AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION DECEMBER 6, 1996.
File Nos. 2-10661/
811-98
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 94 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 31 [X]
KEYSTONE GROWTH AND INCOME FUND (S-1)
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(617) 338-3200
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
Boston, Massachusetts 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
[ ] immediately upon filing pursuant to paragraph (b)
[X] on December 10, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
The Registrant has filed a Declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. A Rule 24f-2 Notice for Registrant's last fiscal
year was filed on October 30, 1996.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered Unit* Price** Fee
- -----------------------------------------------------------------
Shares of
$1.00 Par 2,522,879 $25.50 $329,996 $100
Value
- -----------------------------------------------------------------
* Computed under Rule 457(d) on the basis of the offering price per share at the
close of business on November 26, 1996.
** The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 2,509,938 shares of the
Fund were redeemed during its fiscal year ended August 31, 1996. Of such shares,
none were used for a reduction pursuant to Rule 24f-2 during the current year.
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 94
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 94 to Registrant's Registration Statement
No. 2-10661/811-98 consists of the following pages, items of information, and
documents:
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEMS 24(a) and 24(b)
Financial Statements
Independent Auditors' Report
Listing of Exhibits
PART C - OTHER INFORMATION - ITEMS 25-32 - and SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections of Investment Advisers
Principal Underwriter
Location of Accounts and Records
Management Services
Undertakings
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
Cross-Reference Sheet pursuant to Rule 404 and 495 under the Securities Act of
1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Fee Table
3 Financial Highlights
4 Cover Page
The Fund
Investment Objective and Policies
Investment Restrictions
Additional Investment Restrictions
5 Fund Management and Expenses
Additional Information
5A Not applicable
6 The Fund
Dividends and Taxes
Fund Shares
Shareholder Services
7 How to Buy Shares
Distribution Plan
Shareholder Services
Pricing Shares
8 How to Redeem Shares
9 Not applicable
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Not applicable
13 The Fund
Investment Objective and Policies
Investment Restrictions
Brokerage
Appendix
14 Trustees and Officers
The Trust Agreement
15 Additional Information
16 Distribution Plan
Investment Manager and Investment Adviser
Principal Underwriter
Expenses
Additional Information
17 Brokerage
18 The Trust Agreement
19 Valuation of Securities
Distribution Plan
Sales Charges
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return and Yield
Quotations
23 Financial Statements
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
PART A
PROSPECTUS
<PAGE>
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PROSPECTUS DECEMBER 10, 1996
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KEYSTONE GROWTH AND INCOME FUND (S-1)
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
Keystone Growth and Income Fund (S-1) (the "Fund") is a mutual fund whose goal
is the best possible growth of capital and long-term growth of income.
Under normal circumstances, the Fund invests principally in common stocks of
generally accepted investment quality selected primarily from or similar to
those found in the Standard & Poor's 500 Index, usually with established records
of dividend payments. The Fund may purchase, however, securities that are not
currently paying dividends, but show potential capital growth or future income.
Your purchase payment is fully invested. There is no sales charge when you buy
the Fund's shares. The Fund may impose a deferred sales charge, which declines
from 4% to 1%, if you redeem your shares within four calendar years of purchase.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act") under which it bears some of the
costs of selling its shares to the public.
This prospectus sets forth concisely the information about the Fund that you
should know before investing. Please read it and retain it for future reference.
Additional information about the Fund is contained in a statement of
additional information dated December 10, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number listed above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------------------------------
Page Page
<S> <C> <C> <C>
Fee Table .......................................... 2 How to Buy Shares .............................. 10
Financial Highlights ............................... 3 Distribution Plan .............................. 11
The Fund ........................................... 4 How to Redeem Shares ........................... 12
Investment Objective and Policies .................. 4 Shareholder Services ........................... 14
Investment Restrictions ............................ 5 Performance Data ............................... 15
Risk Factors ....................................... 6 Fund Shares .................................... 15
Pricing Shares ..................................... 6 Additional Information ......................... 16
Dividends and Taxes ................................ 7 Additional Investment Information .............. (i)
Fund Management and Expenses ....................... 7
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</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
<PAGE>
FEE TABLE
KEYSTONE GROWTH AND INCOME FUND (S-1)
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plan"; and "Shareholder Services."
SHAREHOLDER TRANSACTION EXPENSES
Contingent Deferred Sales Load(1) .................... 4.00%
(as a percentage of the lesser of original purchase
price or redemption proceeds, as applicable)
Exchange Fee(2) ...................................... $10.00
(per exchange)
ANNUAL FUND OPERATING EXPENSES(3)
(as a percentage of average net assets)
Management Fee ....................................... 0.67%
12b-1 Fees(4) ........................................ 0.78%
Other Expenses ....................................... 0.40%
----
Total Fund Operating Expenses ........................ 1.85%
====
EXAMPLE(5) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a
$1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each period ..................... $59 $78 $100 $217
You would pay the following expenses on
the same investment, assuming no
redemption ............................. $19 $58 $100 $217
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ----------
(1) The deferred sales load declines from 4% to 1% of amounts redeemed within
four calendar years after purchase. No deferred sales load is imposed
thereafter.
(2) 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.")
(3) Expense ratios are for the Fund's fiscal year ended August 31, 1996. Total
Fund Operating Expenses include indirectly paid expenses.
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the National
Association of Securities Dealers, Inc. ("NASD").
(5) 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%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE GROWTH AND INCOME FUND (S-1)
(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 incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------------
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 ..... $22.98 $23.21 $25.42 $23.17 $25.12 $22.97 $24.82 $18.93 $27.23 $25.49
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .. 0.12 0.25 0.16 0.11 0.15 0.19 0.22 0.32 0.46 0.18
Net gain (loss) on
investments and foreign
currency related
transactions .......... 3.69 2.66 (0.35) 3.11 (0.11) 4.72 (1.29) 6.16 (6.77) 6.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............ 3.81 2.91 (0.19) 3.22 0.04 4.91 (1.07) 6.48 (6.31) 6.68
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income .. (0.54) (0.25) (0.23) (0.11) (0.15) (0.26) (0.65) (0.59) (0.46) (0.42)
In excess of net
investment income ..... (0.22) (0.11) (0.05) (0.17) (0.17) (0.25) (0.09) -0- -0- -0-
Net realized gain on
investments ........... (0.98) (2.78) (1.74) (0.69) (1.67) (2.25) (0.04) -0- (1.53) (4.52)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .... (1.74) (3.14) (2.02) (0.97) (1.99) (2.76) (0.78) (0.59) (1.99) (4.94)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE END OF
YEAR .................. $25.05 $22.98 $23.21 $25.42 $23.17 $25.12 $22.97 $24.82 $18.93 $27.23
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (A) ....... 17.31% 13.87% (0.72%) 14.31% 0.38% 24.82% (4.56%) 34.99% (24.55%) 34.80%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ....... 1.85%(b) 1.75% 2.07% 2.28% 2.08% 2.33% 2.35% 2.05% 1.77% 2.21%
Net investment income 0.52% 1.09% 0.67% 0.47% 0.61% 0.93% 1.36% 2.16% 2.28% 0.88%
Portfolio turnover rate 139% 115% 73% 96% 95% 64% 47% 44% 82% 71%
Average commission rate
paid .................. $0.0635 N/A N/A N/A N/A N/A N/A N/A N/A N/A
NET ASSETS END OF YEAR
(THOUSANDS) ........... $224,819 $199,456 $208,532 $234,688 $204,004 $176,985 $154,124 $187,696 $195,375 $261,804
<FN>
(a) Excluding applicable sales charges.
(b) The ratio of total expenses to average net assets includes indirectly paid expenses for the year ended August 31, 1996.
Excluding indirectly paid expenses the expense ratio would have been 1.84%.
</FN>
</TABLE>
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was created under Pennsylvania law as a common
law trust and has been offering its shares continuously since September 11,
1935. 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."
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide shareholders with the best
possible growth of capital and long-term growth of income.
The Fund's objective is fundamental and cannot be changed without the approval
of a majority of the Fund's outstanding shares (as defined in 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
Under normal circumstances, the Fund will invest principally in common stocks
of generally accepted investment quality selected primarily from or similar to
those found in the Standard & Poor's 500 Index ("S&P 500"), usually with
established records of dividend payments. However, the Fund may purchase
securities that are not currently paying dividends, but show potential capital
growth or future income.
In addition, the Fund will invest in quality companies with medium market
capitalizations that are smaller than those of companies typically found in the
S&P 500. For this purpose, companies with medium capitalizations are generally
those whose market capitalization falls within the capitalization range of the
Standard & Poor's MidCap 400 Index ("S&P MidCap 400") at the time of the Fund's
investment. As of October 31, 1996, the S&P MidCap 400 includes companies with
an average market capitalization of approximately $1.7 billion.
In pursuing its objective, the Fund may invest up to 25% of its assets in
foreign securities issued by issuers located in developed countries as well as
emerging market countries. For this purpose, countries with emerging markets are
generally those where the per capita income is in the low to middle ranges, as
determined, from time to time, by the International Bank for Reconstruction and
Development.
The Fund may also invest in other types of securities, including other common
stocks, debt securities convertible into common stocks or having common stock
characteristics, and rights and warrants to purchase common stocks. In addition
to its other investment options, the Fund may invest in limited partnerships,
including master limited partnerships.
OTHER ELIGIBLE INVESTMENTS
When market conditions warrant, the Fund may invest up to 100% of its assets
for temporary or defensive purposes in money market instruments. Such
instruments, which must mature within one year of their purchase, include United
States ("U.S.") government securities; instruments, including certificates of
deposit, demand and time deposits and bankers' acceptances, of banks that are
members of the Federal Deposit Insurance Corporation and have at least $1
billion in assets as of the date of their most recently published financial
statements, including U.S. branches of foreign banks and foreign branches of
U.S. banks; and prime commercial paper, including master demand notes. When the
Fund invests for defensive purposes it seeks to limit the loss of principal and
is not pursuing its investment objective.
The Fund may enter into repurchase and reverse repurchase agreements, purchase
and sell securities and currencies on a when issued and delayed delivery basis
and purchase or sell securities on a forward commitment basis, lend portfolio
securities, write covered call and put options and purchase call and put options
to close out existing positions. The Fund may also enter into currency and other
financial futures contracts and related options transactions for hedging
purposes and not for speculation. The Fund may employ new investment techniques
with respect to options or futures contracts and related options.
ILLIQUID AND RESTRICTED SECURITIES
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, any securities that may not
be sold or disposed of in the ordinary course of business, within seven days, at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of net assets.
The Fund may invest in restricted securities, including securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933
Act"). Generally, Rule 144A establishes a safe harbor from the registration
requirements of the 1933 Act for resales by large institutional investors of
securities not publicly traded in the U.S. The Fund may purchase Rule 144A
securities when such securities present an attractive investment opportunity and
otherwise meet the Fund's selection criteria. The Board of Trustees has adopted
guidelines and procedures pursuant to which Keystone determines the liquidity of
the Fund's Rule 144A securities. The Board monitors Keystone's implementation of
such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of Trustees will consider what action, if any, is appropriate.
For further information about the types of investments and investment
techniques available to the Fund and the associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus and
the statement of additional information.
- ------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------
The Fund has adopted the fundamental 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 the statement of additional
information.
The Fund may not do the following: (1) invest more than 5% of its total assets
in the securities of any one issuer (other than U.S. government securities)
except that up to 25% of its total assets may be invested without regard to this
limit; (2) invest in more than 10% of the outstanding voting securities of any
one issuer (other than U.S. government securities) except that up to 25% of the
Fund's total assets may be invested without regard to this limit; and (3) borrow
money, except that the Fund may (a) borrow money from banks for temporary or
emergency purposes in aggregate amounts up to 10% of the value of the Fund's net
assets (computed at cost) or (b) enter into reverse repurchase agreements. (Bank
borrowings and reverse repurchase agreements, in the aggregate, shall not exceed
10% of the value of the Fund's 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.
- ------------------------------------------------------------------------------
RISK FACTORS
- ------------------------------------------------------------------------------
Like any investment, your investment in the Fund involves an element of risk.
Before you buy shares of the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
Certain significant risks related to the Fund are discussed below. In addition
to the risks discussed in this section, specific risks attendant to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.
FUND RISKS
The Fund, which normally invests principally in common stocks of generally
accepted investment quality from the large cap arena and to a lesser degree the
mid-cap arena, does not, by itself, constitute a balanced investment plan.
Investors may wish to consult their financial advisors when considering what
portion of their total assets to invest in such common stocks.
Investing in companies with large market capitalizations carries less risk
than investing in small capitalization stocks because they may have broader
product lines, markets or financial resources. However, investing in medium
capitalization stocks may involve greater risk than investing in large
capitalization stocks, since they can be subject to more abrupt or erratic
movements. Such stocks tend to involve less risk than stocks of small
capitalization companies.
The value of the Fund's portfolio securities will fluctuate with changing
market conditions and generally in relation to the yield (value) of stocks in
the S&P 500. The Fund makes most sense for those investors who can afford to
maintain their investment over a relatively long period of time despite changes
in the stock market, and who are seeking a fund which is growth oriented and has
the potential for returns but also involves risk.
Should the Fund need to raise cash to meet a large number of redemptions, it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
- ------------------------------------------------------------------------------
PRICING SHARES
- ------------------------------------------------------------------------------
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's securities do not
affect the current net asset value of its shares. The Exchange is currently
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset
value per share is arrived at by determining the value of all of the Fund's
assets, subtracting all liabilities and dividing the result by the number of
shares outstanding.
Current values for the Fund's portfolio securities are determined as follows:
(1) Securities traded on an established exchange are valued on the basis of
the last sales price;
(2) Securities traded in the over-the-counter market, for which complete
quotations are available, are valued at the mean of the bid and the asked
prices;
(3) Short-term investments with initial or remaining maturities of sixty days
or less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market value;
(4) Short-term investments with greater than sixty days to maturity are
valued at current market value; and
(5) 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.
- ------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- ------------------------------------------------------------------------------
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code (the "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company when it
fails to distribute, with respect to each calendar year, at least 98% of its
ordinary income for such calendar year and 98% of its net capital gains for the
one-year period ending on October 31 of such calendar year.
If the Fund qualifies and if it distributes all of its net investment income
and net capital gains, if any, to shareholders, it will be relieved of any
federal income tax liability.
The Fund will make distributions from its net income by the 4th business day
of January, April, July and October each year, and net capital gains, if any, at
least annually.
Distributions are payable in shares of the Fund or, at the shareholder's
option (which must be exercised before the record date for the distribution), in
cash. Fund distributions in the form of additional shares are made at net asset
value without the imposition of a sales charge.
Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains distributions are taxable
as ordinary income. Net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, such loss will be treated for tax
purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received. Any taxable dividend declared in October, November or
December to shareholders of record in such a month and paid by the following
January 31 will be includable in the taxable income of shareholders as if paid
on December 31 of the year in which the dividend was declared. Dividends and
distributions may also be subject to state and local taxes.
The Fund advises its shareholders annually as to the federal tax status of all
distributions made during the year.
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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, organized in 1989, 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 other funds in the
Keystone Fund Family and certain other funds in the Keystone Investments Family
of Funds.
Pursuant to its Investment Management Agreement with the Fund (the "Management
Agreement"), Keystone Management has delegated its investment management
functions, except for certain administrative and management services, to
Keystone and has entered into an Investment 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
set forth below:
AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE OF THE FUND
0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% of the next $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000;
computed as of the close of business each business day and payable daily.
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 and certain employees of Keystone and its
affiliates. The shares of Keystone Investments common stock beneficially owned
by management are held in a number of voting trusts, the trustees of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey, 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 August 31, 1996, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,492,757, which represented 0.67% of the Fund's average daily net assets. Of
such amount paid to Keystone Management, $1,268,843 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 is to 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 the Advisory Agreement and the Management
Agreement. Consequently, the completion of the transaction 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 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, 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 the fees payable thereunder, that are substantively identical
to those in the current agreements.
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 Agreement
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 Merger's
completion: (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 Furman Selz LLC with respect to
the Fund. EFD is a wholly-owned subsidiary of Furman Selz LLC. It is currently
anticipated 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 new subadministration agreement
between Keystone and BISYS with respect to the Fund. The terms of such
agreements will be substantively identical to the terms of the agreements to be
executed upon completion of the Merger.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Judith A. Warners has been the Fund's Portfolio Manager since January 1995.
Ms. Warners is currently a Keystone Vice President and has been an equity
investment professional with Keystone since 1988.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that the Fund is
expected to pay include, but are not limited to, expenses of its transfer agent,
its custodian and its independent auditors; expenses under its Distribution
Plan; fees of its Independent Trustees (Trustees who are not interested persons
(as defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the Fund's Distribution Plan or any agreement related
thereto); expenses of shareholders' and Trustees' meetings; fees payable to
government agencies, including registration and qualification fees of the Fund
and its shares under federal and state securities laws; expenses of preparing,
printing and mailing Fund prospectuses, notices, reports, and proxy material;
and certain extraordinary expenses. In addition to such expenses, the Fund pays
its brokerage commissions, interest charges, and taxes. For the fiscal year
ended August 31, 1996, the Fund paid 1.85% of its average net assets in
expenses, including indirectly paid expenses.
During the fiscal year ended August 31, 1996, the Fund paid or accrued $15,735
to Keystone Investments for certain accounting services and $611,194 to Keystone
Investor Resource Center, Inc. ("KIRC") for services rendered as the Fund's
transfer and dividend disbursing agent. 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 the number of shares of the Fund sold by such
broker-dealers. In addition, broker-dealers executing portfolio transactions
may, from time to time, be affiliated with the Fund, Keystone Management,
Keystone, the Fund's principal underwriter, or their affiliates.
The Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising the Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal years ended August 31, 1995
and 1996 were 115% and 139%, respectively. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
would be borne directly by the Fund, as well as additional realized gains and/or
losses to shareholders. For further information about brokerage and
distributions, see the statement of additional information.
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HOW TO BUY SHARES
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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 Fund shares in any amount may be
made by check, by wiring Federal funds, by direct deposit or by an electronic
funds transfer ("EFT").
The Fund's shares are sold at the net asset value per share next computed
after the Fund receives the purchase order. The initial purchase must be at
least $1,000 except for purchases by participants in certain retirement plans
for which the minimum is waived. There is no minimum for subsequent purchases.
Purchase payments are fully invested at net asset value. There are no sales
charges on purchases of Fund shares at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE
With certain exceptions, when shares are redeemed within four calendar years
after their purchase, the Fund may impose a contingent deferred sales charge
("CDSC") at rates ranging from a maximum of 4% of amounts redeemed during the
same calendar year of purchase to 1% of amounts redeemed during the third
calendar year after the year of purchase. No CDSC is imposed on amounts redeemed
thereafter or on shares purchased through reinvestment of dividends. If imposed,
the CDSC is deducted from the redemption proceeds otherwise payable to the
shareholder. CDSCs are, to the extent permitted by the NASD, paid to the
Principal Underwriter.
The CDSC is a declining percentage of the lesser of (1) the net asset value of
the shares redeemed or (2) the total cost of such shares. No CDSC is imposed
when a shareholder redeems amounts derived from (1) increases in the value of
his account above the total 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; or (3) shares
held in all or part of more than four consecutive calendar years.
Upon request for redemption, shares not subject to the CDSC charge will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed. No CDSC is payable on permitted exchanges of shares between the funds
in the Keystone Fund Family that have adopted distribution plans pursuant to
Rule 12b-1 under the 1940 Act. For purposes of computing CDSCs, when shares of
one such fund are exchanged for shares of another such fund, the date of
purchase of the shares being acquired by exchange is deemed to be the date the
shares being tendered for exchange were originally purchased.
WAIVER OF DEFERRED SALES CHARGES
No CDSC is imposed on a redemption of shares of the Fund in the event of (1)
death or disability of the shareholder; (2) a lump-sum distribution from a 401
(k) plan or other benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of
accounts having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1% 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.
Shares also may be sold, to the extent permitted by applicable law, at net
asset value without the payment of commissions or the imposition of a CDSC to
(1) certain Directors, Trustees, officers and employees of the Fund, Keystone
Management, Keystone, and certain of their affiliates; (2) registered
representatives of firms with dealer agreements with the Principal Underwriter;
and (3) a bank or trust company acting as trustee for a single account. For more
details, see the statement of additional information.
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DISTRIBUTION PLAN
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The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. The Fund's Distribution
Plan provides that the Fund may expend up to 0.3125% quarterly (approximately
1.25% annually) of average daily net asset value of its shares to pay
distribution costs for sales of its shares and to pay shareholder service fees.
The NASD limits the amount that the Fund may pay annually in distribution costs
for the sale of its shares and shareholder service fees. The NASD currently
limits such annual expenditures to 1% of the aggregate 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 Fund's Distribution Plan, plus interest at the
prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.
Payments under the 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 Fund shares sold and (2) as shareholder service fees in
respect of shares maintained by the recipients and outstanding on the Fund's
books for specified periods. 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% of the price paid for each Fund share sold. In addition,
the Principal Underwriter generally reallows to broker-dealers or others a
shareholder service fee at a rate of 0.25% per annum of the net asset value of
shares maintained by such recipients and outstanding on the books of the Fund
for specified periods. See also "Arrangements with Broker-Dealers and Others."
If the Fund is unable to pay the Principal Underwriter a commission on a new
sale because the annual maximum (0.75% of average daily net assets) has been
reached, the Principal Underwriter intends, but is not obligated, to continue to
accept new orders for the purchase of Fund shares and to pay or accrue
commissions and service fees to broker-dealers in excess of the amount it
currently receives from the Fund ("Advances"). While the Fund is under no
contractual obligation to reimburse the Principal Underwriter for Advances, the
Principal Underwriter intends to seek full payment of Advances from the Fund
(together with interest at the rate of prime plus 1%) at such time in the future
as, and to the extent that, payment thereof by the Fund would be within
permitted limits. If the Independent Trustees authorize such payments, the
effect will be to extend the period of time during which the Fund incurs the
maximum amount of costs allowed by the Distribution Plan.
The amounts and purposes of expenditures under the Distribution Plan must be
reported to the Independent Trustees quarterly. The Independent Trustees may
require or approve changes in the operation of the Distribution Plan and may
require that total expenditures by the Fund under the Distribution Plan be kept
within limits lower than the maximum amount permitted by the Distribution Plan
as stated above. If such costs are not limited by the Independent Trustees, such
costs could, for some period of time, be higher than such costs permitted by
most other plans presently adopted by other investment companies.
The Distribution Plan 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 Fund.
If the 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 Advances.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of the majority of both (1) the Fund's Trustees and (2) the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
amendment.
While the Distribution Plan is in effect, the Fund is required to commit the
selection and nomination of candidates for Independent Trustees to the
discretion of the Independent Trustees.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
Upon written notice to broker-dealers, the Principal Underwriter may, at its
own expense, periodically sponsor programs that offer additional compensation in
connection with sales of Fund shares. Participation in such programs may be
available to all broker-dealers or to selected broker-dealers who have sold or
are expected to sell significant amounts of shares. Additional compensation may
also include financial assistance to broker-dealers in connection with
preapproved 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, depending on the
broker-dealer's satisfaction of the required conditions, may be periodic and may
be up to 0.25% of the value of shares sold by such broker-dealer.
The Principal Underwriter also may pay banks and other financial services
firms that facilitate transactions in shares of the Fund for their clients a
transaction fee up to the level of the payments made allowable to broker-dealers
for the sale of such shares as described above.
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 Fund's 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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HOW TO REDEEM SHARES
- ------------------------------------------------------------------------------
You may redeem Fund shares for cash at the redemption value by writing to the
Fund, c/o Keystone Investor Resource Center, Inc., P.O. Box 2121, Boston,
Massachusetts 02106-2121, and presenting a properly endorsed share certificate
to the Fund (if certificates have been issued). Your signature(s) on the written
order and certificates must be guaranteed, as described below.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. The Principal Underwriter
charges no fee for this service. Your broker-dealer, however, may charge a
service fee.
The redemption value equals the net asset value adjusted for fractions of a
cent and may be more or less than your cost depending upon changes in the value
of the Fund's portfolio securities between purchase and redemption. The Fund may
impose a CDSC at the time of redemption of certain shares as explained in "How
to Buy Shares." If imposed, the Fund deducts the CDSC 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 up to 15 days or
more. Any delay may be avoided by purchasing shares either with a certified
check, by Federal Reserve or bank wire of funds, by direct deposit or by EFT.
Although the mailing of a redemption check 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 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 mailing of a redemption check has been delayed, the
check will be mailed promptly after good payment has been collected.
The Fund computes the amount due to you at the close of the Exchange at the
end of the day on which it has received all proper documentation from you.
Payment of the amount due on redemption, less any applicable CDSC (as described
above), will be made within seven days thereafter, except as discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND 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 where 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 or repurchase order, but the shareholder has
not clearly indicated the amount of money or number of shares involved, the Fund
cannot execute the order. In such cases, the Fund will request the missing
information from the shareholder and process the order the day it receives such
information.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by calling toll free 1-800-343-2898. You must complete the Telephone Redemption
Section of the application to enjoy telephone redemption privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth above.
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. No CDSCs are
applied to such redemptions.
GENERAL
The Fund reserves the right at any time to terminate, suspend, or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL"), or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL, or by telephone are
genuine. Neither the Fund, KIRC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) 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
- ------------------------------------------------------------------------------
Details on all shareholder services may be obtained by writing to KIRC or
calling toll free 1-800-343-2898.
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 shares
of the Fund for shares of any of the other funds in the Keystone Fund Family, on
the basis of their respective net asset values, by calling toll free
1-800-343-2898 or by writing to KIRC at P.O. Box 2121, Boston, Massachusetts
02106-2121. (See "How to Redeem Shares" for additional information with respect
to telephone transactions.)
Fund shares purchased by check may be exchanged for shares of the named funds,
other than Keystone Precious Metals Holdings, Inc. ("KPMH"). In order to
exchange Fund shares for shares of KPMH, a shareholder must have held Fund
shares for a period of at least six months. You may exchange your shares for
another Keystone fund for a $10 fee by calling or writing to Keystone. The
exchange fee is waived for individual investors who make an exchange using KARL.
If the shares being tendered for exchange have been held for less than four
calendar years and are still subject to a CDSC, such CDSC will carry over to the
shares being acquired in the exchange transaction. The Fund reserves the right
to terminate this exchange offer or to change its terms, including the right to
change the service charge for any exchange.
Orders to exchange shares of the Fund for shares of Keystone Liquid Trust
("KLT") will be executed by redeeming the shares of the Fund and purchasing
shares of KLT at the net asset value of KLT shares determined after the proceeds
from such redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund prior
to 4:00 p.m. (eastern time) on any business day will be executed at the
respective net asset values determined as of the close of business that day.
Orders for exchanges received after 4:00 p.m. (eastern time) on any business day
will be executed at the respective net asset values determined at the close of
the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
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 (TSAs); 403(b) (7) Plans; 401(k) Plans; Keogh Plans; Corporate
Profit-Sharing Plans; and Money Purchase Pension Plans. For details, including
fees and application forms, call KIRC toll free at 1-800-247-4075 or write to
KIRC at P.O. Box 2121, Boston, Massachusetts 02106-2121.
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 KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call KIRC. Please
include your account numbers. Termination of an Automatic Investment Plan may
take up to 30 days.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, shareholders may arrange for regular monthly
or quarterly fixed withdrawal payments. Each payment must be at least $100 and
may be as much as 1% per month or 3% per quarter of the total net asset value of
the Fund shares in the shareholder's account when the Systematic Income Plan is
opened. Fixed withdrawal payments are not subject to a CDSC. Excessive
withdrawals may decrease or deplete the value of a shareholder's account.
OTHER SERVICES
Under certain circumstances, shareholders may, within 30 days after a
redemption, reinstate their accounts at current net asset value.
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PERFORMANCE DATA
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise "total return" and "current yield."
BOTH FIGURES ARE BASED ON HISTORICAL EARNINGS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
refers to the Fund's average annual compounded rates of return over specified
periods determined by comparing the initial amount invested to the ending
redeemable value of that amount. The resulting equation assumes reinvestment of
all dividends and distributions and deduction of all recurring charges, if any,
applicable to all shareholder accounts. The deduction of the contingent deferred
sales charge is reflected in the applicable years. The exchange fee is not
included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period. The Fund presently does not intend to advertise current yield.
The Fund may include comparative performance information when 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.
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FUND SHARES
- ------------------------------------------------------------------------------
The Fund currently issues one class of shares, which participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares may be exchanged as explained under "Shareholder Services," but
will have no other preference, conversion, exchange, or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares are redeemable, transferable, and freely
assignable as collateral. There are no sinking fund provisions. The Fund may
establish additional classes or series of shares.
The Fund does not have annual meetings. The Fund will have special meetings
from time to time as required under its Restatement of Trust Agreement (the
"Trust Agreement") and under the 1940 Act. As provided in the Fund's Trust
Agreement, 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.
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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>
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ADDITIONAL INVESTMENT INFORMATION
- ------------------------------------------------------------------------------
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES
BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S., and the Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by the Fund must permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days notice). Notes acquired by the Fund may have maturities of more than one
year, provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals which normally will
not exceed 31 days, but may extend up to one year. The notes are deemed to have
a maturity equal to the longer of the period remaining to the next interest rate
adjustment or the demand notice period. Because these types of notes are direct
lending arrangements between the lender and borrower, such instruments are not
normally traded and there is no secondary market for these notes, although they
are redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, Keystone considers, under
standards established by the Board of Trustees, earning power, cash flow and
other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund will invest in them only
if, at the time of investment, the issuer meets the criteria established for
commercial paper discussed in the statement of additional information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
credit-worthy. Such persons must be registered as U.S. government securities
dealers with an appropriate regulatory organization. Under such agreements, the
bank, primary dealer or other financial institution agrees, upon entering into
the contract, to repurchase the security at a mutually agreed upon date and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period. Under a repurchase agreement, the seller must maintain the value of the
securities subject to the agreement at not less than the repurchase price, such
value being determined on a daily basis by marking the underlying securities to
their market value. Although the securities subject to the repurchase agreement
might bear maturities exceeding a year, the Fund only intends to enter into
repurchase agreements that provide for settlement within a year and usually
within seven days. Securities subject to repurchase agreements will be held by
the Fund's custodian or in the Federal Reserve book entry system. The Fund does
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and
losses, including (1) possible declines in the value of the underlying
securities during the period while the Fund seeks to enforce its rights thereto;
(2) possible subnormal levels of income and lack of access to income during this
period; and (3) expenses of enforcing its rights. The Board of Trustees has
established procedures to evaluate the creditworthiness of each party with whom
the Fund enters into repurchase agreements by setting guidelines and standards
of review for Keystone and monitoring Keystone's actions with regard to
repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets, such as
U.S. government securities or other high grade debt securities, having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that the Fund is obligated to repurchase may decline below the repurchase price.
FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities principally traded
in securities markets outside the U.S. While investment in foreign securities is
intended to reduce risk by providing further diversification, such investments
involve sovereign risk in addition to the credit and market risks normally
associated with domestic securities. Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company, particularly emerging market country companies, than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the United States. Investments
in foreign securities may also be subject to other risks different from those
affecting U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments and currency blockage (which would prevent cash
from being brought back to the U.S.).
In addition, investing in securities of foreign issuers generally involves
more risk than investing in securities of domestic issuers for the following
reasons: (1) there may be less public information available about foreign
companies than is available about U.S. companies; (2) foreign companies are not
generally subject to the uniform accounting, auditing and financial reporting
standards and practices applicable to U.S. companies; (3) foreign stock markets
have less volume than the U.S. market, and the securities of some foreign
companies are much less liquid and much more volatile than the securities of
comparable U.S. companies; (4) foreign securities transactions may involve
higher brokerage commissions; (5) there may be less government regulation of
stock markets, brokers, listed companies and banks in foreign countries than in
the U.S.; (6) the Fund may incur fees on currency exchanges when it changes
investments from one country to another; (7) the Fund's foreign investments
could be affected by expropriation, confiscatory taxation, nationalization,
establishment of currency exchange controls, political or social instability or
diplomatic developments; (8) fluctuations in foreign exchange rates will affect
the value of the Fund's investments, the value of dividends and interest earned,
gains and losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments; and (9) interest and
dividends on foreign securities may be subject to withholding taxes in a foreign
country that could result in a reduction of net investment income available for
distribution.
Investing in securities of issuers in emerging markets countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging markets countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
companies in emerging markets countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities. These risks are carefully
considered by Keystone prior to the purchase of these securities.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when issued
and delayed delivery basis. When issued or delayed delivery transactions arise
when securities or currencies are purchased or sold by the Fund with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. When the Fund engages in when issued and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the sale. Failure to do so may result in the Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. No payment or delivery is made by the Fund,
however, until it receives payment or delivery from the other party to the
transaction. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained until payment is made. When issued and
delayed delivery agreements are subject to risks from changes in value based
upon changes in the level of interest rates, currency rates and other market
factors, both before and after delivery. The Fund does not accrue any income on
such securities or currencies prior to their delivery. To the extent the Fund
engages in when issued and delayed delivery transactions, it will do so for the
purpose of acquiring prortfolio securities or currencies consistent with its
investment objective and policies and not for the purpose of investment
leverage. The Fund currently does not intend to invest more than 5% of its
assets in when issued or delayed delivery transactions.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers or dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if, as a result, the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other high
grade, short-term obligations or interest bearing cash equivalents. Although
voting rights attendant to securities loaned pass to the borrower, such loans
may be called at any time and will be called so that the securities may be voted
by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made to borrowers deemed to be of good standing, under standards
approved by the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.
DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes, although the Fund generally uses derivatives
primarily as direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options for hedging purposes. Derivatives are a valuable tool which,
when used properly, can provide significant benefit to Fund shareholders.
Keystone is not an aggressive user of derivatives with respect to the Fund.
However, the Fund may take positions in those derivatives that are within its
investment policies if, in Keystone's judgment, this represents an effective
response to current or anticipated market conditions. Keystone's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objective and policies.
Derivatives may be (1) standardized, exchange traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards, and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures is provided
later in this section and is provided in the Fund's statement of additional
information. The Fund does not presently engage in the use of swaps.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, the Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. The Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Fund may only write "covered" options. This means that so long as the Fund
is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities that are available
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. The Fund does not expect, however, that this will occur.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and, by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously
written put or call options of the same series.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Fund generally will write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular option at any
particular time, and, for some options, no secondary market may exist. In such
event, it might not be possible to effect a closing transaction in a particular
option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair the Fund's ability to
use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options in which the Fund will trade are generally
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to the Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the Securities and Exchange Commission is of the view that the
premiums that the Fund pays for the purchase of unlisted options and the value
of securities used to cover unlisted options written by the Fund are considered
to be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its policies on illiquid securities.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into securities,
currency or index-based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies is an agreement to buy or sell securities or currencies
at a specified price during a designated month. A futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. The Fund does not make payment or deliver securities upon entering into a
futures contract. Instead, it puts down a margin deposit, which is adjusted to
reflect changes in the value of the contract and which continues until the
contract is terminated.
The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the Fund's contract will tend to rise when the
value of the underlying securities or currencies declines and to fall when the
value of such securities or currencies increases. Thus, the Fund sells futures
contracts in order to offset a possible decline in the value of its securities
or currencies. If a futures contract is purchased by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. The Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.
The Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by the Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case, it would continue to bear market
risk on the transaction.
Although futures and related options transactions are intended to enable the
Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates, exchange rates or market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone correctly predicts interest or exchange rate movements, a hedge could
be unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund. Keystone will attempt to minimize these risks through careful selection
and monitoring of the Fund's futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Fund may invest in securities of foreign issuers. When
the Fund invests in foreign securities, they usually will be denominated in
foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell. The
Fund intends to use these contracts to hedge the U.S. dollar value of a security
it already owns, particularly if the Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to accurately predict the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the U.S. dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund.
Although the Fund does not currently intend to do so, the Fund may also purchase
and sell options related to foreign currencies. The Fund does not intend to
enter into foreign currency transactions for speculation or leverage.
<PAGE>
-------------------------------
KEYSTONE
FUND FAMILY
*
Quality Bond Fund (B-1)
Diversified Bond Fund (B-2)
High Income Bond Fund (B-4)
Balanced Fund (K-1)
Strategic Growth Fund (K-2)
Growth and Income Fund (S-1)
Mid-Cap Growth Fund (S-3)
Small Company Growth Fund (S-4)
International Fund
Precious Metals Holdings
Tax Free Fund
Liquid Trust
-------------------------------
[LOGO] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[recycle symbol]
S1-P 12/96
-------------------------------
KEYSTONE
[GRAPHIC OMITTED]
GROWTH AND INCOME
FUND (S-1)
-------------------------------
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE GROWTH AND INCOME FUND (S-1)
December 10, 1996
This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone Growth
and Income Fund (S-1) (the "Fund") dated December 10, 1996. A copy of the
prospectus may be obtained from The Fund's principal underwriter, Keystone
Investment Distributors Company (the "Principal Underwriter"), or your
broker-dealer. The Principal Underwriter is located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034,
TABLE OF CONTENTS
Page
Investment Objective and Policies.....................................2
Investment Restrictions...............................................2
Valuation of Securities...............................................4
Distributions and Taxes...............................................4
Sales Charges.........................................................5
Distribution Plan.....................................................6
The Trust Agreement...................................................7
Investment Manager and
Investment Adviser................................................. 9
Trustees and Officers................................................11
Principal Underwriter................................................14
Brokerage............................................................15
Expenses.............................................................16
Standardized Total Return
and Yield Quotations...............................................17
Additional Information...............................................18
Financial Statements.................................................19
Appendix............................................................A-1
17450
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund's investment objective is to provide
shareholders with the best possible growth of capital and long-term growth of
income by investing its assets as fully as practicable.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without a vote of the majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (the
"1940 Act")). Unless otherwise stated, all references to Fund assets are in
terms of current market value.
The Fund may not do any of the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; provided that these limitations do not apply
to investments in securities issued or guaranteed by the United States ("U.S.")
government or its agencies or instrumentalities;
(2) invest more than 5% of the value of its total assets in companies which
have been in operation for less than three years;
(3) borrow money, except that the Fund may (a) borrow money from banks for
temporary or emergency purposes in aggregate amounts up to 10% of the value of
the Fund's net assets (computed at cost); or (b) enter into reverse repurchase
agreements (bank borrowings and reverse repurchase agreements, in aggregate,
shall not exceed 10% of the value of the Fund's net assets);
(4) underwrite securities, except that the Fund may purchase securities
from issuers thereof or others and dispose of such securities in a manner
consistent with its other investment policies; in the disposition of restricted
securities the Fund may be deemed to be an underwriter, as defined in the
Securities Act of 1933 (the "1933 Act");
(5) purchase or sell real estate or interests in real estate, except that
it may purchase and sell securities secured by real estate and securities of
companies which invest in real estate, and will not
2
<PAGE>
purchase or sell commodities or commodity contracts, except that the Fund may
engage in currency or other financial futures contracts and related options
transactions;
(6) invest for the primary purpose of exercising control over or management
of any issuer;
(7) make margin purchases or short sales of securities;
(8) make loans, except that the Fund may purchase money market securities,
enter into repurchase agreements, buy publicly and privately distributed debt
securities and lend limited amounts of its portfolio securities to
broker-dealers; all such investments must be consistent with the Fund's
investment objective and policies;
(9) invest more than 25% of its total assets in the securities of issuers
in any single industry, other than securities issued by banks and savings and
loan associations or securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; and
(10) purchase the securities of any other investment company except in the
open market and at customary brokerage rates and in no event more than 3% of the
voting securities of any investment company.
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.
The Fund has no current intention of attempting to increase its net income
by borrowing and intends to repay any borrowings made in accordance with the
third investment restriction enumerated above before it makes any additional
investments.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
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 15% of its net
assets.
Portfolio securities of the Fund may not be purchased from or sold or
loaned to Keystone Management, Keystone, or any affiliate thereof or any of
their Directors, officers, or employees.
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VALUATION OF SECURITIES
Current value for the Fund's portfolio securities is determined in the
following manner:
(1) securities traded on an established exchange are valued on the basis of
the last sales price on the exchange where the securities are primarily traded
prior to the time of the valuation;
(2) securities traded in the over-the-counter market, for which complete
quotations are readily available, are valued at the mean of the bid and asked
prices at the time of valuation;
(3) short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market;
(4) short-term investments maturing in more than sixty days are valued at
current market value;
(5) short-term investments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market; and
(6) the Board of Trustees values the following securities at prices it
deems in good faith to be fair: (a) securities, including restricted securities,
for which complete quotations are not readily available; (b) listed securities
if, in the Board's opinion, the last sales price does not reflect a current
market value or if no sale occurred; and (c) other assets.
DISTRIBUTIONS AND TAXES
The Fund distributes to its shareholders dividends from net investment
income and net realized capital gains, if any, annually in shares or, at the
option of the shareholder, in cash. (Distributions of ordinary income may be
eligible in whole or in part for the corporate 70% dividends received
deduction.) Shareholders who have not opted, prior to the record date for any
distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the day on the ex-dividend date after adjustment for the distribution.
Net asset value is used in computing the number of shares in both gains and
income distribution reinvestments. Account statements and/or checks, as
appropriate, will be mailed to shareholders by the 15th of the appropriate
month. Unless the Fund receives instructions to the contrary from a shareholder
before the record date, it will assume that the shareholder wishes to receive
that distribution and future gains and income distributions in shares.
Instructions continue in effect until changed in writing.
Distributed long-term capital gains are taxable as such to the shareholder
regardless of the period of time Fund shares have been held by the shareholder.
However, if such shares are held less than six months and redeemed at a loss,
the shareholder will recognize a long-term capital loss on such
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shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the sale of
its shares (see "Distribution Plan"), a contingent deferred sales charge
("CDSC") may be imposed at the time of redemption of certain Fund shares within
four calendar years after their purchase. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to the shareholder.
The CDSC is a declining percentage of the lesser of (1) the net asset value
of the shares redeemed, or (2) the total cost of such shares. No CDSC is imposed
when the shareholder redeems amounts derived from (1) increases in the value of
his account above the total 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; or (3) shares
held in all or part of more than four consecutive calendar years.
Subject to the limitations stated above, the CDSC is imposed according to
the following schedule: 4% of amounts redeemed during the calendar year of
purchase; 3% of amounts redeemed during the calendar year after the year of
purchase; 2% of amounts redeemed during the second calendar year after the year
of purchase; and 1% of amounts redeemed during the third calendar year after the
year of purchase. No CDSC is imposed on amounts redeemed thereafter.
The following example illustrates the operation of the CDSC. Assume that an
investor makes a purchase payment of $10,000 during the calendar year 1996 and
on a given date in 1997 the value of the investor's account has grown through
investment performance and reinvestment of distributions to $12,000. On such
date in 1997, the investor could redeem up to $2,000 ($12,000 minus $10,000)
without incurring a CDSC. If, on such date, the investor should redeem $3,000, a
CDSC would be imposed on $1,000 of the redemption proceeds (the amount by which
the investor's account was reduced by the redemption below the amount of the
initial purchase payment). The CDSC would be imposed at the rate of 3% (because
the redemption is made during the calendar year after the calendar year of
purchase) and would total $30.
Upon request for redemption, shares not subject to the CDSC will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed. There is no CDSC on permitted exchanges of shares between the funds in
the Keystone Fund Family that have adopted distribution plans pursuant
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to Rule 12b-1 under the 1940 Act. For purposes of computing any future CDSC,
when shares of one such fund have been exchanged for shares of another such
fund, the calendar year of purchase is deemed to be the year shares tendered for
exchange were originally purchased.
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
imposition of a CDSC to (1) Directors, Trustees, officers, full-time employees,
and sales representatives of the Fund, Keystone Management, Keystone, Keystone
Investments, Inc. ("Keystone Investments"), Harbor Capital Management Company,
Inc., the Principal Underwriter and their affiliates who have been such for not
less than ninety days; and (2) the pension and profit-sharing plans established
by such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives,
provided, however, that all such sales are made upon the written assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No CDSC is imposed on a redemption of shares of the Fund purchased by a
bank or trust company in a single account in the name of such bank or trust
company as trustee if the initial investment in shares of the Fund, any other
fund in the Keystone Fund Family, and/or any Keystone America Fund, is at least
$500,000 and any commission paid by the Fund and such other funds at the time of
such purchase is not more than 1% of the amount invested.
The Fund's prospectus enumerates certain additional CDSC waivers.
DISTRIBUTION PLAN
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear the expenses of distributing their shares if
they comply with various conditions, including the adoption of a distribution
plan containing certain provisions set forth in Rule 12b-1. The Fund bears some
of the costs of selling its shares under a Distribution Plan adopted pursuant to
Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The National Association of Securities Dealers, Inc.
("NASD") limits such annual expenditures to 1%, 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
Fund's Distribution Plan plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any CDSC paid by shareholders to the Principal
Underwriter).
Payments under the 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 Fund shares sold and (2) as shareholder service fees in
respect of shares maintained by the recipients and outstanding on the Fund's
books for specific periods. Amounts paid or accrued to the Principal Underwriter
under (1) and (2) in the aggregate may not exceed the limitation referred to
above. The Principal Underwriter generally reallows to broker-dealers or others
a commission equal to 4% of the price paid for each Fund share sold as well as a
shareholder service fee at a rate of 0.25% per annum of the net asset value of
shares maintained by such recipients and outstanding on the books of the Fund
for specified periods.
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If the Fund is unable to pay the Principal Underwriter a commission on a
new sale because the annual maximum (0.75% of average daily net assets) has been
reached, the Principal Underwriter intends, but is not obligated, to continue to
accept new orders for the purchase of Fund shares and to pay or accrue
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to
reimburse the Principal Underwriter for advances made by the Principal
Underwriter in excess of the Distribution Plan limitation, the Principal
Underwriter intends to seek full payment of such amounts from the Fund (together
with interest 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 permitted
limits. If the Trustees who are not interested persons (as defined in the 1940
Act) of the Fund (the "Independent Trustees") authorize such payments, the
effect will be to extend the period of time during which the Fund incurs the
maximum amount of costs allowed by the Distribution Plan. If the 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.
The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limit specified above, and the amounts and
purposes of expenditures under the Distribution Plan must be reported to the
Fund's Independent Trustees quarterly. The Fund's Independent Trustees may
require or approve changes in the implementation or operation of the
Distribution Plan and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent Trustees, such costs could, for some period of time, be higher than
such costs permitted by most other plans presently adopted by other investment
companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
securities of the Fund.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund is required to commit
the selection and nomination of candidates for Independent Trustees to the
discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plan have benefited
the Fund.
THE TRUST AGREEMENT
TRUST AGREEMENT
The Fund is a Pennsylvania common law trust established under a Trust
Agreement, as restated and amended (the "Trust Agreement"). The Trust Agreement
restructured the Fund so that its operation would be substantially similar to
that of most other mutual funds. The Trust Agreement provides for a Board of
Trustees and enables the Fund to enter into an agreement with an investment
manager and/or adviser to provide the Fund with investment advisory, management
and administrative services.
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A copy of the Trust Agreement is on file as an exhibit to the Fund's
Registration Statement, of which this statement of additional information is a
part. This summary is qualified in its entirety by reference to the Trust
Agreement.
DESCRIPTION OF SHARES
The Trust Agreement authorizes the issuance of an unlimited number of
shares of beneficial interest and the creation of additional series and/or
classes of series of Fund shares. Each share represents an equal proportionate
interest in the Fund with each other share of that class. Upon liquidation,
shares are entitled to a pro rata share in the net assets of their class of Fund
shares. Shareholders shall have no preemptive or conversion rights. Shares are
transferable. The Fund currently intends to issue only one class of shares.
SHAREHOLDER LIABILITY
Pursuant to court decisions or other theories of law, shareholders of a
Pennsylvania common law trust could possibly be held personally liable for the
obligations of the trust. The possibility of Fund shareholders incurring
financial loss under such circumstances appears to be remote, however, because
the Trust Agreement (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
Under the terms of the Trust Agreement, 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. No amendment may be made to the Trust
Agreement that adversely affects any class of shares without the approval of a
majority of the shares of that class. There shall be no cumulative voting in the
election of Trustees.
After a meeting as described above, no further meetings of shareholders for
the purpose of electing Trustees will be held, unless required by law or unless
and until such time as less than a majority of the Trustees holding office have
been elected by shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may cease to hold office or may be removed from office (as
the case may be) (1) at any time by a two-thirds vote of the remaining Trustees;
(2) when such Trustee becomes mentally or physically incapacitated; or (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Trust Agreement 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 Trust Agreement shall protect a Trustee against any liability for his
willful misfeasance, bad faith, gross negligence, or reckless disregard of his
duties.
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The Trustees have absolute and exclusive control over the management and
disposition of all 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.
INVESTMENT MANAGER AND INVESTMENT ADVISER
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 and 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. 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 other 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 an Investment Management
Agreement with the Fund (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 will provide office space and all necessary office facilities,
equipment, and personnel in connection with its services under the Management
Agreement. The Management Agreement also stipulates that Keystone Management
will pay or reimburse the Fund for the compensation of Fund officers and
Trustees who are affiliated with the investment manager as well as pay all
expenses of Keystone Management incurred in connection with the provision of its
services. All charges and expenses, other than those specifically referred to as
being borne by Keystone Management, will be paid by the Fund, including, but not
limited to, custodian charges and expenses; bookkeeping and auditors' charges
and expenses; transfer agent charges and expenses; fees of Independent Trustees;
brokerage commissions, brokers' fees and expenses; issue and transfer taxes;
costs and expenses under the Distribution Plan; taxes and trust fees payable to
governmental agencies; the cost of share certificates; fees and expenses of the
registration and qualification of the Fund and its shares with the Securities
and Exchange Commission (the "Commission") or under state or other securities
laws; expenses of preparing, printing, and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; expenses of shareholders' and Trustees' meetings; charges and expenses
of legal counsel for the Fund and for the Trustees of the Fund on matters
relating to the Fund; charges and expenses of filing annual and other reports
with the Commission and other authorities; and all extraordinary charges and
expenses of 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 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
set forth below:
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Annual Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- -------------------- --------------------
0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% the next $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000;
computed as of the close of business each business day and payable daily.
The Management Agreement continues in effect only if approved at least
annually by the Fund's Board of Trustees or by a vote of a majority of the
outstanding shares, and such renewal has been approved by the vote of a majority
of the Independent Trustees cast in person at a meeting called for the purpose
of voting on such approval. The Management Agreement may be terminated, without
penalty, on 60 days' written notice by the Fund's Board of Trustees or by a vote
of a majority of outstanding shares. The Management Agreement will terminate
automatically upon its "assignment," as that term is defined in the 1940 Act.
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.
INVESTMENT ADVISER
Pursuant to the Management Agreement, Keystone Management has entered into
an Investment Advisory Agreement with Keystone (the "Advisory Agreement"), under
which Keystone Management has delegated all of its investment management
functions, except for certain administrative and management services, to
Keystone. As a result, subject to the supervision of the Fund's Board of
Trustees, Keystone performs services on behalf of the Fund that are
substantially similar to those described above with respect to Keystone
Management.
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. 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.
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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.
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 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 and management 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, among other
things, 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.
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 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, Keystone Investor Resource Center, Inc. ("KIRC"), and
Fiduciary Investment Company, Inc. ("FICO"); Director of Boston Children's
Services Association; Trustee of Anatolia College, Middlesex School, and
Middlebury College; Member, Board of Governors, New England Medical Center;
former Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"); former Director and Vice President, Robert Van
Partners, Inc.; and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Professor, Finance Department,
George Washington University; President, Amling & Company (investment
advice); and former Member, Board of Advisers, Credito Emilano (banking).
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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 (investment 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 Di rector, 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;
Director, Vermont Yankee Nuclear Power Corporation, Grand Trunk
Corporation, Grand Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company, Inc., and the Investment
Company Institute; former Director and President, Associated Industries of
Vermont; former Director of Keystone, Central Vermont Railway, Inc., S.K.I.
Ltd., and Arrow Financial Corp.; and former Director and Chairman of the
Board, 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
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Warranty, Inc. (insurance agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of Connecticut Natural Gas
Corporation, Hartford Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial Services, Inc.; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief Investment Officer, The
Travelers Corporation; former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the 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.
DONALD C. DATES: Vice President of the Fund; Vice President of certain other
funds in the Keystone Investments Family of Funds; and Senior Vice
President of Keystone.
MAUREEN E. CULLINANE: Vice President of the Fund; Vice President of certain
other funds in the Keystone Investments Family of Funds; and Senior Vice
President of Keystone.
WALTER T. McCORMICK: Vice President of the Fund; Vice President of certain
other Keystone funds in the Keystone Investments Family of Funds; and
Senior Vice President of Keystone.
* This Trustee may be considered an "interested person" of the Fund within
the meaning of the 1940 Act.
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<PAGE>
Mr. Elfner and Mr. Bissell are "interested persons" of the Fund 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 August 31, 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 November 30, 1996, the
Fund's Trustees and officers beneficially owned less than 1% of the Fund's then
outstanding shares.
The address of all the Fund's Trustees and officers and the address of the
Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
PRINCIPAL UNDERWRITER
The Fund has entered into a Principal Underwriting Agreement with the
Principal Underwriter (the "Underwriting Agreement"). The Principal Underwriter
is a Delaware corporation wholly-owned by Keystone.
The Principal Underwriter, as agent, has agreed to use its best efforts to
find purchasers for the shares. The Principal Underwriter may retain and employ
representatives to promote distribution of the shares and may obtain orders from
broker-dealers and others, acting as principals, for sales of shares to them.
The Underwriting Agreement provides that the Principal Underwriter will bear the
expense of preparing, printing, and distributing advertising and sales
literature and prospectuses used by it. In its capacity as principal
underwriter, the Principal Underwriter may receive payments from the Fund
pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually by (i) a vote of a majority
of the Fund's Independent Trustees cast in person at a meeting called for that
purpose and (ii) vote of a majority of Trustees or by vote of a majority of the
outstanding shares.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its "assignment," as that term is defined in the 1940 Act.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may provide to
selected dealers promotional materials and selling aids, including, but not
limited to, personal computers, related software and Fund data files.
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 Underwriting Agreement. As a
result, the Fund's Trustees have approved the following agreements, subject to
the Merger's completion: (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
14
<PAGE>
Fund; and (iii) a subadministration agreement between Keystone and Furman Selz,
LLC ("Furman Selz") with respect to the Fund. EFD is a wholly-owned subsidiary
of Furman Selz. It is currently anticipated that on or about January 2, 1997,
Furman Selz 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 Keystone and BISYS with respect to the Fund.
The terms of such agreements will be substantively identical to the terms of the
agreements to be executed upon completion of the Merger.
BROKERAGE
It is Keystone's policy, in effecting transactions for the Fund in
portfolio securities, to seek best execution of orders at the most favorable
prices. The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker-dealer 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, or Keystone is
considered to be in addition to, and not in lieu of, services required to be
performed by Keystone Management under the Management Agreement or Keystone
under the Advisory Agreement. The cost, value, and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of Keystone Management or Keystone who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for such other clients. Under the Management Agreement and the Advisory
Agreement, Keystone Management and Keystone are permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
Management and Keystone do follow such a practice, they will do so on a basis
that is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark-up or reflect a dealer's mark-down. Where transactions are made in
the over- the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for the
direct purchase from an issuer of certain securities for the Fund's portfolio
thereby taking advantage of the lower purchase price available to members of
such a group.
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<PAGE>
Neither Keystone Management, Keystone, nor the Fund intend to place
securities transactions with any particular broker-dealer or group thereof. The
Fund's Board of Trustees, however, has determined that the Fund may consider
sales of shares as a factor in the selection of broker-dealers to execute
portfolio transactions, subject to the requirements of best execution, including
best price, described above.
The Fund's Board of Trustees periodically reviews the Fund's brokerage
policy. Because of the possibility of further regulatory developments affecting
the securities exchanges and brokerage practices generally, the foregoing
practices may be changed, modified, or eliminated.
Investment decisions for the Fund are made independently by Keystone
Management or Keystone 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, the
transactions are allocated as to amount in accordance with a formula that 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 portfolio
securities, the Fund believes that, in other cases, the ability of the Fund to
participate in volume transactions will produce better executions.
In no instance are portfolio securities purchased from or sold to Keystone
Management, Keystone, the Principal Underwriter or any of their affiliated
persons, as defined in the 1940 Act.
EXPENSES
INVESTMENT ADVISORY FEES
For each of the Fund's last fiscal year, the table below lists the total
dollar amounts paid by (1) the Fund to Keystone Management for services rendered
under the Management Agreement and (2) by Keystone Management to Keystone for
services rendered under the Advisory Agreement. For more information, see
"Investment Manager and Investment Adviser."
Percent of Fund's
Fee Paid to Keystone Average Net Assets Fee Paid to
Management under Represented by Keystone under
Fiscal Year Ended the Management Keystone the Advisory
August 31, Agreement Management's Fee Agreement
- ------------------ -------------------- ------------------- --------------
1996 $1,492,757 O.67% $1,268,843
1995 $1,318,897 0.68% $1,121,062
1994 $1,453,310 0.67% $1,235,313
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<PAGE>
DISTRIBUTION PLAN EXPENSES
For the fiscal year ended August 31, 1996, the Fund paid $1,738,556 to the
Principal Underwriter under its Distribution Plan. For more information, see
"Distribution Plan."
UNDERWRITING COMMISSIONS
For each of the Fund's last three fiscal years, the table below lists the
aggregate dollar amounts of underwriting commissions (front-end sales charges,
plus distribution fees, plus CDSCs) paid with respect to the public distribution
of the Fund's shares. The table also indicates the aggregate dollar amount of
underwriting commissions retained by the Principal Underwriter. For more
information, see "Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Underwriting Commissions
Fiscal Year Ended Aggregate Dollar Amount of Retained by the Principal
August 31, Underwriting Commissions Underwriter
- ------------------ ---------------------------- --------------------------
1996 $1,415,505 $334,606
1995 $1,083,702 $629,377
1994 $1,865,658 $1,215,476
BROKERAGE COMMISSIONS
Listed below are the aggregate dollar amounts paid by the Fund in brokerage
commissions for each of the last three fiscal years. For more information, see
"Brokerage."
For the Fiscal Year Aggregate Dollar Amount of
Ended August 31, Brokerage Commissions Paid
- ---------------------------- -----------------------------------------
1996 $684,496
1995 $621,829
1994 $345,941
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
Total return quotations for the Fund as they may appear from time to time
in advertisements are calculated by finding the average annual compounded rates
of return over one, five, and ten year periods on a hypothetical $1,000
investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five, or ten year periods.
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<PAGE>
The cumulative total returns of the Fund for the one, five, and ten year
periods ended August 31, 1996 were 14.31% (including CDSC), 52.17%, and 148.86%,
respectively. The compounded average annual rates of return for the one, five,
and ten year periods ended August 31, 1996 were 14.31% (including CDSC), 8.76%,
and 9.55%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund does not presently
intend to advertise current yield.
ADDITIONAL INFORMATION
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is custodian of all securities and cash of the Fund (the
"Custodian"). The Custodian may hold securities of some foreign issuers outside
the U.S. The Custodian performs no investment management functions for the Fund,
but in addition to its custodial services, is responsible for accounting and
related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the Fund's independent auditors.
KIRC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is
a wholly-owned subsidiary of Keystone, and acts as transfer agent and dividend
disbursing agent for the Fund.
To the best of the Fund's knowledge, there were no shareholders who owned
5% or more of the Fund's outstanding shares on November 30, 1996.
Except as otherwise stated in its prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in its prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property. The Fund has obligated itself, however, under the
1940 Act to redeem for cash all shares presented for redemption by any one
shareholder up to the lesser of $250,000 or 1% of the Fund's net assets in any
90-day period. Securities delivered in payment of redemptions would be valued at
the same value assigned to them in computing the net asset value per share and
would, to the extent permitted by law, be readily marketable. Shareholders
receiving such securities would incur brokerage costs upon the securities' sale.
No dealer, salesman or other person is authorized to give any information
or to make any representation not contained in the Fund's prospectus, 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
18
<PAGE>
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.
FINANCIAL STATEMENTS
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission:
Schedule of Investments as of August 31, 1996;
Financial Highlights for each of the years in the ten-year period ended
August 31, 1996;
Statement of Assets and Liabilities as of August 31, 1996;
Statement of Operations for the year ended August 31, 1996;
Statements of Changes in Net Assets for each of the years in the two-year
period ended August 31, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated September 27, 1996.
A copy of the Fund's Annual report will be furnished upon request and
without charge. Requests may be made in writing to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling KIRC toll free at 1-800-343-2898.
19
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A-1
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APPENDIX
- -------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK RATINGS
S&P'S Earnings and Dividend Rankings for Common Stock
Because the investment process involves assessment of various factors, such
as product and industry position, corporate resources and financial policy, with
results that make some common stocks more highly esteemed than others, Standard
& Poor's Corporation ("S&P") believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a consid-erable bearing on relative quality.
S&P rankings, however, do not reflect all of the factors, tangible or
intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements in
establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on pershare
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
Moody's Common Stock Rankings
Moody's Investors Service ("Moody's") presents a concise statement of the
important characteristics of a company and an evaluation of the grade (quality)
of its common stock. Data presented includes: (a) capsule stock information
which reveals short and long term growth and yield afforded by the indicated
dividend, based on a recent price; (b) a long term price chart which shows
patterns of monthly stock price movements and monthly trading volumes; (c) a
breakdown of a company's capital account which aids in determining the degree of
conservatism or financial leverage in a company's balance sheet; (d) interim
earnings for the current year to date, plus three previous years; (e) dividend
information; (f) company background; (g) recent corporate developments; (h)
prospects for a company in the immediate future and the next few years; and (i)
a ten year comparative statistical analysis.
<PAGE>
A-2
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently, and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings, and record of dividend payments.
Other considerations include conservativeness of capitalization, depth and
caliber of management, accounting practices, technological capabilities and
industry position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
Moody's Preferred Stock Ratings
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. aa: An issue that is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well-maintained in the foreseeable
future.
3. a: An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. baa: An issue that is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. ba: An issue that is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. b: An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. caa: An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
8. ca: An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
<PAGE>
A-3
9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
S&P Corporate Bond Ratings
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
<PAGE>
A-4
5. BB, B, CCC, CC and C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Moody's Corporate Bond Ratings
Moody's ratings are as follows:
1. Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments *I903*are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
3. A - Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
4. Baa - Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds that are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
6. B - Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
<PAGE>
A-5
LIMITED PARTNERSHIPS
The Fund may invest in limited and master limited partnerships. A limited
partnership is a partnership consisting of one or more general partners, jointly
and severally responsible as ordinary partners, and by whom the business is
conducted, and one or more limited partners who contribute cash as capital to
the partnership and who generally are not liable for the debts of the
partnership beyond the amounts contributed. Limited partners are not involved in
the day-to-day management of the partnership. They receive income, capital gains
and other tax benefits associated with the partnership project in accordance
with terms established in the partnership agreement. Typical limited
partnerships are in real estate, oil and gas and equipment leasing, but they
also finance movies, research and development and other projects.
For an organization classified as a partnership under the Internal Revenue
Code, each item of income, gain, loss, deduction and credit is not taxed at the
partnership level but flows through to the holder of the partnership unit. This
allows the partnership to avoid taxation and to pass through income to the
holder of the partnership unit at lower individual rates.
A master limited partnership is a publicly traded limited partnership. The
partnership units are registered with the Securities and Exchange Commission and
are freely exchanged on a securities exchange or in the over-the-counter market.
MONEY MARKET INSTRUMENTS
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 Investors Service, Inc. These ratings
and other money market instruments are described as follows:
Commercial Paper 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.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the factors
considered by Fitch in assigning this rating are: (1) the issuer's liquidity;
<PAGE>
A-6
(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 ("U.S.") Government
include a variety of Treasury securities that differ only in their interest
rates, maturities and dates of issuance. Treasury bills have maturities of one
year or less. Treasury notes have maturities of one to ten years, and Treasury
bonds generally have maturities of greater than ten years at the date of
issuance.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include direct obligations of the U.S. Treasury and securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the U.S., 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 U.S. Government agencies and instrumentalities, such as
Treasury bills and Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S.; 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 U.S. 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. U.S. Government securities will not
include international agencies or instrumentalities in which the U.S.
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-denominated
certificates of U.S. banks, including their branches abroad, which are members
of the Federal Reserve System or the Federal Deposit Insurance Corporation, and
of U.S. branches of foreign banks, each of which have total deposits at the time
of purchase in excess of $1 billion 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 Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such 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.
<PAGE>
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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. Athough maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances 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.
OPTIONS TRANSACTIONS
The Fund is authorized to write (i.e., sell) covered call options and to
purchase call options to close out covered call options previously written. A
call option obligates a writer to sell, and gives a purchaser the right to buy,
the underlying security at the stated exercise price at any time until the
stated expiration date.
The Fund will only write call options which are covered, which means that
the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund will receive a premium for writing a call
option, but will give up, until the expiration date, the opportunity to profit
from an increase in the underlying security's price above the exercise price.
The Fund will retain the risk of loss from a decrease in the price of the
underlying security. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked options which the Fund will not do) but capable of
enhancing the Fund's total return.
The premium received by the Fund for writing a covered call option will be
recorded as a liability in the Fund's statement of assets and liabilities. This
liability will be adjusted daily to the option's current market value, which
will be the latest sale price at the time as of which the net asset value per
share of the Fund is computed (the close of the New York Stock Exchange), or, in
the absence of such sale, at the latest bid quotation. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction or delivery of the underlying security upon exercise of
the option.
Many options are traded on registered securities exchanges. Options traded
on such exchanges are issued by the Options Clearing Corporation, a clearing
corporation which assumes responsibility for the completion of options
transactions.
The Fund will purchase call options only to close out a covered call option
it has written. When it appears that a covered call option written by the Fund
is likely to be exercised, the Fund may consider it appropriate to avoid having
to sell the underlying security. Or, the Fund may wish to extinguish a covered
call option which it has written in order to be free to sell the underlying
security to realize a profit on the previously written call option or to write
another covered call option on the underlying security. In all such instances,
the Fund can close out the previously written call option by purchasing
<PAGE>
A-8
a call option on the same underlying security with the same exercise price and
expiration date. (The Fund may, under certain circumstances, also be able to
transfer a previously written call option.) The Fund will realize a short-term
capital gain if the amount paid to purchase the call option plus transaction
costs is less than the premium received for writing the covered call option. The
Fund will realize a short-term capital loss if the amount paid to purchase the
call option plus transaction costs is greater than the premium received for
writing the covered call option.
A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.
If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
In the past the Fund has qualified for, and elected to receive, the special
tax treatment afforded regulated investment companies under Subchapter M of the
Internal Revenue Code. Although the Fund intends to continue to qualify for such
tax treatment, in order to do so it must, among other things, derive less than
30% of its gross income from gains from the sale or other disposition of
securities held for less than three months. Because of this, the Fund may be
restricted in the writing of call options where the underlying securities have
been held less than three months, in the writing of covered call options which
expire in less than three months, and in effecting closing purchases with
respect to options which were written less than three months earlier. As a
result, the Fund may elect to forego otherwise favorable investment
opportunities and may elect to avoid or delay effecting closing purchases or
selling portfolio securities, with the risk that a potential loss may be
increased or a potential gain may be reduced or turned into a loss.
Under the Internal Revenue Code of 1954, as amended, gain or loss
attributable to a closing transaction and premiums received by the Fund for
writing a covered call option which is not exercised may constitute short-term
capital gain or loss. Under provisions of the Tax Reform Act of 1986, effective
for taxable years beginning after October 22, 1986, a gain on an option
transaction which qualifies as a "designated hedge" transaction under Treasury
regulations may be offset by realized or unrealized losses on such designated
transaction. The netting of gain against such losses could result in a reduction
in gross income from options transactions for purposes of the 30 percent test.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
<PAGE>
A-9
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by so doing, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions on futures contracts
which are related to currency and other financial futures contracts for hedging
purposes and in connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts and
related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
Futures Contracts
Futures contracts are transactions in the commodities markets rather than
in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the U.S. are The Board of Trade of the
City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
<PAGE>
A-10
Interest Rate Futures Contracts
The sale of an interest rate futures contract creates an obligation by the
Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by the Fund, as purchaser,
to accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determinaion is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
("GNMA") certificates, 90-day domestic bank certificates of deposit, 90- day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
Index Based Futures Contracts
Stock Index Futures Contracts
A stock index assigns relative values to the common stocks included in the
index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently, stock index futures contracts can be purchased or sold on the
Standard and Poor's Corporation ("S&P") Index of 500 Stocks, the S&P Index of
100 Stocks, the New York Stock Exchange Composite Index, the Value Line Index
and the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.
The Fund does not believe that differences between existing stock indexes
will create any differences in the price movements of the stock index futures
contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
Other Index Based Futures Contracts
It is expected that bond index and other financially based index futures
contracts will be developed in the future. It is anticipated that such index
based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
<PAGE>
A-11
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Tresury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
<PAGE>
A-12
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
Options on Currency and Other Financial Futures Contracts
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures contracts are similar
to options on stocks except that an option on a currency or other financial
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) rather than to purchase or
sell stock, currency or other financial instruments at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account. This amount represents the amount by which the
market price of the futures contract at exercise exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and value of
the futures contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
Purchase of Put Options on Futures Contracts
The purchase of protective put options on commodity futures contracts is
analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
Purchase of Call Options on Futures Contracts
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency or other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Fund is not fully invested.
<PAGE>
A-13
Use of New Investment Techniques Involving Currency and Other Financial Futures
Contracts or Related Options
The Fund may employ new investment techniques involving currency and other
financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
Limitations on Purchase and Sale of Futures Contracts and Related Options on
Such Futures Contracts
The Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
Federal Income Tax Treatment
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
<PAGE>
A-14
Risks of Futures Contracts
Currency and other financial futures contracts prices are volatile and are
influenced, among other things, by changes in stock prices, market conditions,
prevailing interest rates and anticipation of future stock prices, market
movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. A decision of
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Risks of Options on Futures Contracts
In addition to the risks described above for currency and other financial
futures contracts, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with
<PAGE>
A-15
such options are not greater than the risks in connection with the futures
contracts. Compared to the use of futures contracts, the purchase of options on
such futures involves less potential risk to the Fund because the maximum amount
at risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests
in foreign securities they usually will be denominated in foreign currencies and
the Fund temporarily may hold funds in foreign currencies. Thus, the Fund's
share value will be affected by changes in exchange rates.
Forward Currency Contracts
As one way of managing exchange rate risk, the Fund may engage in forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rate or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
Currency Futures Contracts
Currency futures contracts are bilateral agreements under which two parties
agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the U.S. is regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently, the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to engage in currency futures contracts only for
hedging purposes, and not for speculation. The Fund may enter into currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures ontracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British pound Sterling,
Canadian dollar, Dutch guilder, Deutsche mark, Japanese yen, Mexican peso, Swiss
and French francs can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
<PAGE>
A-16
L125,000 for the pound, 125,000 for the guilder, mark and Swiss francs,
C$100,000 for the Canadian dollar, Y12,500,000 for the yen, and 1,000,000 for
the peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
Foreign Currency Options Transactions
Foreign currency options (as opposed to futures) are traded in a variety of
currencies in both the U.S. and Europe. On the Philadelphia Stock Exchange, for
example, contracts for half the size of the corresponding futures contracts on
the Chicago Board Options Exchange are traded with up to nine months maturity in
Marks, Sterling, Yen, Swiss Francs and Canadian Dollars. Options can be
exercised at any time during the contract life and require a deposit subject to
normal margin requirements. Since a futures contract must be exercised, the Fund
must continually make up the margin balance. As a result, a wrong price move
could result in the Fund losing more than the original investment as it cannot
walk away from the futures contract as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in connection
with hedging strategies.
Purchase of Put Options on Foreign Currencies
The purchase of protective put options on a foreign currency is analagous
to the purchase of protective puts on individual stocks, where an absolute level
of protection is sought below which no additional economic loss would be
incurred by the Fund. Put options may be purchased to hedge a portfolio of
foreign stocks or foreign debt instruments or a position in the foreign currency
upon which the put option is based.
Purchase of Call Options on Foreign Currencies
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
<PAGE>
A-17
Currency Trading Risks
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
Exchange Rate Risk
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
Maturity Gaps and Interest Rate Risk
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
Credit Risk
Whenever the Fund enters into a foreign exchange contract, it faces a risk,
however small, that the counterparty will not perform under the contract. As a
result there is a credit risk, although no extension of "credit" is intended. To
limit credit risk, the Fund intends to evaluate the creditworthiness of each
other party. The Fund does not intend to trade more than 5% of its net assets
under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign echange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences between
the U.S. and foreign nations. If the Fund sells sterling it generally must pay
pounds to a counterparty earlier in the day than it will be credited with
dollars in New York. In the intervening hours, the buyer can go into bankruptcy
or can be declared insolvent. Thus, the dollars may never be credited to the
Fund.
<PAGE>
A-18
Country Risk
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international investment
transactions. If one of the factors affecting the buying or selling of a
currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and control on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the Fund
may be dealing with a foreign trader whose home country is facing a payments
problem. Even though the foreign trader intends to perform on its foreign
exchange contracts, the contracts are tied to other external liabilities the
country has incurred. As a result performance may be delayed, and can result in
unanticipated cost to the Fund. This aspect of country risk is a major element
in the Fund's credit judgment as to with whom it will deal and in what amounts.
<PAGE>
KEYSTONE GROWTH AND INCOME FUND (S-1)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24(a). Financial Statements
The following financial statements are incorporated by reference to Registrant's
1996 Annual Report, as filed with the Securities and Exchange Commission
Schedule of Investments August 31, 1996
Financial Highlights For each of the years in the
ten-year period ended
August 31, 1996
Statement of Assets and Liabilities August 31, 1996
Statement of Operations Year ended August 31, 1996
Statement of Changes in Net Assets For each of the years in the
two-year period ended
August 31, 1996
Notes to Financial Statements
Independent Auditors' Report September 27, 1996
All other schedules are omitted as the required information is inapplicable.
<PAGE>
Item 24(b). Exhibits
(1) (A) Registrant's Restatement of Trust Agreement ("Trust Agreement") (1).
(B) First Amendment to Trust Agreement (2).
(2) (A) Registrant's By-Laws (1).
(B) Amendment to By-Laws (2).
(3) Not applicable.
(4) (A) A specimen of the security issued by the Fund (3).
(B) Articles III, V, VI, and VIII to Trust Agreement (1).
(C) Article 2 to By-Laws (1).
(5) (A) Investment Management Agreement between Registrant and Keystone
Management, Inc. (the "Management Agreement") (1).
(B) Investment Advisory Agreement between Keystone Management, Inc. and
Keystone Investment Management Company (the "Advisory Agreement") (1).
(6) (A) Principal Underwriting Agreement between Registrant and Keystone
Investment Distributors Company (the "Principal Underwriting
Agreement") (1).
(B) Form of Dealer Agreement used by Keystone Investment Distributors
Company (2).
(C) Registrant's respective Underwriting Agreements with Kokasai
Securities Co., Ltd. and Nomura Securities Co., Ltd. (1).
(7) Not applicable.
(8) Custodian, Fund Accounting and Recordkeeping Agreement between Registrant
and State Street Bank and Trust Company, as amended (1).
(9) Not applicable.
(10) Opinion and a consent of counsel (2).
(11) Consent of the Independent Auditors Report (2).
(12) Not applicable.
(13) Not applicable.
(14) Copies of forms of model plans used in the establishment of retirement
plans in connection with which Registrant offers its securities (4).
(15) Registrant's Distribution Plan adopted pursuant to Rule 12b-1 (1).
(16) Schedules for computation of total return (2).
(17) Financial Data Schedule (2).
(18) Not applicable.
(19) Powers of Attorney (2).
- -------------------------------------------
(1) Filed with Post-Effective Amendment No. 93 ("Post-Effective Amendment
No. 93") to Registration Statement No. 2-10661/811-98 (the "Registration
Statement") and incorporated herein by reference.
(2) Filed herewith.
(3) Filed with Post-Effective Amendment No. 35 to the Registration Statement
and incorporated by reference herein.
(4) Filed with Post-Effective Amendment No. 66 to Registration Statement
No. 2-10527/811-96 and incorporated by reference herein.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of October 31, 1996
-------------- --------------------------------
Shares of $1.00 15,821
Par Value
Item 27. Indemnification
Provisions for the indemnification of the Registrant's Trustees and
officers are contained in Article VIII of the Trust Agreement, a copy of which
was filed with Post-Effective Amendment No. 93.
Provisions for the indemnification of Keystone Investment Distributors
Company, Registrant's principal underwriter, are contained in Section 9 of the
Principal Underwriting Agreement, a copy of which was filed with Post-Effective
Amendment No. 93.
Provisions for the indemnification of Keystone Investment Management
Company and Keystone Management, Inc., Registrant's investment adviser and
investment manager, respectively, are contained in Section 5 of the Advisory
Agreement and Section 6 of the Management Agreement, respectively, copies of
which were filed with Post-Effective Amendment No. 93.
Provisions for the indemnification of Kokasai Securities Co., Ltd. and
Nomura Securities Co., Ltd, underwriters for the sale of Registrant's securities
in Japan, are contained in Section 11 of Registrant's respective Underwriting
Agreements with said entities, copies of which were filed with Post-Effective
Amendment No. 93.
Item 28. Business and other Connections of Investment Advisers
The following tables list the names of the various officers and
directors of Keystone Management, Inc. and Keystone Investment Management
Company, Registrant's investment manager and adviser, respectively, and their
respective positions. For each named individual, the tables list, for at least
the past two years, (i) any other organizations (for Keystone Investment
Management Company, excluding investment advisory clients) with which the
officer and/or director has had or has substantial involvement; and (ii)
positions held with such organizations.
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF KEYSTONE MANAGEMENT, INC.
<TABLE>
<CAPTION>
Position with
Keystone Other
Management, Business
Name Inc. Affiliations
- ---- ------------- -------------
<S> <C> <C>
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Execu- President and Director:
tive Officer, Keystone Investments, Inc.
President and Keystone Software, Inc.
Director Keystone Asset Corporation
Keystone Capital Corporation
Keystone Investments Family of Funds
Chairman of the Board and Director:
Keystone Investment Management Company
Keystone Institutional Company, Inc.
Keystone Fixed Income Advisers, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment Company, Inc.
Keystone Investor Resource Center, Inc.
Boston Children's Services Association
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Edward F. Godfrey Treasurer and Senior Vice President,
Director Chief Financial Officer, Treasurer and Director:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Treasurer:
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Former Treasurer and Director:
Hartwell Keystone Advisers, Inc.
Senior Vice President:
Keystone Investments Family of Funds
Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment Distributors Company
Chairman and Director:
Keystone Investor Resource Center, Inc.
Keystone Investment Management Company
Senior Vice President and Director:
Keystone Investments, Inc.
Treasurer:
Hartwell Emerging Growth Fund
Hartwell Growth Fund
Former President:
Keystone Management, Inc.
Former Treasurer:
Keystone Investments, Inc.
Keystone Investment Management Company
Rosemary D. Van Senior Vice General Counsel, Senior
Antwerp President, Vice President and Secretary:
General Counsel Keystone Investments, Inc.
and Secretary Senior Vice President and General Counsel:
Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Keystone Investor Resource, Center, Inc.
Fiduciary Investment Company, Inc.
Keystone Investment Distributors Company
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Formerly Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Fiduciary Investment Company, Inc.
Keystone Software, Inc.
Formerly Vice President and Controller:
Hartwell Keystone Advisers, Inc.
John D. Rogol Vice President Vice President and Controller:
and Controller Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Comptroller:
Keystone Asset Corporation
Keystone Capital Corporation
Vice President and Treasurer:
Keystone Investor Resource Center, Inc.
Michael A. Thomas Vice President Vice President:
Keystone Investments, Inc.
</TABLE>
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Executive President and Director:
Officer,and Keystone Investments, Inc.
Director Keystone Management, Inc.
Keystone Software, Inc.
Keystone Asset Corporation
Keystone Capital Corporation
Chairman of the Board and Director:
Keystone Fixed Income Advisers, Inc.
Keystone Institutional Company, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment Company, Inc.
Keystone Investment Distributors Company
Keystone Investor Resource Center, Inc.
Boston Children's Services Associates
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Philip M. Byrne Director President and Director:
Keystone Institutional Company, Inc.
Senior Vice President:
Keystone Investments, Inc.
Herbert L. Senior Vice None
Bishop, Jr. President
Donald C. Dates Senior Vice None
President
Gilman Gunn Senior Vice None
President
Edward F. Director, Director, Senior Vice President
Godfrey Senior Vice President, President, Chief Financial Officer and Treasurer:
Treasurer and Keystone Investments, Inc.
Chief Financial Officer Keystone Investment Distributors Company
Treasurer and Director:
Keystone Management, Inc.
Treasurer:
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Former Treasurer and Director:
Hartwell Keystone Advisers, Inc.
James R. McCall Director and None
President
Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment Distributors Company
Senior Vice President and Director:
Keystone Investments, Inc.
Chairman and Director:
Keystone Investor Resource Center, Inc.
Keystone Management, Inc.
Formerly President:
Keystone Management, Inc.
Formerly Treasurer:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone America Hartwell Growth Fund, Inc.
<PAGE>
Rosemary D. Senior Vice General Counsel, Senior Vice President and Secretary:
Van Antwerp President, Keystone Investments, Inc.
General Counsel Senior Vice President and General Counsel:
and Secretary Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Keystone Investor Resource Center, Inc.
Fiduciary Investment Company, Inc.
Keystone Investment Distributors Company
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Former Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Formerly Controller:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
John D. Rogol Vice President Vice President and
Controller:
Keystone Investments, Inc.
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Robert K. Vice President None
Baumback
Betsy A. Blacher Senior Vice None
President
Francis X. Claro Vice President None
Kristine R. Vice President None
Cloyes
Christopher P. Senior Vice None
Conkey President
J. Gary Craven Senior Vice None
President
Richard Cryan Senior Vice None
President
Maureen E. Senior Vice None
Cullinane President
Walter T. Senior Vice None
McCormick President
George F. Wilkins Senior Vice None
President
John F. Addeo Vice President None
Andrew G. Baldassare Vice President None
David S. Benhaim Vice President None
Donald M. Bisson Vice President None
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Dana E. Erikson Vice President None
Sami J. Karam Vice President None
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
John C. Vice President None
Madden, Jr.
Eleanor H. Marsh Vice President None
James D. Medredeff Vice President None
Stanley M. Niksa Vice President None
Jonathan A. Noonan Vice President None
Robert E. O'Brien Vice President None
Margery C. Parker Vice President None
William H. Vice President None
Parsons
Joyce W. Petkovich Vice President None
Daniel A. Rabasco Vice President None
Harlen R. Sanderling Vice President None
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
Mary J. Willis Vice President None
Peter Willis Vice President None
Richard A. Wisentaner Vice President None
Cheryle E. Wanble Vice President None
Walter Zagrobski Vice President None
Joseph J. Asst. Vice President None
Decristofaro
</TABLE>
<PAGE>
Item 29. Principal Underwriter
(a) Keystone Investment Distributors Company, the Registrant's principal
underwriter, also acts as principal underwriter for the following
entities:
Keystone Quality Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Balanced Fund II
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Capital Preservation and Income Fund
Keystone Emerging Markets Fund
Keystone Fund of the Americas
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Global Resources and Development Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Omega Fund
Keystone Precious Metals Holdings, Inc.
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone Tax Free Fund
Keystone World Bond Fund
(b) For information with respect to each officer and director of
Registrant's principal underwriter, see the following pages.
Positions with
Keystone Investment Positions with
Name Distributors Company Registrant
- ---- -------------------- --------------
Ralph J. Spuehler* Director, President None
Edward F. Godfrey* Director, Senior Vice Senior Vice
President, Treasurer President
and Chief Financial
Officer
Rosemary D. Van Antwerp* Director, Senior Vice Senior Vice
President, General President
Counsel and Secretary and Secretary
Albert H. Elfner, III* Director President
Charles W. Carr* Senior Vice President None
Peter M. Delehanty* Senior Vice President None
J. Kevin Kenely* Vice President None
John D. Rogol* Vice President and None
Controller
C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londenderry, NH 03053
William L. Carey, Jr. Regional Manager and None
4 Treble Lane Vice President
Malvern, PA 19355
John W. Crites Regional Manager and None
2769 Oakland Circle W. Vice President
Aurora, CO 80014
Richard J. Fish Regional Manager and None
309 West 90th Street Vice President
New York, NY 10024
Michael E. Gathings Regional Vice None
245 Wicklawn Way President
Roswell, GA 30076
Paul D. Graffy Regional Manager and None
15509 Janas Drive Vice President
Lockport, IL 60441
Robert G. Holz, Jr. Regional Manager and None
313 Meadowcrest Drive President
Richardson, Texas 75080
Todd L. Kobrin Regional Manager and None
20 Iron Gate Vice President
Metuchen, NJ 08840
Ralph H. Johnson Regional Manager and None
345 Masters Court, #2 Vice President
Walnut Creek, CA 94598
Paul J. McIntyre Regional Manager and None
118 Main Center #203 Vice President
Northville, MI 48167
Robert P. Muligan* Regional Manager and None
Vice President
Alan V. Niemi Regional Manager and None
3511 Grant Street Vice President
Lee's Summit, MO 64064
Matthew D. Twomey Regional Vice None
9627 Sparrow Court President
Ellicott City, MD 21042
Raymond P. Ajemian* Manager and None
Vice President
Jonathan I. Cohen* Vice President None
Michael S. Festa* Vice President None
Russell A. Haskell* Vice President None
Jeffrey M. Landes Vice President None
Joan M. Balchunas* Assistant Vice None
President
Julie A. Robinson Vice President None
John M. McAllister* Vice President None
Thomas J. Gainey* Assistant Vice None
President
Lyman Jackson* Assistant Vice None
President
Eric S. Jeppson* Assistant Vice None
President
Mark Minnucci* Assistant Vice None
President
Ashley M. Norwood* Assistant Vice None
President
* Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
Item 29(c). - Not applicable
Item 30. Location of Accounts and Records
Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02720
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Upon request and without charge, Registrant hereby undertakes
to furnish to each person to whom a copy of the Registrant's
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for the effectiveness of this amendment to its registration
statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its registration statement to be signed on its behalf
by the undersigned, thereto duly authorized in the City of Boston, and The
Commonwealth of Massachusetts, on the 6th day of December, 1996.
KEYSTONE GROWTH AND INCOME FUND (S-1)
By:/s/ Rosemary D. Van Antwerp
---------------------------
Rosemary D. Van Antwerp
General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment to
Registrant's registration statement has been signed below by the following
persons in the capacities indicated on the 6th day of December, 1996.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board, and Trustee
- -------------------------
George S. Bissell*
/s/ Albert H. Elfner, III Chief Executive Officer, President
- ------------------------- and Trustee
Albert H. Elfner, III*
/s/ J. Kevin Kenely Treasurer (Principal Financial
- ------------------------- and Accounting Officer)
J. Kevin Kenely*
*By: /s/ James M. Wall
--------------------------
James M. Wall**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
- ---------- -----
/s/ Frederick Amling Trustee
- -------------------------
Frederick Amling*
/s/ Charles A. Austin, III Trustee
- --------------------------
Charles A. Austin, III*
/s/ Edwin D. Campbell Trustee
- -------------------------
Edwin D. Campbell*
/s/ Charles F. Chapin Trustee
- -------------------------
Charles F. Chapin*
/s/ K. Dun Gifford Trustee
- -------------------------
K. Dun Gifford*
/s/ Leroy Keith, Jr. Trustee
- -------------------------
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Trustee
- -------------------------
F. Ray Keyser, Jr.*
/s/ David M. Richardson Trustee
- -------------------------
David M. Richardson*
/s/ Richard J. Shima Trustee
- -------------------------
Richard J. Shima*
/s/ Andrew J. Simons Trustee
- -------------------------
Andrew J. Simons*
*By: /s/ James M. Wall
---------------------------
James M. Wall**
Attorney-in-Fact
** James M. Wall, by signing his name hereto, does hereby sign this document on
behalf of each of the above-named individuals pursuant to powers of attorney
duly executed by such persons and attached hereto as Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Page Number
In Sequential
Exhibit Number Exhibit Numbering System
- -------------- ------- ----------------
1 (A) Trust Agreement (1)
(B) First Amendment to
Trust Agreement (2)
2 (A) By-Laws (1)
(B) Amendment to By-Laws (2)
4 (A) Specimen Share Certificate (3)
(B) Trust Agreement (1)
(C) By-Laws (1)
5 (A) Management Agreement (1)
(B) Advisory Agreement (1)
6 (A) Principal Underwriting Agreement (1)
(B) Dealer Agreement (4)
(C) Additional Underwriting Agreements (1)
8 Custodian, Fund Accounting and
Recordkeeping Agreement, as amended (1)
10 Opinion and Consent of Counsel (2)
11 Independent Auditors' Consent (2)
14 Model Plans (5)
15 Distribution Plan (1)
16 Performance Data Schedule (2)
17 Financial Data Scheduled (filed as Exhibit 27) (2)
19 Powers of Attorney (2)
- -----------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 93.
(2) Filed herewith.
(3) Incorporated herein by reference to Post-Effective Amendment No. 35 to the
Registration Statement.
(4) Incorporated herein by reference to Post-Effective Amendment No. 84 to the
Registration Statement.
(5) Incorporated herein by reference to Post-Effective Amendment No. 66 to the
Registration Statement No. 2-10527/811-96.
KEYSTONE CUSTODIAN FUND, SERIES S-1
FIRST AMENDMENT
TO
RESTATEMENT OF TRUST AGREEMENT
Effective May 1, 1995
FIRST AMENDMENT dated March 15, 1995 made by George S. Bissell, Albert H.
Elfner, III, Frederick Amling, Charles A. Austin, III, Edwin D. Campbell,
Charles F. Chapin, K. Dun Gifford, Leroy Keith, Jr., F. Ray Keyser, Jr., David
M. Richardson, Richard J. Shima and Andrew J. Simons (hereinafter with their
successors referred to as the "Trustees") to RESTATEMENT OF TRUST AGREEMENT,
dated December 19, 1989.
WHEREAS, the Trustees have determined to change the name of the Trust and
to change the designation of its principal office to 200 Berkeley Street Boston
Massachusetts 02116.
NOW, THEREFORE, the Trustees hereby declare that they will amend the
Restatement of Trust Agreement as hereinafter set forth:
ARTICLE I, Name and Definitions, Section 1. Name., is hereby amended to
read as follows:
"This Trust shall be known as the "Keystone Growth and Income Fund (S-1)"
and the Trustees shall conduct the business of this Trust under that name
or any other name as they may from time to time determine."
This Amendment shall become effective as of May 1, 1995.
All other provisions of the Restatement of Trust Agreement shall continue
as originally stated.
IN WITNESS WHEREOF, the undersigned, being all the Trustees of the Trust,
have caused this First Amendment to Restatement of Trust Agreement to be
executed on the 15th day of March, 1995.
/s/ George S. Bissell
George S. Bissell, Trustee
/s/ Albert H. Elfner
Albert H. Elfner, III, Trustee
/s/ Frederick Amling
Frederick Amling, Trustee
/s/ Charles A. Austin
Charles A. Austin, III, Trustee
/s/ Edwin D. Campbell
Edwin D. Campbell, Trustee
/s/ Charles F. Chapin
Charles F. Chapin, Trustee
/s/ K. Dun Gifford
K. Dun Gifford, Trustee
/s/ Leroy Keith
Leroy Keith, Jr., Trustee
/s/ F. Ray Keyser, Jr.
F. Ray Keyser, Jr., Trustee
/s/ David M. Richardson
David M. Richardson, Trustee
/s/ Richard J. Shima
Richard J. Shima, Trustee
/s/ Andrew J. Simons
Andrew J. Simons, Trustee
KEYSTONE GROWTH AND INCOME FUND (S-1)
Revised Article 4, Section 4.1 of the By-Laws as adopted by the Board of
Trustees on June 19, 1996:
4.1 Term. A Trustee shall serve until his or her death, retirement, resignation
or removal from office or until his or her successor is elected and qualifies. A
Trustee holding office shall automatically retire on December 31 of the year in
which he or she reaches the age of seventy-five.
Dated: September 13, 1996
December 6, 1996
Keystone Growth and Income Fund (S-1)
200 Berkeley Street
Boston, Massachusetts 02116-5034
Ladies and Gentlemen:
I am a Senior Vice President of and General Counsel to Keystone Investment
Management Company, investment adviser to Keystone Growth and Income Fund (S-1)
(the "Fund"). You have asked for my opinion with respect to the proposed
issuance of 2,522,879 additional shares of the Fund.
To my knowledge, a Prospectus is on file with the Securities and Exchange
Commission (the "Commission") as part of Post-Effective Amendment No. 93 to the
Fund's Registration Statement, which covers the public offering and sale of the
Fund shares currently registered with the Commission.
In my opinion, such additional shares, if issued and sold in accordance
with the Fund's Restatement of Trust Agreement, as amended ("Trust Agreement")
and offering Prospectus, will be legally issued, fully paid and nonassessable by
the Fund, entitling the holders thereof to the rights set forth in the Trust
Agreement and subject to the limitations set forth therein.
My opinion is based upon my examination of the Trust Agreement and By-Laws,
as amended; a review of the minutes of the Fund's Board of Trustees authorizing
the issuance of such additional shares; and the Fund's Prospectus. In my
examination of such documents, I have assumed the genuineness of all signatures
and the conformity of copies to originals.
I hereby consent to the use of this opinion in connection with
Post-Effective Amendment No. 94 to the Fund's Registration Statement, which
covers the registration of such additional shares.
Very truly yours,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Vice President and
General Counsel
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Growth and Income Fund (S-1)
We consent to the use of our report dated September 27, 1996, incorporated
by reference herein, and to the reference to our firm under the caption
"FINANCIAL HIGHLIGHTS" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
December 6, 1996
<TABLE>
<CAPTION>
S-1 MTD YTD ONE YEAR THREE YEAR THREE YEAR
30-Aug-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A 3.70% 14.31% 31.63% 9.59%
W/O CDSC 2.83% 6.70% 17.31% 32.62% 9.87%
Beg dates 31-Jul-96 29-Dec-95 31-Aug-95 31-Aug-93 31-Aug-93
Beg Value (no load) 48,345 46,591 42,378 37,487 37,487
End Value (W/O CDSC) 49,714 49,714 49,714 49,714 49,714
End Value (with cdsc) 48,316 48,443 49,345 49,345
beg nav 24.36 23.57 22.98 25.42 25.42
end nav 25.05 25.05 25.05 25.05 25.05
shares originally purchased 1,984.60 1,976.72 1,844.14 1,474.70 1,474.70
TIME 3
<CAPTION>
S-1 FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
30-Aug-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 52.17% 8.76% 148.86% 9.55%
W/O CDSC 52.17% 8.76% 148.86% 9.55%
Beg dates 30-Aug-91 30-Aug-91 29-Aug-86 29-Aug-86
Beg Value (no load) 32,670 32,670 19,976 19,976
End Value (W/O CDSC) 49,714 49,714 49,714 49,714
End Value (with cdsc) 49,714 49714.143848 49,714 49714.143848
beg nav 25.12 25.12 25.49 25.49
end nav 25.05 25.05 25.05 25.05
shares originally purchased 1,300.54 1,300.54 783.39 783.39
TIME 5 10
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Rosemary D. Van Antwerp, Jean S.
Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of
them singly, my true and lawful attorneys, with full power to them and each of
them to sign for me and in my name in the capacity indicated below any and all
registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5,
N-1 and N-1A, as amended from time to time, and any and all amendments thereto
to be filed with the Securities and Exchange Commission for the purpose of
registering from time to time all investment companies of which I am now or
hereafter a Director, Trustee or officer and for which Keystone Custodian Funds,
Inc. serves as Adviser or Manager and registering from time to time the shares
of such companies, and generally to do all such things in my name and in my
behalf to enable such investment companies to comply with the provisions of the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/S/ J. Kevin Kenely
-------------------------------
J. Kevin Kenely
Treasurer
Dated: December 15, 1995
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser,Jr.
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/Andrew J. Simons
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE GROWTH AND INCOME FUND (S-1)
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 198,764,102
<INVESTMENTS-AT-VALUE> 224,349,315
<RECEIVABLES> 653,093
<ASSETS-OTHER> 25,146
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 225,027,554
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 208,290
<TOTAL-LIABILITIES> 208,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 173,170,625
<SHARES-COMMON-STOCK> 8,974,524
<SHARES-COMMON-PRIOR> 8,677,778
<ACCUMULATED-NII-CURRENT> 5,624,332
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,439,094
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,585,213
<NET-ASSETS> 224,819,264
<DIVIDEND-INCOME> 4,662,925
<INTEREST-INCOME> 584,100
<OTHER-INCOME> 0
<EXPENSES-NET> (4,088,126)
<NET-INVESTMENT-INCOME> 1,158,899
<REALIZED-GAINS-CURRENT> 35,400,173
<APPREC-INCREASE-CURRENT> (2,334,533)
<NET-CHANGE-FROM-OPS> 34,224,539
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,695,266)
<DISTRIBUTIONS-OF-GAINS> (8,574,523)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,238,539
<NUMBER-OF-SHARES-REDEEMED> (2,509,938)
<SHARES-REINVESTED> 568,144
<NET-CHANGE-IN-ASSETS> 25,363,137
<ACCUMULATED-NII-PRIOR> 3,637,729
<ACCUMULATED-GAINS-PRIOR> 5,636,521
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,492,757)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,088,126)
<AVERAGE-NET-ASSETS> 222,201,246
<PER-SHARE-NAV-BEGIN> 22.98
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 3.69
<PER-SHARE-DIVIDEND> (0.76)
<PER-SHARE-DISTRIBUTIONS> (0.98)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 25.05
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
