as a percentage of offering price)
Deferred Sales Load ............................... 0.00% 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, the sixth year and 0.00% thereafter
as applicable) thereafter
Exchange Fee (per exchange)(3) .................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(4)
(as a percentage of average net assets)
Management Fees ................................... 0.50% 0.50% 0.50%
12b-1 Fees ........................................ 0.06% 1.00%(5) 1.00%(5)
Other Expenses .................................... 0.42% 0.41% 0.44%
---- ---- ----
Total Fund Operating Expenses ..................... 0.98% 1.91% 1.94%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES(6) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
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 ................................................................... $10 $31 $ 54 $120
Class B ................................................................... $69 $90 $123 $199
Class C ................................................................... $30 $61 $105 $226
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $10 $31 $ 54 $120
Class B ................................................................... $19 $60 $103 $199
Class C ................................................................... $20 $61 $105 $226
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
<FN>
- ----------
(1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight 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 Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3) There is no fee for exchange orders received by the Fund directly from a shareholder over the Keystone Automated Response
Line ("KARL"). (For a description of KARL, see "Shareholder Services.")
(4) Expense ratios shown above are for the Fund's fiscal year ended June 30, 1996. Total Fund Operating Expenses for the fiscal
year ended June 30, 1996 include indirectly paid expenses.
(5) Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by
the National Association of Securities Dealers, Inc. ("NASD").
(6) 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%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE LIQUID TRUST
CLASS A SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 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 .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .. .0464 .0454 .0235 .0230 .0386 .0634 .0760 .0786 .0597 .0524
Net realized and
unrealized gain (loss)
on investments ....... (.0001) 0 0 (.0001) .0003 0 0 .0001 (.0001) 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ........... .0463 .0454 .0235 .0229 .0389 .0634 .0760 .0787 .0596 .0524
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS TO
SHAREHOLDERS ......... (.0463) (.0454) (.0235) (.0229) (.0389) (.0634) (.0760) (.0787) (.0596) (.0524)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE END OF
YEAR ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN ........... 4.73% 4.63% 2.37% 2.31% 3.96% 6.47% 7.81% 8.18% 6.31% 5.35%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income 4.66% 4.42% 2.50% 2.29% 3.99% 6.51% 7.53% 7.88% 5.99% 5.30%
Total expenses ....(a) 0.98% 0.92% 1.02% 1.11% 1.10% 0.92% 1.00% 1.00% 1.00% 1.00%
NET ASSETS END OF YEAR
(THOUSANDS) .......... $332,796 $245,308 $398,617 $189,167 $227,115 $400,597 $406,306 $475,640 $461,032 $375,542
<FN>
(a) "Ratio of total expenses to average net assets" for the year ended June 30, 1996 includes indirectly paid expenses. Excluding
indirectly paid expenses for the year ended June 30, 1996, the expense ratio would have been 0.95%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE LIQUID TRUST
CLASS B SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED JUNE 30, (DATE OF INITIAL
------------------------------------- PUBLIC OFFERING) TO
1996 1995 1994 JUNE 30, 1993
---- ---- ---- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR ......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................... .0369 .0362 .0142 .0047
Net realized and unrealized loss on
investments ............................... 0 0 0 (.0001)
------- ------- ------- -------
Total from investment operations .......... .0369 .0362 .0142 .0046
------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS ........ (.0369) (.0362) (.0142) (.0046)
------- ------- ------- -------
NET ASSET VALUE END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
TOTAL RETURN(c) ........................... 3.76% 3.68% 1.43% 0.46%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income ................... 3.73% 3.66% 1.84% 1.08%(b)
Total expenses .......................... 1.91%(a) 1.84% 1.85% 2.15%(b)
NET ASSETS END OF YEAR (THOUSANDS) ........ $10,042 $ 7,281 $11,198 $ 241
<FN>
(a) "Ratio of total expenses to average net assets" for the year ended June 30, 1996 includes indirectly paid expenses.
Excluding indirectly paid expenses for the year ended June 30, 1996, the expense ratio would have been 1.88%.
(b) Annualized.
(c) Excluding applicable sales charges.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE LIQUID TRUST
CLASS C SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED JUNE 30, PUBLIC OFFERING)
------------------------------- TO
1996 1995 1994 JUNE 30, 1993
---- ---- ---- ---------------
NET ASSET VALUE BEGINNING
OF YEAR ................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ... .0370 .0362 .0142 .0045
Net realized loss on
investments ............ (.0001) 0 0 (.0002)
------- ------- ------- -------
Total from investment
operations ............. .0369 .0362 .0142 .0043
------- ------- ------- -------
LESS DISTRIBUTIONS TO
SHAREHOLDERS ........... (.0369) (.0362) (.0142) (.0043)
------- ------- ------- -------
NET ASSET VALUE END OF
YEAR ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
TOTAL RETURN(c) ......... 3.75% 3.68% 1.43% 0.43%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income . 3.72% 3.52% 1.97% 1.01%(b)
Total expenses ........ 1.94%(a) 1.82% 1.86% 2.09%(b)
NET ASSETS END OF YEAR
(THOUSANDS) ............ $ 3,285 $ 4,112 $ 6,599 $ 34
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 1.91%.
(b) Annualized.
(c) Excluding applicable sales charges.
<PAGE>
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FUND DESCRIPTION
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The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust
on May 22, 1975. The Fund is one of approximately twenty funds managed by
Keystone Management, Inc. ("Keystone Management"), the Fund's investment
manager, and is one of more than thirty funds managed or advised by Keystone
Investment Management Company ("Keystone"), the Fund's investment adviser.
Keystone and Keystone Management are, from time to time, also collectively
referred to as "Keystone."
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INVESTMENT OBJECTIVE AND POLICIES
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INVESTMENT OBJECTIVE
The Fund's investment objective is to provide shareholders with high current
income from short-term money market instruments while emphasizing preservation
of capital and maintaining liquidity.
The investment objective of the Fund is fundamental and may not be changed
without the approval of a majority of the Fund's outstanding 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).
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective.
PRINCIPAL INVESTMENTS AND INVESTMENT POLICIES
To achieve its objective, the Fund invests in money market instruments
maturing in 397 days or less. Such instruments include (1) commercial paper,
including master demand notes; (2) obligations issued or guaranteed by the
United States ("U.S.") government, its agencies or instrumentalities; (3)
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in assets as
of the date of their most recently published financial statements that are
members of the Federal Deposit Insurance Corporation, including U.S. branches
of foreign banks and foreign branches of U.S. banks; and (4) corporate
obligations that, at the date of investment, are rated AA or better by
Standard & Poor's Corporation ("S&P") or Aa or better by Moody's Investor's
Service ("Moody's"). The Fund may invest up to 100% of its assets in U.S.
government securities, obligations of domestic branches of U.S. banks and
repurchase agreements of such banks.
The Fund will limit its investments, including repurchase agreements, to
those U.S. dollar-denominated instruments that Keystone determines present
minimal credit risk and are, at the time of acquisition, eligible securities,
as defined under Rule 2a-7 of the 1940 Act ("Eligible Securities"). Generally,
Eligible Securities include (1) securities rated by the requisite rating
agencies, at the date of investment, in one of the two highest short-term
rating categories; (2) securities of issuers receiving such rating with
respect to other short-term debt securities; and (3) comparable unrated
securities. Requisite rating agencies means any two agencies that have issued
a rating with respect to a security or class of debt obligations of an issuer
or one rating agency, if only one agency has issued a rating with respect to
such security or issuer. If the Fund purchases securities that are unrated or
that have been rated by a single rating agency, the purchase must be approved
or ratified by the Fund's Board of Trustees.
The short-term ratings are as follows: A-1 and
A-2, the two highest ratings given by S&P; Prime-1 and Prime-2, the two
highest ratings given by Moody's; and F-1 and F-2, the two highest ratings
given by Fitch Investors Service, Inc. ("Fitch").
While the Fund may purchase single rated or unrated securities, the Fund
anticipates that at least 95% of its assets will be invested in instruments
that, at the date of investment, are rated or deemed to be of comparable
quality to securities rated in the highest short-term rating categories by any
two rating agencies. The Fund will not invest more than 5% of its assets in
securities rated in the second highest short-term rating category.
The Fund is designed for individuals and institutions, including counselors,
brokers, lawyers, accountants, charitable and religious organizations and
others acting in a fiduciary, advisory, agency, custodial or similar capacity.
The Fund offers a convenient alternative to investing directly in money market
instruments by eliminating the mechanical problems normally associated with
direct investments while, most importantly, providing the opportunity to
obtain the higher yields often available from money market investments made in
large denominations.
Because interest rates on money market instruments fluctuate in response to
economic factors, the rates on short-term investments made by the Fund and the
daily dividend paid to shareholders will vary, rising or falling with short-
term rates generally. Additionally, yields from short-term securities may be
lower than yields from longer term securities. Also, the value of the Fund's
securities will fluctuate inversely with interest rates. In addition, the
Fund's investments in certificates of deposit issued by U.S. branches of
foreign banks and foreign branches of U.S. banks involve somewhat more risk,
but also more potential reward (higher interest rates), than investments in
comparable domestic obligations.
The securities in which the Fund may invest may not earn as high a level of
current income as longer term or lower quality securities, which generally
have less liquidity, greater market risk and more price fluctuation.
The Fund may enter into reverse repurchase agreements and purchase and sell
securities on a when-issued or delayed delivery basis.
The average weighted maturity of the Fund's investments will not exceed 90
days.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see the
"Additional Investment Information" section of this prospectus and the
statement of additional information.
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INVESTMENT RESTRICTIONS
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The Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the approval of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in detail in the statement of
additional information. 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) invest more than 5% of its assets in
the securities of any one issuer other than the U.S. government; (2) borrow
money, except that, in an aggregate amount not to exceed one-third of the
Fund's assets, including the amount borrowed, the Fund may borrow money from
banks on a temporary basis or enter into reverse repurchase agreements; (3)
pledge more than 15% of its assets to secure borrowings; and (4) invest more
than 10% of its assets in repurchase agreements maturing in more than seven
days.
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 the investment on
its books and (2) limiting its holdings of such securities to less than 10% of
net assets.
In addition, the Fund may, notwithstanding any other investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objectives, policies and restrictions as the Fund. The Fund does
not currently intend to implement this policy and would do so only if the
Trustees were to determine such action to be in the best interest of the Fund
and its shareholders. In the event of such implementation, the Fund will
comply with such requirements as to written notice to shareholders as are then
in effect.
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PRICING SHARES
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The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for purposes of pricing Fund
shares) except on days when changes in the value of the Fund's portfolio
securities do not affect the current net asset value of its shares. The
Exchange is currently closed on weekends, New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share of the Fund is arrived at by
determining the value of all of the Fund's assets, subtracting its liabilities
and dividing the result by the number of its outstanding shares.
Since the net income of the Fund is declared as a dividend each time net
income is determined, the net asset value per share is expected to remain at
$1.00 immediately after each dividend declaration.
The Fund expects to have net income at the time of each dividend
determination. If for any reason there is a net loss, the Fund will first
offset such amount pro rata against dividends accrued during the month in each
shareholder account. To the extent that such a net loss would exceed such
accrued dividends, the Fund will reduce the number of its outstanding shares
by having each shareholder contribute to the Fund's capital his pro rata
portion of the total number of shares required to be cancelled in order to
maintain a net asset value of $1.00 per share of the Fund. EACH SHAREHOLDER
WILL BE DEEMED TO HAVE AGREED TO SUCH A CONTRIBUTION IN THESE CIRCUMSTANCES BY
HIS OR HER INVESTMENT IN THE FUND.
The Fund values its money market investments as follows: (1) money market
investments maturing in sixty days or less are valued at amortized cost
(original purchase cost as adjusted for amortization of premium or accretion
of discount), which, when combined with accrued interest approximates market;
and (2) money market investments maturing in more than sixty days for which
market quotations are readily available are valued at current market value.
All other investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Fund's Board of Trustees.
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DIVIDENDS AND TAXES
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The Fund has qualified and intends to continue to qualify in the future as a
regulated investment company (a "RIC") under the Internal Revenue Code of
1986, as amended (the "Code"). The Fund qualifies if, among other things, it
distributes to its shareholders at least 90% of its net investment income for
its fiscal year. The Fund also intends to make timely distributions, if
necessary, sufficient in amount to avoid the nondeductible 4% excise tax
imposed on a regulated investment company to the extent that it fails to
distribute, with respect to each calendar year, at least 98% of its ordinary
income for such calendar year and 98% of its net capital gains for the one-
year period ending on October 31 of such calendar year.
If the Fund qualifies as a RIC and if it distributes substantially 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 declares dividends daily from its net investment income and net
capital gains, if any, and makes distributions to its shareholders monthly.
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 B and Class C shares bear the costs of distribution of their
shares through a higher annual distribution fee than Class A shares, expenses
attributable to Class B shares and Class C shares will generally be higher
than those of 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 distributions are taxable
as ordinary income. Dividends and distributions may also be subject to state
and local taxes. Any taxable distribution 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 shareholders as if
paid on December 31 of the year in which the distribution was declared. The
Fund advises its shareholders annually as to the federal tax status of all
distributions made during the year.
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FUND MANAGEMENT AND EXPENSES
- ------------------------------------------------------------------------------
FUND MANAGEMENT
Subject to the general supervision of the Fund's Board of Trustees, Keystone
Management, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
is responsible for the overall management of the Fund's business and affairs.
INVESTMENT MANAGER
Keystone Management was organized in 1989 and is a wholly-owned subsidiary
of Keystone. Its directors and principal executive officers have been
affiliated with Keystone, a seasoned investment adviser, for a number of
years. Keystone Management also serves as investment manager to each of the
funds in the Keystone Fund Family and to certain other funds in the Keystone
Investments Family of Funds.
Pursuant to its Management Agreement with the Fund (the "Management
Agreement"), Keystone Management has delegated its investment management
functions, except for certain administrative and management services as
described below, to Keystone and has entered into an Advisory Agreement with
Keystone (the "Advisory Agreement") under which Keystone provides investment
advisory and management services to the Fund. Services performed by Keystone
Management include (1) performing research and planning with respect to (a)
the Fund's qualification as a regulated investment company under Subchapter M
of the Code, (b) tax treatment of the Fund's portfolio investments, (c) tax
treatment of special corporate actions (such as reorganizations), (d) state
tax matters affecting the Fund, and (e) the Fund's distributions of income and
capital gains; (2) preparing the Fund's federal and state tax returns; and (3)
providing services to the Fund's shareholders in connection with federal and
state taxation and distributions of income and capital gains.
The Fund pays Keystone Management a fee for its services at the annual rate
of:
(1) .50 of 1% of the average daily value of the net assets of the Fund on
the first $500,000,000 of such assets; plus
(2) .45 of 1% of the average daily value of the net assets of the Fund
that exceed $500,000,000 and are less than $1,000,000,000; plus
(3) .40 of 1% of the average daily value of the net assets of the Fund
that are $1,000,000,000 or more
The management fee is computed as of the close of business each business day
and payable monthly.
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"). Both
Keystone and Keystone Investments are located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in
a number of voting trusts, the trustees of which are George S. Bissell, Albert
H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van
Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone Management, Keystone,
their affiliates and the Keystone Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee equal to 85% of the management fee received by Keystone Management
under the Management Agreement.
During the fiscal year ended June 30, 1996, the Fund paid or accrued to
Keystone Management investment management fees and administrative service fees
of $1,359,239, which represented 0.50% of the Fund's average net assets. Of
such amount paid to Keystone Management, $1,155,353 was paid to Keystone for
its services to the Fund.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant
to which Keystone Investments will be merged with and into a subsidiary of
First Union National Bank of North Carolina ("FUNB-NC") (the "Merger"). The
surviving corporation will assume the name, "Keystone Investments, Inc."
Subject to a number of conditions being met, it is currently anticipated that
the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.
If consummated, the proposed merger may be deemed to cause an assignment,
within the meaning of the 1940 Act, of the Advisory Agreement and the
Management Agreement. Consequently, the completion of the Merger is contingent
upon, among other things, the approval of the Fund's shareholders of a new
investment advisory and management agreement between the Fund and Keystone
(the "New Advisory Agreement"). The Funds' Trustees have approved the terms of
the New Advisory Agreement, subject to the approval of shareholders and the
completion of the Merger, and have called a special meeting of shareholders to
obtain their approval of, among other things, the New Advisory Agreement. The
meeting is expected to be held in December 1996. The proposed New Advisory
Agreement has terms, including investment advisory fees payable thereunder,
that are substantively identical to those in the current agreements.
The proposed transaction may also be deemed to cause an assignment, as
defined by the 1940 Act, of the Principal Underwriting Agreements between the
Fund and the Fund's principal underwriter, Keystone Investment Distributors
Company (the "Principal Underwriter"). As a result, the Fund's Trustees have
approved the following agreements, subject to the completion of the Merger:
(i) a principal underwriting agreement between Evergreen Funds Distributor,
Inc. ("EFD") and the Fund; (ii) a marketing services agreement between the
Principal Underwriter and EFD with respect to the Fund; and (iii) a
subadministration agreement between Keystone and EFD with respect to the Fund.
EFD is a wholly-owned subsidiary of Furman Selz LLC. It is expected that on or
about January 2, 1997, Furman Selz LLC will transfer EFD, and Furman Selz's
related services, to BISYS Group, Inc. ("BISYS") (the "Transfer"). The Fund's
Trustees have also approved, subject to completion of the Transfer: (i) a new
principal underwriting agreement between EFD and the Fund; (ii) a new
marketing services agreement between the Principal Underwriter and EFD with
respect to the Fund; and (iii) a subadministration agreement between the
Keystone and BISYS with respect to the Fund. The terms of such agreements are
substantively identical to the terms of the agreements to be executed upon
completion of the Merger.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
advisory and management fees discussed above, the principal expenses that the
Fund is expected to pay include, but are not limited to, expenses of those
Trustees who are not interested persons (as defined in the 1940 Act) of the
Fund (the "Independent Trustees"); transfer dividend disbursing and
shareholder servicing agent expenses; custodian expenses; fees of its
independent auditors and legal counsel to its Independent Trustees; expenses
of shareholders' and Trustees' meetings; fees payable to government agencies,
including registration and qualification fees of the Fund and its shares under
federal and state securities laws; brokerage commissions, interest charges and
taxes; 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.
For the fiscal year ended June 30, 1996, the Fund's Class A, Class B and
Class C shares paid 0.98%, 1.91% and 1.94% of average daily net assets
(including indirectly paid expenses), respectively, in expenses.
During the fiscal year ended June 30, 1996, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, $759,359 for transfer agent fees and $17,571 to
Keystone Investments, for certain accounting services provided to the Fund.
KIRC, a wholly-owned subsidiary of Keystone, is located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Fund, Keystone may consider as a factor the number of shares of the Fund
sold by such broker-dealer. In addition, broker-dealers may, from time to
time, be affiliated with the Fund, Keystone Management, Keystone, the Fund's
principal underwriter or their affiliates.
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HOW TO BUY SHARES
- ------------------------------------------------------------------------------
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. The Principal Underwriter, a wholly-
owned subsidiary of Keystone, is located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034. In addition, you may purchase shares of the Fund by
mailing to the Fund c/o Keystone Investor Resource Center, Inc., P.O. Box
2121, Boston, Massachusetts 02106-2121, a completed account application and a
check payable to the Fund. 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").
All classes of Fund shares are sold on a continuing basis without a sales
load at net asset value, which is expected to be $1.00 per share on each day
on which banks in both Boston and New York are open for business. An initial
purchase of Fund shares must be at least $1,000. There is no minimum amount
for subsequent purchases.
GENERAL
Broker-dealers, banks and other financial institutions may assist their
clients in effecting transactions in the Fund's shares and may charge a fee
for these services.
Orders for the purchase of Fund shares become effective at the next
transaction time after monies become available for investment. The Fund's
transaction time is the close of trading on the Exchange (currently 4:00 p.m.
eastern time.) Investments received before 4:00 p.m. will become effective as
of 4:00 p.m. and begin accruing dividends the next business day.
Your purchase of shares will be confirmed to you and your shares credited to
your account at net asset value.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC, the Fund's transfer agent,
by calling toll-free
1-800-343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
SUB-ACCOUNTING
The Fund offers free "sub-accounting" service to banks, brokers, investment
advisers and others who have multiple accounts. Multiple accounts may be
carried under one master account. Transaction advices and monthly reports are
provided for each sub-account individually, and that information also is
included in summary master account reports. For information concerning sub-
accounting, call KIRC at the telephone number listed above.
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ALTERNATIVE SALES OPTIONS
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The Fund offers Class A, B, and C shares:
CLASS A SHARES -- NO LOAD OPTION
Class A shares are sold without a sales charge at the time of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a deferred sales charge if they are
redeemed. Class B shares purchased on or after June 1, 1995 are subject to a
deferred sales charge if redeemed during the 72 month period from and
including the month of purchase. Class B shares purchased prior to June 1,
1995 are subject to a deferred sales charge upon redemption during the four
calendar years following purchase. Class B shares purchased on or after June
1, 1995 that have been outstanding for eight years from and including the
month of purchase will automatically convert to Class A shares without the
imposition of an exchange fee. Class B shares purchased prior to June 1, 1995
retain their existing conversion rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through broker-
dealers who have entered into special distribution agreements with the
Principal Underwriter.
Each class of shares, pursuant to its Distribution Plan, currently 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.
In general, three Fund share classes have been established so that investors
in each class of any Keystone America Fund who wish to take advantage of the
exchange privilege within the Keystone America Fund Family can have a money
market fund exchange option available to them. Investors purchasing shares of
the Fund without regard to the availability of exchanges should consider Class
A shares because there is no distribution fee. (In the event of an exchange
for Class A shares of a Keystone America Fund, the applicable front-end sales
charge will be imposed.) Investors who wish to have the ability to exchange
their shares for Class B or Class C shares of other Keystone America Funds
should consider purchasing Class B or Class C shares of the Fund, depending on
the amount and intended length of the investment.
The Fund will not normally accept any purchase of Class B shares in the
amount of $250,000 or more, and will not normally accept any purchase of Class
C shares in the amount of $1,000,000 or more.
CLASS A SHARES
Class A shares are offered at net asset value without an initial sales
charge.
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, to pay expenses associated with the distribution of Class A
shares. Amounts paid by the Fund to the Principal Underwriter 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 daily net asset
value of Class A shares maintained by such recipients and outstanding on the
books of the Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with
the following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve-month period .................... 5.00%
Second twelve-month period ................... 4.00%
Third twelve-month period .................... 3.00%
Fourth twelve-month period ................... 3.00%
Fifth twelve-month period .................... 2.00%
Sixth twelve-month period .................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, the Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and the first calendar year
after the year of purchase; 2.00% on shares redeemed during the second
calendar year after the year of purchase; and 1.00% on shares redeemed during
the third calendar year after the year of purchase. No deferred sales charge
is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. Amounts received by the Principal
Underwriter under the Class B Distribution Plans are reduced by deferred sales
charges retained by the Principal Underwriter. See "Contingent Deferred Sales
Charge and Waiver of Sales Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of an exchange fee. Class B shares purchased prior
to June 1, 1995 will similarly convert to Class A shares at the end of seven
calendar years after the year of purchase. (Conversion of Class B shares
represented by share certificates will require the return of the share
certificates to KIRC.) The Class B shares so converted will no longer be
subject to the higher expenses borne by Class B shares. It is the Fund's
opinion that, under current federal income tax law, such a conversion will not
constitute a taxable event. In the event that this ceases to be the case, the
Board of Trustees will consider what action, if any, is appropriate and in the
best interests of the Class B shareholders.
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 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) (1) as commissions for
Class B shares sold and (2) as shareholder service fees. Amounts paid or
accrued to the Principal Underwriter under (1) and (2) in the aggregate may
not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus
the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class B share sold. Beginning approximately 12 months after the
purchase of a Class B share, the broker or other party will receive service
fees at an annual rate of 0.25% of the average daily net asset value of such
Class B share maintained by the recipient and outstanding on the books of the
Fund for specified periods. See "Distribution Plans" below.
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 may impose a deferred sales charge of 1.00% on shares
redeemed within one year after the date of purchase. No deferred sales charge
is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by the Principal Underwriter. See
"Contingent Deferred Sales Charge and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures 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. Amounts paid by the Fund
under the Class C Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers)
(1) as commissions for Class C shares sold and (2) as shareholder service
fees. Amounts paid or accrued to the Principal Underwriter under (1) or (2) 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 of each Class C share sold, and, beginning approximately fifteen
months after purchase, a commission at an annual rate of 0.75% (subject to
NASD rules -- see "Distribution Plans") plus service fees at an annual rate of
0.25%, respectively, of the average daily net asset value of each share
maintained by such recipients and outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE
AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class B
or Class C shares is a percentage of the lesser of (1) the net asset value of
the shares redeemed or (2) the net asset value at the time of purchase of such
shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (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) Class B shares held during more than four
consecutive calendar years or more than 72 months, as the case may be; or
(4) Class C shares held for more than one year. Upon request for redemption,
shares not subject to the contingent deferred sales charge will be redeemed
first. Thereafter, shares held the longest will be the first to be redeemed.
The Fund also may sell Class A, Class B or Class C shares at net asset value
without a contingent deferred sales charge to certain Directors, Trustees,
officers and employees of the Fund and Keystone and certain of their
affiliates, to registered representatives of firms with dealer agreements with
the Principal Underwriter and to a bank or trust company acting as a trustee
for a single account. For more information, see the statement of additional
information.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000;
(5) automatic withdrawals under the Systematic Income Plan of up to 1.5% 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.
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 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.
The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to broker-dealers that satisfy certain
criteria established from time to time by the Principal Underwriter. These
conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on
the broker-dealer's satisfaction of the required conditions, be periodic and
may be up to 0.25% of the value of shares sold by such dealer.
The Principal Underwriter also may pay a transaction fee (up to the level of
the payments made allowable to broker-dealers for the sale of such shares, as
described above) to banks and other financial services firms that facilitate
transactions in shares of the Fund for their clients.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax
current restrictions on depository institutions, the Board of Trustees will
consider what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
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DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and
Class C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that the Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees to 1% of the
aggregate average daily net asset value of its shares, of which 0.75% may be
used to pay such distribution costs and 0.25% may be used to pay shareholder
service fees. The NASD also limits the aggregate amount that the Fund may pay
for such distribution costs to 6.25% of gross share sales since the inception
of the 12b-1 Distribution Plans, plus interest at the prime rate plus 1% on
such amounts (less any deferred sales charges paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be
received by the Principal Underwriter from the Fund. The Principal Underwriter
intends to seek full payment of such charges from the Fund (together with
annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
payments, the effect would be to extend the period of time during which the
Fund incurs the maximum amount of costs allowed by a Distribution Plan.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B
shares sold during the two-year period commencing approximately June 1, 1995.
The Fund has agreed not to reduce the rate of payment of 12b-1 fees in respect
of such Class B shares unless it terminates such shares' Distribution Plan
completely. If it terminates such Distribution Plan, the Fund may be subject
to possible adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. If a Distribution Plan is terminated, the Principal
Underwriter will ask the Independent Trustees to take whatever action they
deem appropriate under the circumstances.
Unreimbursed distribution expenses at June 30, 1996 were $1,069,672 for
Class B shares purchased prior to June 1, 1995 (10.65% of such Class B net
assets at June 30, 1996); $201,443 for Class B shares purchased on or after
June 1, 1995 (2.01% of such Class B net assets at June 30, 1996); and
$1,036,758 for Class C shares (31.6% of Class C net assets at June 30, 1996).
For the year ended June 30, 1996, the Fund paid the Principal Underwriter
$148,564 under its Class A Distribution Plan; $77,113 for Class B shares prior
to June 1, 1995, and $25,876 for Class B shares sold on or after June 1, 1995,
under its Class B Distribution Plans; and $27,202 under its Class C
Distribution Plan.
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.
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HOW TO REDEEM SHARES
- ------------------------------------------------------------------------------
You may redeem Fund shares for cash at their net redemption value, expected to
be a constant $1.00 per share, upon written order to the Fund c/o KIRC, and
presentation to the Fund of a properly endorsed share certificate (if
certificates have been issued). Your signature(s) on the written order and
certificates must be guaranteed as described below. In order to redeem by
telephone or to engage in telephone transactions generally, you must complete
the authorization in your account application. Proceeds for shares redeemed on
telephonic order will be deposited by wire or EFT only to the bank account
designated in your account application.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from 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 deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. The Principal Underwriter
charges no fee for this service. Your broker-dealer, however, may charge a
fee.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable
to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case, the Fund will mail the
redemption proceeds upon clearance of the purchase check, which may take 15
days or more. Any delay may be avoided by purchasing shares either with a
certified check, by Federal Reserve or bank wire of funds, or by EFT. Although
the mailing of a redemption check or the wiring or EFT of redemption proceeds
may be delayed, the redemption value will be determined and the redemption
processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after the redemption and prior to the release
of the proceeds, no appreciation or depreciation will occur in the value of
the redeemed shares, and no interest will be paid on the redemption proceeds.
If the payment of a redemption has been delayed, the check will be mailed or
the proceeds wired or sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable contingent deferred sales
charge (as described above), will be made within seven days thereafter except
as discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC may
waive this requirement, or require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such case, the Fund will request the mission information from you
and process the order on the day such information is received.
BY CHECK
If requested, the Fund will establish a checking account for each class of
shares held by the shareholder with State Street Bank and Trust Company
("State Street"). Checks may be drawn for $500 or more and may be payable to
anyone. When a check is presented to State Street for payment, it will cause
the Fund to redeem, at the net asset value next determined, a sufficient
number of the shareholder's shares to cover the check. A shareholder thereby
receives the daily dividends declared on the shares to be redeemed to cover
the check through the day State Street instructs the Fund to redeem them.
There is currently no charge to the shareholder for this checking account.
BY TELEPHONE
A shareholder may redeem any amount from his or her account by calling toll-
free 1-800-343-2898 or by using the Keystone Automated Response Line ("KARL").
(See the "Shareholder Services" section of this prospectus for a description
of KARL.)
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation
of your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if
the address and bank account of record have been the same for a minimum period
of 30 days.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Because of 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.
GENERAL
The checking account described in this prospectus will be subject to State
Street's rules and regulations governing checking accounts. If there is an
insufficient number of shares in a shareholder's account when a check is
presented to State Street for payment, the check will be returned. If a
shareholder presents a check on his or her account in person to State Street,
it will be treated as a redemption by mail received that day.
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. State Street reserves the right, at
any time, to terminate, suspend or change the terms of the offered checking
account and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over KARL or by
telephone. KIRC will employ reasonable procedures to confirm that instructions
received over KARL or by telephone are genuine. Neither the Fund, KIRC nor the
Principal Underwriter will be liable when following instructions received over
KARL or by telephone that KIRC reasonably believes to be genuine. If, for any
reason, reasonable procedures are not followed, the Fund, KIRC, or the
Principal Underwriter may be liable for any losses due to unauthorized or
fraudulent instructions.
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.
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SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers shareholders specific fund account information and price and
yield quotations as well as the ability to effect account transactions,
including investments, exchanges and redemptions. Shareholders may access KARL
by dialing toll free 1-800-346-3858 on any touch-tone telephone, 24 hours a
day, seven days a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange Class
A shares of the Fund that were purchased directly for shares of any of the
funds in the Keystone Fund Family. This exchange privilege may be restricted
for shareholders wishing to exchange Class A Fund shares that the shareholder
acquired in a prior exchange transaction using shares of any fund in the
Keystone Fund Family.
A Fund shareholder exchanging into any such Keystone fund acquires his or
her shares subject to the sales charges, deferred sales charges or other fees
imposed by the new fund as they may apply.
In addition, you may exchange shares of the Fund for shares of Keystone
America Funds as follows:
Class A shares may be exchanged for Class A shares of certain Keystone
America Funds;
Class B shares, except as noted below, may be exchanged for the same type
of Class B shares of certain Keystone America Funds; and
Class C shares may be exchanged for Class C shares of certain Keystone
America Funds.
Class B shares purchased on or after June 1, 1995 cannot be exchanged for
Class B shares of Keystone Capital Preservation and Income Fund during the 24
month period commencing with and including the month of original purchase.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are:
(1) Class B shares that have been held for less than 72 months or four
years, as the case may be, or
(2) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over
to the shares being acquired in the exchange transaction.
You may exchange shares by calling toll free
1-800-343-2898, by writing KIRC or by calling KARL.
Subject to the foregoing restrictions, Fund shares purchased by check may be
exchanged for shares of the named funds, other than Keystone Precious Metal
Holdings, Inc. ("KPMH"). In order to exchange Fund shares for shares of KPMH,
a shareholder must have held Fund shares for a period of six months.
You may exchange your shares as described above for another Keystone fund
for a $10 fee by calling or writing to Keystone. The exchange fee is waived
for individual investors who make an exchange using KARL. As noted above, if
the shares being exchanged are still subject to a deferred sales charge, such
charge will carry over to the shares being acquired in the exchange
transaction. Shares of the Fund purchased directly and not by prior exchange
into the Fund are not subject to an exchange fee upon exchange into another
fund. The Fund reserves the right to terminate this exchange offer or change
the fee charged for any exchange.
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 $100 per month or quarter from your bank account or from the Fund 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
Keystone. Please include your account numbers. Termination may take up to 30
days.
DOLLAR COST AVERAGING
Subject to the exchange restrictions set forth above and any other
applicable exchange restrictions, you may elect to have a prestated amount
automatically exchanged from your Fund account to any other Keystone fund.
This exchange may be made either monthly or quarterly. There is a $100 minimum
for each exchange, and there may be a minimal charge for each transaction.
Upon written notice, you may change the amount to be exchanged, the frequency
or the fund designated to receive such exchanges.
SYSTEMATIC INCOME PLAN
Under the Fund's Systematic Income Plan, shareholders may request that they
receive a monthly check in any specified amount of $100 or more. Upon written
notice, the frequency and amount of such payments may be changed by the
shareholder at any time. Depending upon the amount requested to be paid, the
Fund's yield and the size of the shareholder's account, the specified
distribution may in part include some return of capital. If the return of
capital is continued it may possibly exhaust the shareholder's investment in
the Fund.
RETIREMENT PLANS
The Fund has various retirement plans available to investors, 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; Profit-Sharing Plans, and
Money Purchase Pension Plans. For details, including fees and application
forms, call toll free 1-800-247-4075 or write to KIRC.
- ------------------------------------------------------------------------------
PERFORMANCE DATA
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise "yield" and "effective yield." BOTH
YIELD FIGURES ARE BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME.
The "yield" of a class refers to the income generated by an investment in the
Fund over a stated seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly, but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. See the statement of additional
information for more complete information concerning performance calculations.
The Fund may also include comparative performance information 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 and 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 has a
different designation. When issued and paid for, the shares will be fully paid
and nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion,
exchange or preemptive rights. Shares are redeemable, transferable and freely
assignable as collateral. The Fund may establish additional classes or series
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 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, as Supplemented (the "Declaration
of Trust") and under the 1940 Act. As provided in the Fund's Declaration of
Trust, shareholders have the right to remove Trustees by an affirmative vote
of two-thirds of the outstanding shares. A special meeting of the shareholders
will be held when holders of 10% of the outstanding shares request a meeting
for the purpose of removing a Trustee.
The Fund is prepared to assist shareholders in communications with one
another for the purpose of convening such a meeting as prescribed by Section
16(c) of the 1940 Act.
- ------------------------------------------------------------------------------
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.
COMMERCIAL PAPER
The Fund's investments in commercial paper are limited to those rated A-1 by
S&P, Prime-1 by Moody's or F-1 by Fitch. These are the highest ratings
assigned by such rating services.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of
interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally
referred to as sovereign risk). In addition, evidences of ownership of such
securities may be held outside the U.S., and the Fund may be subject to the
risks associated with the holding of such property overseas. Examples of
governmental actions would be the imposition of currency controls, interest
limitations, withholding taxes, seizure of assets or the declaration of a
moratorium. Various provisions of federal law governing domestic branches do
not apply to foreign branches of domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch or may be limited by the
terms of a specific obligation and by federal and state regulation as well as
by governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
ILLIQUID SECURITIES
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 Trustees has
adopted guidelines and procedures pursuant to which Keystone determines the
liquidity of the Fund's Rule 144A securities. The Board of Trustees monitors
Keystone's implementation of such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the
market for Rule 144A securities will develop. A Rule 144A security that was
readily marketable upon purchase may subsequently become illiquid. In such an
event, the Board of Trustees will consider what action, if any, is
appropriate.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to
direct arrangements between the Fund, as lender, and the issuer, as borrower.
Master demand notes may permit daily fluctuations in the interest rate and
daily changes in the amount borrowed. The Fund has the right to increase the
amount under the note at any time up to the full amount provided by the note
agreement or to decrease the amount. The borrower may repay up to the full
amount of the note without penalty. Notes purchased by the Fund permit the
Fund to demand payment of principal and accrued interest at any time (on not
more than seven days' notice) and to resell the note at any time to a third
party. Notes acquired by the Fund may have maturities of more than one year,
provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days' notice, and (2) the rate of interest
on such notes is adjusted automatically at periodic intervals which normally
will not exceed 31 days but may extend up to one year. The notes are deemed to
have a maturity equal to the longer of the period remaining to the next
interest rate adjustment or the demand notice period. Because these types of
notes are direct lending arrangements between the lender and the borrower,
such instruments are not normally traded, and there is no secondary market for
these notes, although they are redeemable and thus repayable by the borrower
at face value plus accrued interest at any time. Accordingly, the Fund's right
to redeem is dependent on the ability of the borrower to pay principal and
interest on demand. In connection with master demand note arrangements,
Keystone considers, under standards established by the Fund's Board of
Trustees, earning power, cash flow and other liquidity ratios of the borrower
and will monitor the ability of the borrower to pay principal and interest on
demand. These notes typically are not rated by credit rating agencies. Unless
rated, the Fund will invest in them only if, at the time of investment, the
issuer meets the criteria established for commercial paper.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers
in U.S. government securities or other financial institutions believed by
Keystone to be creditworthy. Such persons must be registered as U.S.
government securities dealers with an appropriate regulatory organization.
Under such agreements, the bank, primary dealer or other financial institution
agrees upon entering into the contract to repurchase the security at a
mutually agreed upon date and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. Under a repurchase agreement, the
seller must be required to maintain the value of the securities subject to the
agreement at not less than the repurchase price, such value being determined
on a daily basis by marking the underlying securities to their market value.
Although the securities subject to the repurchase agreement might bear
maturities exceeding a year, the Fund intends only to enter into repurchase
agreements which provide for settlement within a year and usually within seven
days. Securities subject to repurchase agreements will be held by the Fund's
custodian or in the Federal Reserve book entry system. The Fund does not bear
the risk of a decline in the value of the underlying security unless the
seller defaults under its repurchase obligation. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and losses
including (1) possible declines in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto; (2)
possible subnormal levels of income and lack of access to income during this
period; and (3) expenses of enforcing its rights. The Board of Trustees has
established procedures to evaluate the creditworthiness of each party with
whom the Fund enters into repurchase agreements by setting guidelines and
standards of review for Keystone and monitoring Keystone's actions with regard
to repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having
to sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement,
it will establish a segregated account with the Fund's custodian containing
liquid assets such as U.S. government or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities that the Fund is obligated to repurchase may decline below the
repurchase price.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities on a when issued or delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. When issued or delayed delivery transactions arise when securities are
purchased by the Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of purchase. A forward commitment transaction is an
agreement by the Fund to purchase or sell securities at a specified future
date. When the Fund engages in when issued and delayed delivery transactions,
the Fund relies on the buyer or seller, as the case may be, to consummate the
sale. Failure to do so may result in the Fund missing the opportunity to
obtain a price or yield considered to be advantageous. When issued and delayed
delivery transactions may be expected to occur a month or more before
delivery is due. No payment or delivery is made by the Fund, however, until it
receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments may be maintained until payment is made. When issued and delayed
delivery agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors, both before
and after delivery. The Fund does not accrue any income on such securities or
currencies prior to their delivery. To the extent the Fund engages in when
issued and delayed delivery transactions, it will do so consistent with its
investment objective and policies and not for the purpose of investment
leverage. The Fund currently does not intend to invest more than 5% of its
assets in when issued or delayed delivery transactions.
<PAGE>
CERTIFICATE OF RESOLUTIONS
INSTRUCTIONS: Please fill in all information requested. Any change in the
information must be made by a new Certificate of Resolutions.
1. VOTED: That STATE STREET BANK AND TRUST COMPANY, Boston, Massachusetts
("State Street"), its successors or assigns, be and hereby is designated a
depository of this corporation or business trust, and is authorized and
directed to pay and to charge to the account of this corporation or
business trust without limit as to amount and without inquiry as to
circumstance of issue or disposition of the proceeds, even if drawn or
endorsed to any signing or endorsing officer or other officer of this
corporation or business trust or tendered in payment of the individual
obligation of any such officer or for his credit or for deposit to his
personal account, any and all checks, drafts, notes, bills of exchange, or
other orders for the payment of money upon State Street, its successors or
assigns, or payable at the office thereof and signed on behalf of this
corporation or business trust by any ____________ of its following
officers, to wit (insert titles of officers rather than their names):
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. VOTED: That _____________________________ is hereby authorized from time to
(Title)
time (a) to complete and execute on behalf of this corporation or business
trust one or more applications issued by Keystone Liquid Trust substantially
in the form attached to its current prospectus and (b) to designate the bank
and account referred to under Paragraph F-2, TELEPHONE REDEMPTIONS of such
application.
3. VOTED: That the preceding votes shall remain in full force and effect until
terminated by a subsequent vote and until written notice signed by the
Secretary (Clerk) of this corporation or business trust of such subsequent
vote is delivered in the case of Vote 1 to State Street and in the case of
Vote 2 to Keystone Liquid Trust.
I, ___________________________, (Secretary) (Clerk) of ____________________
______________ , a corporation or business trust organized under the laws
of the State of _________________________________________________________ ,
do hereby certify that the above votes were duly adopted by the Board of
Directors or Trustees of said corporation or business trust on the --------
day of ____________________ 19 ________, in conformity with its Charter
(or Trust Agreement) and By-Laws and are in full force and effect.
I further certify that the following persons are authorized to act in
accordance with the foregoing vote, that the signatures set opposite their
names are their true and correct signatures and that they have been duly
elected or appointed to the offices in this corporation or business trust,
if any, set opposite their names:
________________________________ _____________________________ _______________
Name Signature Title
________________________________ _____________________________ _______________
Name Signature Title
In witness whereof, I hereunto set my hand and the seal of said corporation
or business trust this _____________________________________________ day of
______________________________ 19 ________ .
*Confirmed
______________________________________ ______________________________________
Secretary
Clerk
______________________________________
(Title)
*If the Secretary, Clerk or other recording officer is authorized to act by
the above resolutions, this certificate must be signed by another officer.
<PAGE>
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[Recycle Logo]
KLT-P 10/96
2M
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KEYSTONE
--------------------------------
[Graphic Omitted]
--------------------------------
LIQUID
TRUST
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[Logo]
PROSPECTUS AND
APPLICATION
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE LIQUID TRUST
October 31, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Liquid Trust (the "Fund") dated October 31, 1996. A copy of the prospectus may
be obtained from Keystone Investment Distributors Company (the "Principal
Underwriter"), the Fund's principal underwriter, 200 Berkeley Street, Boston, MA
02116-5034, or your broker-dealer.
TABLE OF CONTENTS
Page
Investment Objective and Policies 2
Investment Restrictions 2
Distributions 5
Valuation of Securities 5
Brokerage 6
Sales Charges 8
Distribution Plans 11
Trustees and Officers 15
Investment Manager 19
Investment Adviser 22
Principal Underwriter 24
Declaration of Trust 26
Yield Quotations 28
Additional Information 30
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-12
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is an open-end, diversified management investment company. The
Fund's investment objective is to provide shareholders with high current income
from short-term money market instruments while emphasizing preservation of
capital and maintaining excellent liquidity. The Fund pursues this objective by
investing in securities maturing in 397 days or less. See the Appendix to this
statement of additional information for descriptions of instruments in which the
Fund may invest.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the vote of a majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (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).
The Fund may not do the following:
(1) invest more than 25% of its assets in the securities of issuers in
any single industry, exclusive of securities issued by banks or securities
issued or guaranteed by the United States ("U.S.") government, its agencies or
instrumentalities;
(2) invest more than 5% of its assets in the securities of any one
issuer, including repurchase agreements with any one bank or dealer, exclusive
of securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(3) invest in more than 10% of the outstanding securities of
any one issuer, exclusive of securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities;
(4) borrow money, except that, in an aggregate amount not to exceed
one-third of the Fund's assets, including the amount borrowed, the Fund may (a)
borrow money from banks on a temporary basis; or (b) enter into reverse
repurchase agreements; amounts borrowed shall be used exclusively to facilitate
the orderly maturation and sale of portfolio securities during any periods of
abnormally heavy redemption requests, if they should occur;
(5) pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Fund, except as may be
necessary in connection with any borrowing mentioned above and in an aggregate
amount not to exceed 15% of the Fund's assets;
(6) make loans, provided that the Fund may purchase money market
securities or enter into repurchase agreements;
(7) enter into repurchase agreements if, as a result thereof, more than
10% of the Fund's assets would be subject to repurchase agreements maturing in
more than seven days;
(8) make investments for the purpose of exercising control
over any issuer;
(9) purchase securities of other investment companies, except
in connection with a merger, consolidation, acquisition or
reorganization;
(10) invest in real estate, other than money market securities secured
by real estate or interests therein, or money market securities issued by
companies which invest in real estate or interests therein, commodities or
commodity contracts, interests in oil, gas or other mineral exploration or
development programs; except that the Fund may engage in currency or other
financial futures contracts and related options transactions;
(11) purchase any securities on margin;
(12) make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations thereof;
(13) invest in securities of issuers, other than agencies and
instrumentalities of the U.S. Government, having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the Fund's assets would be invested in such securities;
(14) purchase or retain securities of an issuer if those officers or
Trustees of the Fund or Keystone who individually own more than 1/2% of the
outstanding securities of such issuer, together own more than 5% of the
securities of such issuer; and
(15) act as an underwriter of securities.
The Fund has no current intention of attempting to increase its net
income by borrowing and currently intends to repay any borrowings made in
accordance with the fourth investment restriction enumerated above before it
makes any additional investments.
Non-Fundamental Investment Policies
The Fund intends to follow policies of the Securities and Exchange
Commission (the "Commission") as they are adopted from time to time with respect
to illiquid securities, including (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 the investment on its
books; and (2) limiting its holdings of such securities to less than 10% of net
assets.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in the value of
a security or a decrease in Fund assets is not a violation of the limit.
DISTRIBUTIONS
The Fund determines and declares dividends from the net income of the
Fund as of the close of trading on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern time for the purpose of pricing Fund shares) on
each day that the Exchange is open for trading (or at such other times as the
Trustees may determine). The Fund distributes those dividends on the last
business day of each month in the form of additional shares at the rate of one
share for each $1.00 distributed or, at the election of the shareholder, in
cash.
VALUATION OF SECURITIES
The Fund values its money market instruments as follows: (1) money
market investments maturing in sixty days or less are valued at amortized cost
(original purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market; and
(2) money market investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value. The money
market securities in which the Fund invests are traded primarily in the
over-the-counter market and are valued at the mean between most recent bid and
asked prices or yield equivalent as obtained from dealers that make markets in
such securities. Investments for which market quotations are not readily
available, or for which the markets establishing the most recent bid and asked
prices are closed or inactive, are valued at fair value as determined pursuant
to procedures established in good faith by the Fund's Board of Trustees.
Redemption of Shares
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder in any 90-day period up
to the lesser of $250,000 or 1% of the Fund's net assets at the beginning of
such period.
BROKERAGE
It is the policy of Keystone Investment Management Company
("Keystone"), the Fund's investment adviser, in effecting transactions in the
Fund's portfolio securities, to seek best execution of orders at the most
favorable prices. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker involves a number
of considerations, including, without limitation, the overall direct net
economic result to the Fund, involving both price paid or received and any
commissions and other costs paid; the efficiency with which the transaction is
effected; the broker's ability to effect the transaction at all where a large
block is involved; the availability of the broker to stand ready to execute
potentially difficult transactions in the future; and the financial strength and
stability of the broker. Such considerations are weighed by management in
determining the overall reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund, Keystone Management, Inc.
("Keystone Management"), the Fund's investment manager, or Keystone is
considered to be in addition to, and not in lieu of, services required to be
performed by Keystone Management under its Management Agreement with the Fund
(the "management Agreement") or Keystone under its Advisory Agreement with
Keystone Management (the "Advisory Agreement"). The cost, value and specific
application of such information are indeterminable and cannot be practically
allocated among the Fund and other clients of Keystone Management and Keystone
who may indirectly benefit from the availability of such information. Similarly,
the Fund may indirectly benefit from information made available as a result of
transactions effected for such other clients.
The Fund expects that purchases and sales of money market instruments
usually will be principal transactions. Money market instruments are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually will be no brokerage commissions paid by the Fund
for such purchases. Purchases from underwriters will include the underwriting
commission or concession, and purchases from dealers serving as market makers
will include the spread between the bid and asked prices. Where transactions are
made in the over-the-counter market, the Fund will deal with primary market
makers unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities, thereby taking
advantage of the lower purchase price available to such a group.
Neither Keystone nor the Fund intends to place securities transactions
with any particular broker-dealer or group thereof. The Fund's Board of Trustees
has determined, however, that the Fund may consider sales of Fund shares as a
factor when selecting broker-dealers to execute portfolio transactions, subject
to the requirements of best execution described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made by Keystone Management or
Keystone independently from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop that the
same investment decision is made for more than one fund. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, Keystone will
allocate the transactions as to amount in accordance with a formula which is
equitable to each fund or account. Although in some cases this system could have
a detrimental effect on the price or volume of the Fund's security, the Fund
recognizes that, in other cases its ability to participate in volume
transactions will produce better executions.
In no instance will portfolio securities be purchased from or sold to
Keystone Management, Keystone, the Principal Underwriter or any of their
affiliated persons, as defined in the 1940 Act and rules and regulations issued
thereunder.
The Fund paid no brokerage commissions for securities transactions
during its last three fiscal years.
SALES CHARGES
General
The Fund offers Class A, B, and C shares. Class A shares are offered at
net asset value without a sales charge ("No Load Option"). Class B shares
purchased on or after June 1, 1995 are subject to a contingent deferred sales
charge if redeemed during the 72-month period from and including the month of
purchase ("Back-End Load Option"). Class B shares purchased prior to June 1,
1995 are sold subject to a contingent deferred sales charge payable upon
redemption within four calendar years after the first year of purchase. Class B
shares purchased on or after June 1, 1995 that have been outstanding eight years
from and including the month of purchase will automatically convert to Class A
shares without the imposition of a front-end sales charge or exchange fee. Class
B shares purchased prior to June 1, 1995 that have been outstanding during seven
calendar years will similarly convert to Class A shares. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to Keystone Investor Resource Center, Inc., the Fund's transfer and
dividend disbursing agent ("KIRC").) Class C shares are sold subject to a
contingent deferred sales charge payable upon redemption within one year after
purchase ("Level Load Option"). Class C shares are available only through
broker-dealers who have entered into special distribution agreements with the
Principal Underwriter. The prospectus contains a general description of how
investors may buy shares of the Fund and a description of applicable contingent
deferred sales charges.
Contingent Deferred Sales Charges
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plans"), a contingent deferred sales
charge is imposed at the time of redemption of certain Fund shares as described
below. If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge on Class B
shares redeemed during succeeding twelve-month periods as follows: 5% during the
first twelve-month period; 4% during the second twelve-month period; 3% during
the third twelve-month period; 3% during the fourth twelve-month period; 2%
during the fifth twelve-month period; and 1% during the sixth twelve-month
period. No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge of 3% on
shares redeemed during the calendar year of purchase and during the first
calendar year after purchase; 2% on shares redeemed during the second calendar
year after purchase; and 1% on shares redeemed during the third calendar year
after purchase. No deferred sales charge is imposed on amounts redeemed
thereafter.
Amounts received by the Principal Underwriter under the Class
B Distribution Plans are reduced by deferred sales charges retained
by the Principal Underwriter. See "Calculation of Contingent
Deferred Sales Charge" below.
Class C Shares
With certain exceptions, the Fund will impose a deferred sales charge
of 1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter.
Calculation of Contingent Deferred Sales Charge
Any contingent deferred sales charge imposed upon the redemption of
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares; (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) Class B shares held more
than four consecutive calendar years or more than 72 months as the case may be;
or (4)Class C shares held for more than one year from date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase, for purposes of any future deferred sales charge,
is deemed to be the year shares tendered for exchange were originally purchased.
Waiver of Deferred Sales Charge
No contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder;
(2) a lump-sum distribution from a benefit plan qualified under the Employee
Retirement Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from
ERISA plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of accounts having an aggregate net asset value of less than $1,000;
(5) automatic withdrawals under a Systematic Income Plan of up to 1.5% of the
shareholder's initial account balance per month; (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.
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.
The National Association of Securities Dealers, Inc. ("NASD") limits
the amount that the Fund may pay annually in distribution costs for sale of its
shares and shareholder service fees. The NASD limits annual expenditures to 1%
of the aggregate average daily net asset value of its shares, of which 0.75% may
be used to pay 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 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 contingent deferred sales charges paid by shareholders to the Principal
Underwriter).
Class A Distribution Plan
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate that 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 a
principal underwriter of the Fund (currently the Principal Underwriter) to
enable the Principal Underwriter to pay or to have paid to others who sell Class
A shares a service fee or other fee, at such intervals as the Principal
Underwriter may determine, in respect of Class A shares maintained by such
recipients and outstanding on the books of the Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average daily net asset value of Class A shares
maintained by such others and outstanding on the books of the Fund for specified
periods.
Class B Distribution Plans
The Fund has adopted Class B Distribution Plans that 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 a
principal underwriter of the Fund (currently 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 the Distribution Plan; and
(2) to enable the Principal Underwriter to pay or to have paid to others a
service fee, at such intervals as the Principal Underwriter may determine, in
respect of Class B shares previously maintained by any such recipients and
outstanding on the books of the Fund for specified periods.
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
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class B share sold. Beginning approximately 12 months after the
purchase of a Class B share, the broker-dealer or other party receives service
fees at an annual rate of 0.25% of the average daily net asset value of such
Class B share maintained by any such recipients and outstanding on the books of
the Fund for specified periods.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, the Principal Underwriter has
sold to a financial institution substantially all of its 12b-1 fee collection
rights and contingent deferred sales charge collection rights in respect of
Class B shares sold during the two-year period commencing approximately June 1,
1995. 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 Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with each Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Fund would be within the permitted limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
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 a principal underwriter of the Fund
(currently 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; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class C shares maintained
by any such recipients and outstanding on the books of the Fund for specified
periods.
The Principal Underwriter generally reallows to 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% of the average daily net asset value of each Class C share
maintained by such recipients and outstanding on the books of the
Fund for specified periods.
Distribution Plans - General
Each of the Distribution Plans may be terminated at any time by vote of
the Fund's Trustees who had no direct or indirect financial interest in the
Distribution Plans or any agreement related thereto (the "Rule 12b-1 Trustees"),
or by vote of a majority of the outstanding voting shares of the respective
class of the Fund. Any change in a Distribution Plan that would materially
increase the distribution expenses of the Fund provided for in the Distribution
Plan requires shareholder approval. Otherwise, the Distribution Plans may be
amended by the Trustees, including the Rule 12b-1 Trustees.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Trustees who are not
interested persons of the Fund (as defined in the 1940 Act)(the "Independent
Trustees") to the discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by a Distribution Plan as stated
above.
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
During the year ended June 30, 1996, the Fund paid the Principal
Underwriter $148,564, $77,113, $25,876 and $27,202 in Distribution Plan fees for
Class A shares, Class B shares sold prior to June 1, 1995, Class B shares sold
on or after June 1, 1995 and Class C shares, respectively, which represented
0.06%, 0.89%, 0.30% and 1.00%, respectively, of the average net assets of each
Class.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
TRUSTEES AND OFFICERS
Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President and Chief Executive Officer of
Keystone Investments, Keystone, Keystone Management, Inc. ("Keystone
Management") and Keystone Software, Inc. ("Keystone Software");
President, Chief Executive Officer and Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Chairman of the
Board and Director of Keystone Institutional Company, Inc. ("Keystone
Institutional")and Keystone Fixed Income Advisors ("KFIA"); Director
and President of Keystone Asset Corporation, Keystone Capital
Corporation and Keystone Trust Company; Director of the Principal
Underwriter, KIRC, and Fiduciary Investment Company, Inc. ("FICO");
Director of Boston Children's Services Association; Trustee of Anatolia
College, Middlesex School, and Middlebury College; Member, Board of
Governors, New England Medical Center; former Director and President of
Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"); former Director
and Vice President, Robert Van Partners, Inc.; and former Trustee of
Neworld Bank.
FREDERICKAMLING: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Pro fessor, Finance
Department, George Washington University; President, Amling & Company
(investment advice); and former Member, Board of Advisers, Credito
Emilano (banking).
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Investment Counselor
to Appleton Partners, Inc.; and former Managing Director, Seaward
Management Corporation (in vestment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Chairman of
the Board and Trustee or Director of all other funds in the Keystone
Investments Family of Funds; Director of Keystone Investments; 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 and Chief Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Principal, Padanaram
Associates, Inc.; and former Executive Director, Coalition of Essential
Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; and former Director,
Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family 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.
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family 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.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Chairman and Of
Counsel, Keyser, Crowley, Meub, Layden, Kulig & Sullivan 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; Di rector, 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, Hitchcock Clinic, Proctor
Bank, and Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Vice Chair and
former Executive Vice President, DHR Interna tional, Inc. (executive
recruitment); former Senior Vice President, Boyden International Inc.
(executive recruitment); and Director, Commerce and Industry
Association of New Jersey, 411 International, Inc., and J & M Cumming
Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Chairman, Environmental
Warranty, Inc. (insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of Connecticut Natural
Gas Corpora tion, 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 Corpora tion; former Trustee,
Kingswood-Oxford School; and former Managing Director and Consultant,
Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; 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.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; Director,
Senior Vice President, Chief Financial Officer, and Treasurer of
Keystone Investments, the Principal Underwriter, Keystone Asset
Corporation, Keystone Capital Corporation, and Keystone Trust Company;
Treasurer of Keystone Institutional and FICO; Treasurer and Director of
Keystone Management and Keystone Software; Vice President and Treasurer
of KFIA; Director of KIRC; former Treasurer and Director of Hartwell
Keystone; and former Treasurer of Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; and
President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in
the Keystone Investments Family of Funds; Vice President and former
Controller of Keystone Investments, Keystone, the Principal
Underwriter, FICO, and Keystone Software; and former Controller of
Keystone Asset Corporation and Keystone Capital Corporation.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other funds in the Keystone
Investments Family of Funds; Senior Vice President, General Counsel,
and Secretary of Keystone; Senior Vice President, General Counsel,
Secretary, and Director of the Principal Underwriter, Keystone
Management, and Keystone Software; Senior Vice President and General
Counsel of Keystone Institutional; Senior Vice President, General
Counsel, and Director of FICO and KIRC; Vice President and Secretary of
KFIA; Senior Vice President, General Counsel, and Secretary of Keystone
Investments, Keystone Asset Corporation, Keystone Capital Corporation,
and Keystone Trust Company; and former Senior Vice President and
Secretary of Hartwell Keystone and Robert Van Partners, Inc.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain
other Keystone Investments Funds; and Senior Vice President of
Keystone.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended June 30, 1996, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. Annual
retainers and meeting fees paid by all funds in the Keystone Investments Family
of Funds (which includes over 30 mutual funds) for the calendar year ended
December 31, 1995, totaled approximately $450,716. On September 30, 1996,
Trustees and officers of the Fund beneficially owned less than 1% of the Fund's
then outstanding Class A shares and none of the Fund's then outstanding Class B
and Class C shares.
The address of all Trustees and officers of the Fund and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
INVESTMENT MANAGER
Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund. As investment manager,
Keystone Management is responsible for the overall management of the Fund's
business and affairs. Keystone Management, organized in 1989, is a wholly-owned
subsidiary of Keystone, and its directors and principal executive officers have
been affiliated with Keystone, a seasoned investment adviser, for a number of
years. Keystone Management also serves as investment manager to each of the
funds in the Keystone Fund Family and to certain other funds in the Keystone
Investments Family of Funds.
Except as otherwise noted below, pursuant to the Management Agreement,
Keystone Management manages and administers the operation of the Fund and
manages the investment and reinvestment of the Fund's assets in conformity with
the Fund's investment objective and restrictions. The Management Agreement
stipulates that Keystone Management shall provide office space and all necessary
facilities, equipment and personnel for management of the Fund's affairs and
shall pay all compensation of employees, officers, and Trustees of the Fund who
are affiliated persons of Keystone and Keystone Management. The Fund shall bear
all other costs and expenses including, but not limited to: (i) interest and
taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv) compensation
and expenses of its Trustees and officers other than those affiliated with
Keystone or Keystone Management; (v) legal, audit and accounting expenses; (vi)
fees and expenses of a custodian and transfer agent; (vii) expenses incident to
the issuance of Fund Shares, including issuance on the payment of, or
reinvestment of, dividends; (viii) fees and expenses of the registration and
qualification of the Fund and its Shares with the Commission or under state
securities laws; (ix) expenses of preparing, printing and mailing prospectuses,
reports, notices and proxy material to shareholders of the fund; (x) all other
expenses incidental to holding meetings of the Fund's shareholders; and (xi)
such nonrecurring expenses as may arise, including litigation affecting the Fund
and the legal obligations with respect to which the Fund may have to indemnify
its officers and Trustees.
The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, under which Keystone or
such other investment adviser, as investment adviser, will provide substantially
all the services to be provided by Keystone Management under the Management
Agreement. The Management Agreement also permits Keystone Management to delegate
to Keystone or another investment adviser substantially all of the investment
manager's rights, duties and obligations under the Management Agreement.
Services performed by Keystone Management include (1) performing
research and planning with respect to (a) the Fund's qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"), (b) tax treatment of the Fund's portfolio investments,(c) tax
treatment of special corporate actions (such as reorganizations), (d) state tax
matters affecting the Fund, and (e) the Fund's distributions of income and
capital gains; (2) preparing the Fund's federal and state tax returns; and (3)
providing services to the Fund's shareholders in connection with federal and
state taxation and distributions of income and capital gains.
The Fund pays Keystone Management a fee for its services at the annual
rate of:
(1) 0.50% of the average daily value of the net assets of the
Fund on the first $500,000,000 of such assets; plus
(2) 0.45% of the average daily value of the net assets of the Fund on
such assets which exceed $500,000,000 and are less than $1,000,000,000; plus
(3) 0.40% of the average daily value of the net assets of the Fund on
such assets which are $1,000,000,000 or more.
The fee is computed and accrued as of the close of each business day
and is payable monthly.
Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan expenses, are not included in the calculation of the state
expense limitations. This limitation may be modified or eliminated in the
future.
As a continuing condition of registration of shares in a state,
Keystone Management has agreed to reimburse the Fund annually for certain
operating expenses incurred by the Fund in excess of certain percentages of the
Fund's average daily net assets. Keystone Management is not required, however,
to make such reimbursements to the extent it would result in the Fund's
inability to qualify as a regulated investment company under provisions of the
Code. This condition may be modified or eliminated in the future.
The Management Agreement continues in effect only if approved at least
annually (i) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding shares, and (ii) by the vote of a majority of the Independent
Trustees cast in person at a meeting called for the purpose of voting on such
approval. The Management Agreement may be terminated, without penalty, by the
Fund's Board of Trustees or by a vote of a majority of outstanding shares on 60
days' written notice to Keystone Management, and by Keystone Management on 60
days' written notice to the Fund.
INVESTMENT ADVISER
Pursuant to its Management Agreement with the Fund, Keystone Management
has delegated its investment management functions, except for certain
administrative and management services, to Keystone and has entered into the
Advisory Agreement under which Keystone provides investment advisory and
management services to the Fund.
Keystone has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments. Both Keystone and
Keystone Investments are located at 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone. The shares of Keystone
Investments common stock beneficially owned by management are held in a number
of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner,
III, Edward F. Godfrey, Ralph J. Spuehler, Jr., and Rosemary D. Van Antwerp.
Keystone Investments provides accounting, bookkeeping, legal, personnel and
general corporate services to Keystone Management, Keystone, their affiliates
and the Keystone Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services
an annual fee equal to 85% of the management fee received by Keystone Management
under the Management Agreement.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone manages and administers the operation of
the Fund and manages the investment and reinvestment of the Fund's assets in
conformity with the Fund's investment objective and restrictions. The Advisory
Agreement stipulates that Keystone shall provide office space and all necessary
facilities, equipment and personnel for management of the Fund's affairs and
shall pay all compensation of employees, officers, and Trustees of the Fund who
are affiliated persons of Keystone and Keystone Management. The Fund shall bear
all other costs and expenses including, but not limited to: (i) interest and
taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv) compensation
and expenses of its Trustees and officers other than those affiliated with
Keystone or Keystone Management; (v) legal, audit and accounting expenses; (vi)
fees and expenses of a custodian and transfer agent; (vii) expenses incident to
the issuance of Fund Shares, including issuance of the payment of, or
reinvestment of, dividends; (viii) fees and expenses of the registration and
qualification of the Fund and its Shares with the Commission or under state
securities laws; (ix) expenses of preparing, printing and mailing prospectuses,
reports, notices and proxy material to shareholders of the fund; (x) all other
expenses incidental to holding meetings of the Fund's shareholders; and (xi)
such nonrecurring expenses as may arise, including litigation affecting the Fund
and the legal obligations with respect to which the Fund may have to indemnify
its officers and Trustees.
During the fiscal year ended June 30, 1994, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,407,708, which represented 0.50% of the Fund's average net assets. Of such
amount paid to Keystone Management, $1,196,552 was paid to Keystone for its
services to the Fund.
During the fiscal year ended June 30, 1995, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,923,870, which represented 0.50% of the Fund's average net assets. Of such
amount paid to Keystone Management, $1,635,290 was paid to Keystone for its
services to the Fund.
During the fiscal year ended June 30, 1996, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,359,239, which represented 0.50% of the Fund's average net assets. Of such
amount paid to Keystone Management, $1,155,353 was paid to Keystone for its
services to the Fund.
Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant to
which Keystone Investments will be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC")(the
"Merger"). The surviving corporation will assume the name "Keystone Investments,
Inc." Subject to a number of conditions being met, it is currently anticipated
that the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.
If consummated, the proposed Merger will be deemed to cause an
assignment, within the meaning of the 1940 Act, of both the Management Agreement
and the Advisory Agreement. Consequently, the completion of the Merger is
contingent upon, among other things, the approval of the Fund's shareholders of
a new investment advisory agreement between the Fund and Keystone ("the "New
Advisory Agreement"). The Fund's Trustees have approved the terms of the New
Advisory Agreement, subject to the approval of shareholders and the completion
of the Merger, and have called a special meeting of shareholders to obtain their
approval of the New Advisory Agreement. The meeting is expected to be held in
December 1996. The proposed New Advisory Agreement has terms, including fees
payable thereunder, that are substantively identical to those in the current
agreements.
PRINCIPAL UNDERWRITER
The Fund has entered into Principal Underwriting Agreements, (the
"Underwriting Agreements") with the Principal Underwriter, a Delaware
corporation and wholly-owned subsidiary of Keystone.
The Principal Underwriter, as agent, currently has the right to obtain
subscriptions for and to sell shares of the Fund to the public. In so doing, the
Principal Underwriter may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers or others,
acting as principals, for sales of shares. No representative, dealer or broker
has any authority to act as agent for the Fund. The Principal Underwriter has
not undertaken to buy or to find purchasers for any specific number of shares.
The Principal Underwriter may receive payments from the Fund pursuant to the
Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares in accordance with the provisions of the
Fund's Declaration of Trust, as supplemented, By-Laws, and current prospectus
and statement of additional information. All orders are subject to acceptance by
the Fund, and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Underwriting 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 registration of its shares with the Commission and
auditing and filing fees in connection with registration of its shares under the
various state "blue-sky" laws.
From time to time, if in the Principal Underwriter's judgement it could
benefit 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.
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 Trustee 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.
The Underwriting Agreements may be terminated, without penalty, on 60
days' written notice by the Fund's Board of Trustees or by a vote of a majority
of outstanding shares. The Underwriting Agreements will terminate automatically
upon their "assignment" as that term is defined in the 1940 Act.
In addition to an assignment of the Fund's Management Agreement and
Advisory Agreement, the Merger, if consummated, will also be deemed to cause an
assignment, as defined by the 1940 Act, of the Principal Underwriting Agreements
between the Fund and the Principal Underwriter. As a result, the Fund's Trustees
have approved the following agreements, subject to the completion of the Merger:
(i) a principal underwriting agreement between Evergreen Funds Distributor, Inc.
("EFD") and the Fund; (ii) a marketing services agreement between the Principal
Underwriter and EFD with respect to the Fund; and (iii) a subadministration
agreement between the Adviser and EFD with respect to the Fund. EFD is a
wholly-owned subsidiary of Furman Selz LLC. It is expected that on or about
January 2, 1997, Furman Selz LLC will transfer EFD, and Furman Selz's related
services, to BISYS Group, Inc. ("BISYS") (the "Transfer"). The Fund's' Trustees
have also approved, subject to completion of the Transfer: (i) a principal
underwriting agreement between EFD and the Fund; (ii) a marketing services
agreement between the Principal Underwriter and EFD with respect to the Fund;
and (iii) a subadministration agreement between the Adviser and BISYS with
respect to the Fund. The terms of such agreements are substantively identical to
the terms of the agreements to be executed upon completion of the Merger.
DECLARATION OF TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated May 22, 1975, as amended and restated on December 1,
1985 (the "Declaration of Trust"). The Fund is similar in most respects to a
business corporation. The principal distinction between the Fund and a
corporation relates to the shareholder liability described below. This summary
is qualified in its entirety by reference to the Declaration of Trust.
Shareholder Liability
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If, the Fund were held to be a partnership, the possibility of Fund
shareholders incurring financial loss for that reason appears remote because the
Fund's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Fund; (2) requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees; and (3) provides for indemnification out
of Fund property for any shareholder held personally liable for the obligations
of the Fund.
Voting Rights
Shareholders elected Trustees at a meeting held on July 27, 1993. No
further meetings of shareholders for the purpose of electing Trustees will be
held, unless required by law or until such time as less than a majority of the
Trustees holding office have been elected by shareholders. At such time, the
Trustees then in office will call a shareholders' meeting for election of
Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely unless otherwise required by law and may appoint successor
Trustees. Any Trustee may removed from or cease to hold office (1) at any time
by two-thirds vote of the remaining Trustees; (2) when such Trustee becomes
mentally or physically incapacitated; or (3) at a special meeting of
shareholders by a two-thirds vote of the outstanding shares. Any Trustee may
voluntarily resign from office.
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. Classes of shares have
equal voting rights except that each class of shares has exclusive voting rights
with respect to its Distribution Plan. No amendment may be made to the
Declaration of Trust that adversely affects any class of shares without the
approval of a majority of the shares of that class. Shares have non-cumulative
voting rights, which means the holders of more than 50% of the shares voting in
the election of Trustees can, if they choose to do so, elect all of the Trustees
of the Fund, in which event the holders of the remaining shares will be unable
to elect any person as a Trustee.
Limitations of Trustees' Liability
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of assets of the Fund and may perform such acts as in their sole
judgment and discretion are necessary and proper for conducting the business and
affairs of the Fund or promoting the interests of the Fund and the shareholders.
YIELD QUOTATIONS
The current yield of each class of the Fund equals the net change,
exclusive of capital changes (all realized and unrealized gains and losses); in
the value of a hypothetical pre-existing account having a balance of one share
at the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7) and carrying the
resulting current yield figure to the nearest hundredth of one percent. The
determination of net change in account value reflects the value of additional
shares purchased with the dividends from the original share and dividends
declared on both the original share and any such additional shares and all fees
charged to shareholder accounts in proportion to the length of the base period
and the average account size of a class.
If realized and unrealized gains and losses were included in the
calculation of the current yield, the current yield of a class of the Fund might
vary materially from that reported in advertisements.
For the seven day period ended June 30, 1996, the current yields of
Class A, Class B and Class C shares were 4.50%, 3.61%, and 3.61%, respectively.
In addition to the current yield of a class, the Fund may, from time to
time, advertise effective yield. The effective yield is calculated by
compounding the unannualized base period return by adding 1, raising the sum to
a power equal to 365 divided by 7, subtracting 1 from the result and carrying
the resulting effective yield figure to the nearest hundredth of one percent.
For the seven day period ended June 30, 1996, the effective yields of
Class A, Class B and Class C shares were 4.60%, 3.67%, and 3.67%, respectively.
The current and effective yields, as quoted in such advertisements,
will be based on information as of a date no more than fourteen days prior to
the date of their publication. Each yield will vary depending on market
conditions. Principal is not insured. Each yield also depends on the quality,
maturity and type of instruments held in the Fund and operating expenses. The
advertisements will include, among other things, the length of and the date of
the last day in the base period used in computing the quotation.
The yield of any investment is generally a function of quality and
maturity, type of investment and operating expenses. The current yield of a
class of the Fund will fluctuate from time to time and is not necessarily
representative of future results. In addition, past performance is not a
guarantee of future results.
Current yield information is useful in reviewing the Fund's
performance, but because current yield will fluctuate, such information may not
provide a basis for comparison with bank deposits or other investments that pay
a fixed yield for a stated period of time. An investor's principal is not
guaranteed by the Fund.
ADDITIONAL INFORMATION
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "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 record keeping 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.
KIRC, located at 200 Berkeley Street, Boston, Massachusetts 02116, is a
wholly-owned subsidiary of Keystone and is the transfer agent and dividend
disbursing agent for the Fund.
As of September 30, 1996, there were no shareholders of record owning
5% or more of the Fund's outstanding Class A and Class B shares.
As of September 30, 1996, Beacon Council, 80 Southwest 8th Street,
Miami, FL 33130 owned 9.01% of the outstanding Class C shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information, or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in 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.
A-1
APPENDIX
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper will consist of issues rated
at the time of investment A-1, by Standard & Poor's Corporation ("S&P"), PRIME-1
OR PRIME-2 by Moody's Investors Service, Inc. ("Moody's") or F-1 OR F-2 by Fitch
Investors Service, Inc. ("Fitch").
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
MOODY'S RATINGS
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) eval uation
of the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
FITCH'S RATINGS
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Governm ent
include a variety of Treasury securities that differ only in their interest
rates, maturities and dates of issuance. Treasury bills have maturities of one
year or less. Treasury notes have maturities of one-to-ten years and Treasury
bonds generally have maturities of greater than ten years at the date of
issuance.
Securities issued or guaranteed by the United States Govern ment or its
agencies or instrumentalities include direct obli gations of the United States
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board and Federal National Mortgage
Association.
Some obligations of United States Government agencies and
instrumentalities, such as Treasury bills and Government Nation al Mortgage
Association pass-through certificates, are support ed by the full faith and
credit of the United States; others, such as securities of Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; still others,
such as bonds issued by the Federal National Mortgage Association, a private
corporation, are supported only by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in the securities issued by
such an instrumentality only when Keystone determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. United States Government securities will not include international
agencies or instru mentalities in which the United States Government, its
agencies or instrumentalities participate, such as the World Bank, the Asian
Development Bank or the InterAmerican Development Bank, or issues insured by the
Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denom inated
certificates of U.S. banks, including their branches abroad, and of U.S.
branches of foreign banks, which are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation, and have at least $1 billion in
deposits as of the date of their most recently published financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Devel opment, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks (except certificates of deposit of
certain U.S. branches of foreign banks).
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' accep tances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
ZERO COUPON BONDS
If and when the Fund invests in zero coupon bonds, the Fund does not
expect to have enough zero copuon bonds to have a maerial effect on dividends.
The Fund has undertaken to a state securities authority to disclose that zero
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1996
<TABLE>
<CAPTION>
Maturity Principal Market
Date Amount Value
- -------------------------------------------------------- ------- ---------- -------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT (17.4%)
Algemene Bank Nederland NV, Euro CD, 5.08% 07/16/96 $ 5,000,000 $ 4,999,222
Bayerische Landesbank, Euro CD, 5.41% 10/29/96 5,000,000 4,996,354
Bayerische Vereinsbank, Euro CD, 5.35% 07/05/96 5,000,000 4,999,919
Bayerische Vereinsbank, Yankee CD, 5.12% 08/05/96 5,000,000 4,998,157
Deutsche Bank, Yankee CD, 5.37% 07/15/96 5,000,000 4,999,933
Deutsche Bank AG, New York, Yankee CD, 5.62% 01/15/97 5,000,000 4,994,081
First Alabama Bank, CD, 5.34% 07/29/96 10,000,000 9,999,346
NBD Bank NA, CD, 5.35% 08/07/96 10,000,000 9,999,992
Rabobank Nederland NV, Yankee CD, 5.31% 07/18/96 5,000,000 4,999,562
Union Bank Switzerland, Euro CD, 5.05% 07/08/96 5,000,000 4,999,595
- -------------------------------------------------------- ------- ---------- -------------
TOTAL CERTIFICATES OF DEPOSIT (Cost--$60,002,903) 59,986,161
- --------------------------------------------------------------------------------- -------------
COMMERCIAL PAPER (62.7%)
ABN-AMRO North America Finance Co. 08/22/96 5,000,000 4,961,000
American Express Credit Corp. 07/16/96 5,000,000 4,988,875
American Express Credit Corp. 07/17/96 5,000,000 4,988,156
Ameritech Corp. (b) 08/12/96 7,000,000 6,955,900
Ameritech Corp. 08/23/96 8,000,000 7,936,871
Associates Corp. 07/03/96 5,000,000 4,998,533
Associates Corp. of North America 07/09/96 5,000,000 4,994,122
Associates Corp. of North America 07/12/96 5,000,000 4,991,918
Bell Atlantic Capital Funding Corp. 07/01/96 4,815,000 4,815,000
Bell Atlantic Financial Services, Inc. 07/26/96 10,000,000 9,962,778
BellSouth Telecommunications, Inc. 07/25/96 9,000,000 8,968,320
BellSouth Telecommunications, Inc. 08/27/96 5,000,000 4,957,329
Coca-Cola Co. 07/19/96 5,000,000 4,986,750
Coca-Cola Co. 07/22/96 10,000,000 9,968,967
Commerzbank AG, New York 07/08/96 5,000,000 4,994,828
duPont (E.I.) deNemours & Co. 07/12/96 5,000,000 4,991,887
duPont (E.I.) deNemours & Co. 07/24/96 5,000,000 4,983,006
duPont (E.I.) deNemours & Co. 08/15/96 5,000,000 4,966,563
Emerson Electric Co. 07/23/96 5,000,000 4,983,744
General Electric Co. 07/26/96 6,000,000 5,976,681
General Electric Capital Corp. 08/13/96 5,000,000 4,967,571
General Electric Capital Corp. 01/06/97 5,000,000 4,851,688
Heinz (H.J.) Co. 07/02/96 5,000,000 4,999,267
Heinz (H.J.) Co. 07/18/96 4,500,000 4,488,695
Heinz (H.J.) Co. 07/30/96 5,000,000 4,978,371
Hewlett Packard Co. 07/11/96 5,000,000 4,992,597
Hewlett Packard Co. 07/30/96 5,000,000 4,978,451
Hewlett Packard Co. 08/29/96 4,200,000 4,162,486
(continued on next page)
<PAGE>
PAGE 4
- ----------------------
Keystone Liquid Trust
Maturity Principal Market
Date Amount Value
- -------------------------------------------------------- ------- ---------- -------------
COMMERCIAL PAPER (continued)
Kellogg Co. 07/31/96 $10,400,000 $ 10,353,633
Nestle Capital Corp. 07/02/96 7,000,000 6,998,973
Nestle Capital Corp. 07/16/96 3,100,000 3,093,141
Pitney Bowes Credit Corp. 07/23/96 5,200,000 5,183,285
Proctor & Gamble Co. 07/10/96 10,000,000 9,986,675
Proctor & Gamble Co. 08/28/96 4,500,000 4,460,705
Unilever Capital Corp. (b) 07/09/96 5,000,000 4,994,111
Unilever Capital Corp. (b) 09/03/96 5,500,000 5,446,711
Unilever Capital Corp. (b) 10/15/96 5,000,000 4,919,322
Wal Mart Stores, Inc. 07/01/96 3,825,000 3,825,000
- -------------------------------------------------------- ------- ---------- -------------
TOTAL COMMERCIAL PAPER (Cost--$217,073,278) 217,051,910
- --------------------------------------------------------------------------------- -------------
U.S. GOVERNMENT (AND AGENCY) ISSUES (14.4%)
FFCB, 5.30% 08/01/96 7,000,000 6,999,551
FHLB Medium Term Notes, 5.82% 05/01/97 3,000,000 2,997,639
FHLMC Discount Notes 07/03/96 10,000,000 9,997,083
FHLMC Discount Notes 07/15/96 5,000,000 4,989,763
FHLMC Discount Notes 08/05/96 5,000,000 4,974,333
FHLMC Discount Notes 08/22/96 5,000,000 4,961,650
FNMA Discount Notes 08/06/96 5,150,000 5,122,808
FNMA Discount Notes 08/20/96 5,000,000 4,963,056
FNMA Discount Notes 09/10/96 5,000,000 4,947,243
- -------------------------------------------------------- ------- ---------- -------------
TOTAL U.S. GOVERNMENT (AND AGENCY) ISSUES (Cost--$49,956,759) 49,953,126
- --------------------------------------------------------------------------------- -------------
Maturity
Value
- -------------------------------------------------------- ------- ---------- -------------
REPURCHASE AGREEMENTS (5.6%)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account,
5.55%, purchased 6/28/96) (c) 07/01/96 $18,008,325 18,000,000
State Street Bank & Trust, Co., 5.00%, purchased
6/28/96 (Collateralized by $1,080,000 U.S. Treasury
Bond, 10.75%, due 8/15/05) 07/01/96 1,400,583 1,400,000
- -------------------------------------------------------- ------- ---------- -------------
TOTAL REPURCHASE AGREEMENTS (Cost--$19,400,000) 19,400,000
- --------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (COST--$346,432,940) (a) 346,391,197
OTHER ASSETS AND LIABILITIES--NET (-0.1%) (268,054)
- --------------------------------------------------------------------------------- -------------
NET ASSETS--(100.0%) $346,123,143
- --------------------------------------------------------------------------------- -------------
</TABLE>
<PAGE>
PAGE 5
- ----------------------
SCHEDULE OF INVESTMENTS--June 30, 1996
(a) The cost of investments for federal income tax purposes is identical.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at June 30, 1996 are as follows:
Gross unrealized appreciation $ 0
Gross unrealized depreciation (41,743)
---------
Net unrealized depreciation $(41,743)
=========
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Federal
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at June 30, 1996.
Legend of Portfolio Abbreviations
FFCB--Federal Farm Credit Bank
FHLB--Federal Home Loan Bank
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
See Notes to Financial Statements.
<PAGE>
PAGE 6
- ----------------------
Keystone Liquid Trust
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------- ------------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Income from investment operations:
Net investment income .0464 .0454 .0235 .0230 .0386
Net realized and unrealized gain (loss)
on investments (.0001) 0 0 (.0001) .0003
--------------------------------------- ------------ ------- ------- ------- ---------
Total from investment operations .0463 .0454 .0235 .0229 .0389
--------------------------------------- ------------ ------- ------- ------- ---------
Less distributions to shareholders (.0463) (.0454) (.0235) (.0229) (.0389)
--------------------------------------- ------------ ------- ------- ------- ---------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Total return 4.73% 4.63% 2.37% 2.31% 3.96%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 4.66% 4.42% 2.50% 2.29% 3.99%
Total expenses 0.98%(a) 0.92% 1.02% 1.11% 1.10%
Net assets end of year (thousands) $332,796 $245,308 $398,617 $189,167 $227,115
--------------------------------------- ------------ ------- ------- ------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1991 1990 1989 1988 1987
--------------------------------------- ------------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Income from investment operations:
Net investment income .0634 .0760 .0786 .0597 .0524
Net realized and unrealized gain (loss)
on investments 0 0 .0001 (.0001) 0
--------------------------------------- ------------ ------- ------- ------- ---------
Total from investment operations .0634 .0760 .0787 .0596 .0524
--------------------------------------- ------------ ------- ------- ------- ---------
Less distributions to shareholders (.0634) (.0760) (.0787) (.0596) (.0524)
--------------------------------------- ------------ ------- ------- ------- ---------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Total return 6.47% 7.81% 8.18% 6.31% 5.35%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 6.51% 7.53% 7.88% 5.99% 5.30%
Total expenses 0.92% 1.00% 1.00% 1.00% 1.00%
Net assets end of year (thousands) $400,597 $406,306 $475,640 $461,032 $375,542
--------------------------------------- ------------ ------- ------- ------- ---------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 0.95%.
See Notes to Financial Statements.
<PAGE>
PAGE 7
- ----------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
Year Ended June 30, (Date of Initial
-------------------------------- Public Offering) to
1996 1995 1994 June 30, 1993
- --------------------------------------------- ------------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Income from investment operations:
Net investment income .0369 .0362 .0142 .0047
Net realized and unrealized loss on
investments 0 0 0 (.0001)
- --------------------------------------------- ------------ ------ ------ --------------------
Total from investment operations .0369 .0362 .0142 .0046
- --------------------------------------------- ------------ ------ ------ --------------------
Less distributions to shareholders (.0369) (.0362) (.0142) (.0046)
- --------------------------------------------- ------------ ------ ------ --------------------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Total return (c) 3.76% 3.68% 1.43% 0.46%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 3.73% 3.66% 1.84% 1.08%(b)
Total expenses 1.91%(a) 1.84% 1.85% 2.15%(b)
Net assets end of year (thousands) $10,042 $ 7,281 $11,198 $ 241
- --------------------------------------------- ------------ ------ ------ --------------------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 1.88%.
(b) Annualized.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 8
- ----------------------
Keystone Liquid Trust
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
Year Ended June 30, (Date of Initial
-------------------------------- Public Offering) to
1996 1995 1994 June 30, 1993
- --------------------------------------------- ------------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Income from investment operations:
Net investment income .0370 .0362 .0142 .0045
Net realized and unrealized loss on
investments (.0001) 0 0 (.0002)
- --------------------------------------------- ------------ ------ ------ --------------------
Total from investment operations .0369 .0362 .0142 .0043
- --------------------------------------------- ------------ ------ ------ --------------------
Less distributions to shareholders (.0369) (.0362) (.0142) (.0043)
- --------------------------------------------- ------------ ------ ------ --------------------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Total return (c) 3.75% 3.68% 1.43% 0.43%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 3.72% 3.52% 1.97% 1.01% (b)
Total expenses 1.94%(a) 1.82% 1.86% 2.09% (b)
Net assets end of year (thousands) $ 3,285 $ 4,112 $ 6,599 $ 34
- --------------------------------------------- ------------ ------ ------ --------------------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 1.91%.
(b) Annualized.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 9
- ----------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
Assets (Note 1)
Investments at market value
(identified cost--$346,432,940) $346,391,197
Cash 147,619
Receivable for:
Fund shares sold 100
Interest 941,675
Prepaid expenses and other assets 56,798
- ------------------------------------------- -------------
Total assets 347,537,389
- ------------------------------------------- -------------
Liabilities (Note 1)
Payable for:
Fund shares redeemed 232,880
Distributions to shareholders 1,132,539
Accrued expenses 48,827
- ------------------------------------------- -------------
Total liabilities 1,414,246
- ------------------------------------------- -------------
Net assets $346,123,143
- ------------------------------------------- -------------
Net assets represented by (Note 2)
Class A Shares ($1.00 a share on
332,795,671 shares outstanding) $332,795,671
Class B Shares ($1.00 a share on
10,042,074 shares outstanding) 10,042,074
Class C Shares ($1.00 a share on 3,285,398
shares outstanding) 3,285,398
- ------------------------------------------- -------------
$346,123,143
- ------------------------------------------- -------------
Net asset value and offering price per
share (Class A, B and C) $1.00
- ------------------------------------------- -------------
STATEMENT OF OPERATIONS
Year Ended June 30, 1996
Investment income (Note 1)
Interest $15,264,626
- -------------------------------------- --------- ------------
Expenses (Notes 2 and 3)
Management fees $1,359,239
Transfer agent fees 759,359
Accounting, auditing and legal fees 52,723
Custodian fees 148,640
Trustees' fees and expenses 34,299
Distribution Plan expenses 278,755
Miscellaneous 149,465
- -------------------------------------- --------- ------------
Total expenses 2,782,480
Less: Expenses paid indirectly
(Note 3) (81,434)
- -------------------------------------- --------- ------------
Net expenses 2,701,046
- -------------------------------------- --------- ------------
Net investment income 12,563,580
- -------------------------------------- --------- ------------
Net realized and unrealized gain
(loss) on investments (Note 1)
Net realized gain on investments 4,475
Net change in unrealized
depreciation on investments (39,780)
- -------------------------------------- --------- ------------
Net realized and unrealized loss on
investments (35,305)
- -------------------------------------- --------- ------------
Net increase in net assets resulting
from operations $12,528,275
- -------------------------------------- --------- ------------
See Notes to Financial Statements.
<PAGE>
PAGE 10
- ----------------------
Keystone Liquid Trust
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1996 1995
- ------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Operations
Net investment income $ 12,563,580 $ 16,854,349
Net realized gain (loss) on investments 4,475 (71)
Net change in unrealized depreciation on investments (39,780) (685)
- ------------------------------------------------------------------------------ ----------- --------------
Net increase in net assets resulting from operations 12,528,275 16,853,593
- ------------------------------------------------------------------------------ ----------- --------------
Distributions to shareholders (Note 1)
Class A Shares (12,043,595) (16,168,849)
Class B Shares (383,777) (435,508)
Class C Shares (100,903) (249,236)
- ------------------------------------------------------------------------------ ----------- --------------
Total distributions to shareholders (12,528,275) (16,853,593)
- ------------------------------------------------------------------------------ ----------- --------------
Capital share transactions (Note 2)
Class A Shares 87,487,588 (153,308,964)
Class B Shares 2,760,515 (3,916,029)
Class C Shares (826,275) (2,487,651)
- ------------------------------------------------------------------------------ ----------- --------------
Net increase (decrease) in net assets resulting from capital share
transactions 89,421,828 (159,712,644)
- ------------------------------------------------------------------------------ ----------- --------------
Total increase (decrease) in net assets 89,421,828 (159,712,644)
Net assets
Beginning of year 256,701,315 416,413,959
- ------------------------------------------------------------------------------ ----------- --------------
End of year $346,123,143 $ 256,701,315
- ------------------------------------------------------------------------------ ----------- --------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 11
- ----------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Summary of Accounting Policies
Keystone Liquid Trust (the "Fund") is an open-end diversified investment
management company for which Keystone Management, Inc. ("KMI") is the
Investment Manager and Keystone Investment Management Company ("Keystone") is
the Investment Adviser. The Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund is a money market mutual
fund that seeks high current income from short-term securities while
preserving capital and maintaining liquidity.
The Fund offers Class A, B, and C shares. Class A shares are offered without
an initial sales charge. Class B shares are offered without an initial sales
charge, although a contingent deferred sales charge may be imposed at the
time of redemption, which decreases depending on when the shares were
purchased and how long the shares have been held. Class C shares are offered
without an initial sales charge, although a contingent deferred sales charge
may be imposed on redemptions within one year of purchase. Class C shares are
available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company ("KIDC"), the Fund's
principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation owned by an investor
group consisting predominantly of current and former members of management of
Keystone and its affiliates.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
Valuation of Securities--Money market investments maturing in sixty days or
less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. Money market investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Money market investments maturing in more
than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest approximates market.
Repurchase Agreements--When the Fund enters into a repurchase agreement (a
purchase of securities whereby the seller agrees to repurchase the securities
at a mutually agreed upon date and price) the repurchase price of the
securities will generally equal the amount paid by the Fund plus a negotiated
interest amount. The seller under the repurchase agreement will be required
to provide securities (collateral) to the Fund whose value will be maintained
at an amount not less than the repurchase price. The Fund monitors the value
of the collateral on a daily basis, and, if the value of the collateral falls
below required levels, the Fund intends to seek additional collateral from
the seller or terminate the repurchase agreement. If the seller defaults, the
Fund would suffer a loss to the extent that the proceeds from the sale of the
underlying securities were less than the repurchase price. Any such loss
would be increased by any cost incurred on disposing of such securities. If
bankruptcy proceedings are commenced against the seller under the repurchase
agree-
<PAGE>
PAGE 12
- ----------------------
Keystone Liquid Trust
ment, the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.Keystone Liquid Trust
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
Distributions--The Fund declares dividends daily, pays dividends monthly and
automatically reinvests such dividends in additional shares at net asset
value, unless shareholders request payment in cash. Dividends are declared
from the total of net investment income, plus realized and unrealized gain
(loss) on investments.
Securities Transactions and Investment Income--Secu rities transactions are
accounted for no later than one business day after the trade date. Realized
gains and losses from securities transactions are computed on the identified
cost basis. Interest income is recorded on the accrual basis.
Federal Income Taxes--The Fund has qualified, and intends to qualify in the
future, as a regulated investment company under the Internal Revenue Code of
1986, as amended ("Internal Revenue Code"). Thus, the Fund expects to be
relieved of any federal income tax liability by distributing all of its net
tax basis investment income and net tax basis capital gains, if any, to its
shareholders. The Fund intends to avoid any excise tax liability by making
the required distributions under the Internal Revenue Code.
(2.) Shares of Beneficial Interest
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest without par value. Since the Fund
sold, redeemed and reinvested shares at $1.00 net asset value, the shares and
dollar amount are the same. Transactions in Fund shares were as follows:
Year Ended June 30,
Class A Shares 1996 1995
- -------------------------- ------------ --------------
Sales $ 1,105,810,542 $ 725,781,933
Redemptions (1,027,927,276) (892,973,139)
Reinvestment of
distributions from
available sources 9,604,322 13,882,242
- -------------------------- ------------ --------------
Net increase (decrease) $ 87,487,588 $(153,308,964)
========================== ============ ==============
Class B Shares
- -------------------------- ------------ --------------
Sales $ 31,488,209 $ 30,267,166
Redemptions (29,034,624) (34,518,836)
Reinvestment of
distributions from
available sources 306,930 335,641
- -------------------------- ------------ --------------
Net increase (decrease) $ 2,760,515 $ (3,916,029)
========================== ============ ==============
Class C Shares
- -------------------------- ------------ --------------
Sales $ 7,581,549 $ 11,924,336
Redemptions (8,502,653) (14,624,256)
Reinvestment of
distributions from
available sources 94,829 212,269
- -------------------------- ------------ --------------
Net decrease $ (826,275) $ (2,487,651)
========================== ============ ==============
<PAGE>
PAGE 13
- ----------------------
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 Fund's Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, to pay expenses associated with the distribution of Class A
shares. Amounts paid by the Fund to KIDC under the Class A Distribution Plan
are currently used to pay others, such as dealers, service fees at an annual
rate of up to 0.25% of the average daily net asset value of Class A shares
maintained by such others.
The Fund's Class B Distribution Plans provide for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class B shares to
pay expenses associated with the distribution of Class B shares. For Class B
shares sold on or after June 1, 1995, amounts paid by the Fund under such
shares' Class B Distribution Plan are currently used to pay others (dealers)
a commission at the time of purchase normally equal to 4.00% of the price
paid for each Class B share sold plus the first year's service fee in advance
in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of such Class B shares,
the dealer or other party will receive service fees at an annual rate of
0.25% of the average daily net asset value of such Class B shares maintained
by such others. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares purchased on or after June 1, 1995 at rates
ranging from a maximum of 5% of amounts redeemed during the first 12 month
period from and including the month of purchase to 1% of amounts redeemed
during the sixth twelve month period. Class B shares purchased on or after
June 1, 1995 that have been outstanding for eight years from and including
the month of purchase will automatically convert to Class A shares without a
front-end sales charge or exchange fee. Class B shares purchased prior to
June 1, 1995 convert to Class A shares after seven years.
The Fund's Class C Distribution Plan provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares to
pay expenses associated with the distribution of Class C shares. Amounts paid
by the Fund under the Class C Distribution Plan are currently used to pay
others (dealers) a commission at the time of purchase in the amount of 0.75%
of the price paid for each Class C share sold plus the first year's service
fee in advance in the amount of 0.25% of the price paid for each Class C
share. Beginning approximately 15 months after purchase date, the dealer or
other party will receive a commission at an annual rate of 0.75% of the
average net asset value (subject to applicable limitations imposed by rules
adopted by the National Association of Securities Dealers, Inc.("NASD")) plus
service fees at the annual rate of 0.25% of the average net asset value of
each Class C share maintained by such others on the Fund's books for
specified periods.
Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plans were in effect.
During the year ended June 30, 1996, the Fund paid or accrued to KIDC
$148,564 under its Class A Distribution Plan. During the year ended June 30,
1996 under its Class B Distribution Plans, the Fund
<PAGE>
PAGE 14
- ----------------------
Keystone Liquid Trust
paid or accrued to KIDC $77,113 for Class B shares sold prior to June 1, 1995
and $25,876 for Class B shares sold on or after June 1, 1995. During the year
ended June 30, 1996, the Fund paid or accrued $27,202 under its Class C
Distribution Plan.Keystone Liquid Trust
Under applicable NASD rules, the maximum uncollected amounts for which KIDC
may seek payment from the Fund under its Distribution Plans as of June 30,
1996 are $1,069,672 for Class B shares purchased prior to June 1, 1995,
$201,443 for Class B shares purchased on or after June 1, 1995, and
$1,036,758 for Class C shares.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares pursuant to its Distribution
Plan.
(3.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily
calculated by applying percentage rates, starting at 0.50%, and declining as
net assets increase, to 0.40% per annum, to the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone under
which Keystone provides investment advisory and management services to the
Fund and receives for its services an annual fee representing 85% of the
management fee received by KMI.
During the year ended June 30, 1996, the Fund paid or accrued to KMI
investment management and administration services fees of $1,359,239, which
represented 0.50% of the Fund's average net assets. Of such amount paid to
KMI, $1,155,353 was paid to Keystone for its services to the Fund.
During the year ended June 30, 1996, the Fund paid or accrued $17,571 to KII
as reimbursement for certain accounting services provided to the Fund.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the Fund's transfer and dividend disbursing agent. For the
year ended June 30, 1996, the Fund paid or accrued $759,359 to KIRC for
transfer agent fees.
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended June 30, 1996, the Fund paid custody fees in the amount of
$67,206 and received a credit of $81,434 pursuant to the expense offset
arrangement, resulting in a total expense of $148,640. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
- ------------------------------------------------------------------------------
FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTIONS (Unaudited)
During the fiscal year ended June 30, 1996, dividends of $0.0463, $0.0369 and
$0.0369 per share were paid or are payable to shareholders of Keystone Liquid
Trust Class A, B, and C, respectively. All dividends are taxable to
shareholders as ordinary income in the year in which received by them or
credited to their accounts and are not eligible for the corporate dividend
received deduction. In January 1997 we will send you information on the
distributions paid during the calendar year to help you in completing your
federal tax return.
<PAGE>
PAGE 15
- ----------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Liquid Trust
We have audited the accompanying statement of assets and liabilities of
Keystone Liquid Trust, including the schedule of investments, as of June 30,
1996, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
ten-year period then ended for Class A shares, and for each of the years in
the three-year period then ended and the period from February 1, 1993 (date
of initial public offering) to June 30, 1993 for Class B and Class C shares.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 1996, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Liquid Trust as of June 30, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
July 26, 1996
