<PAGE>
SUPPLEMENT TO CURRENT PROSPECTUS
OF
KEYSTONE CUSTODIAN FUND, SERIES S-4
The section of the Fund's prospectus entitled "Fund Management and
Expenses; Portfolio Manager" is hereby supplemented to reflect the following (to
be inserted in place of the text thereunder):
"Christopher R. Ely has recently become the Fund's Portfolio Manager.
He is a Keystone Vice President and Senior Portfolio Manager and has more
than 15 years' experience in equity investing."
March 2, 1995
<PAGE>
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KEYSTONE
[Photograph]
S-4 SMALL COMPANY
GROWTH FUND
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[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
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PROSPECTUS SEPTEMBER 30, 1994
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KEYSTONE CUSTODIAN FUND, SERIES S-4
SMALL COMPANY GROWTH FUND
200 Berkeley Street, Boston, Massachusetts 02116-5034
Call toll free 1-800-343-2898
Keystone Custodian Fund, Series S-4 (the "Fund") is a mutual fund whose goal
is long-term growth of capital. Income is not an objective.
The Fund invests principally in common stocks, which are expected to
experience wide fluctuations in price in both rising and declining markets.
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 years of purchase.
The Fund has adopted a Distribution Plan (the "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 September 30, 1994, 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.
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TABLE OF CONTENTS
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Page
Fee Table ................................................................. 2
Financial Highlights ...................................................... 3
Fund Description .......................................................... 4
Fund Objective and Policies ............................................... 4
Investment Restrictions ................................................... 5
Pricing Shares ............................................................ 5
Dividends and Taxes ....................................................... 6
Fund Management and Expenses .............................................. 7
How to Buy Shares ......................................................... 8
Distribution Plan ......................................................... 9
How to Redeem Shares ...................................................... 11
Shareholder Services ...................................................... 13
Performance Data .......................................................... 14
Fund Shares ............................................................... 14
Additional Information .................................................... 14
Additional Investment Information ......................................... (i)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<PAGE>
FEE TABLE
Keystone Custodian Fund, Series S-4
Small Company Growth Fund
The purpose of the fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear, either 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 Charge(1) ........................ 4.00%
(as a percentage of the lesser of total
cost or the net asset value of shares redeemed)
Exchange Fee(2) ............................................ $10.00
(per exchange)
Annual Fund Operating Expenses(3)
(as a percentage of average net assets)
Management Fees ............................................ 0.52%
12b-1 Fees(4) .............................................. 0.93%
Other Expenses ............................................. 0.28%
----
Total Fund Operating Expenses .............................. 1.73%
====
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Example(5)
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: ................. $58.00 $74.00 $94.00 $204.00
You would pay the following expenses on
the same investment, assuming no
redemption: ......................... $18.00 $54.00 $94.00 $204.00
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 charge declines from 4% to 1% of amounts redeemed within
four calendar years after purchase. No deferred sales charge is imposed
thereafter.
(2) There is no exchange 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 May 31, 1994.
(4) The 12b-1 fee represents, on a financial statement basis, the net percentage
attributable to 12b-1 expenses for the fiscal year ended May 31,1994, after
deduction from gross 12b-1 expenses of deferred sales charges recovered
during such period. 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"). In
accordance with NASD rules, the Fund has limited its annual 12b-1 expenses
to 1.00% of average net assets.
(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%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CUSTODIAN FUND, SERIES S-4 -- SMALL COMPANY GROWTH FUND
(For a share outstanding throughout the year)
The following table contains significant financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in 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 May 31,
------------------------------------------------------------------------------------
1994<F1> 1993<F1> 1992<F1> 1991<F1> 1990<F1> 1989<F1>
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ......... $ 7.95 $ 7.61 $ 7.17 $ 6.24 $ 5.66 $ 4.48
Income From Investment Operations
Investment Income (Deficit) -- Net ......... (0.12) (0.12) (0.08) (0.04) -0- 0.02
Realized Gains (Losses) on Investments ..... 0.63 1.82 0.98 1.17 0.63 1.20
Net Commissions Paid on Fund Share Sales <F2> -0- -0- -0- -0- -0- -0-
------- ------- ------- ------- ------- -------
Total from Investment Operations ........... 0.51 1.70 0.90 1.13 0.63 1.22
------- ------- ------- ------- ------- -------
Less Distributions <F5>
Distributions from Net Investment Income ... -0- -0- -0- -0- (0.05) (0.01)
Distributions from capital gains ........... (0.82) (1.36) (0.46) (0.20) -0- (0.03)
------- ------- ------- ------- ------- -------
Total Distributions ........................ (0.82) (1.36) (0.46) (0.20) (0.05) (0.04)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Year ............... $ 7.64 $ 7.95 $ 7.61 $ 7.17 $ 6.24 $ 5.66
======= ======= ======= ======= ======= =======
Total Return <F4> ........................... 6.84% 28.76% 13.45% 19.42% 11.24% 27.45%
Ratios/Supplemental Data
Ratios to Average Net Assets:
Operating and Management Expenses .......... 1.73% 2.04% 1.47% 1.48% 1.40% 1.27%
Investment Income (Deficit) -- Net ......... (1.49%) (1.68%) (1.09%) (0.68%) 0.02% 0.47%
Portfolio Turnover Rate<F3> ................. 60% 78% 81% 73% 77% 57%
Net Assets, End of Year (thousands) ........ $1,005,595 $965,959 $702,442 $623,291 $537,912 $503,908
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------------
1988 1987 1986 1985
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ......... $ 7.80 $ 7.60 $ 5.78 $ 5.47
Income From Investment Operations
Investment Income (Deficit) -- Net ......... -0- -0- -0- 0.03
Realized Gains (Losses) on Investments ..... (1.64) 1.11 1.86 0.93
Net Commissions Paid on Fund Share Sales <F2> -0- (0.02) (0.02) (0.02)
-------- ------- ------- -------
Total from Investment Operations ........... (1.64) 1.09 1.84 0.94
-------- ------- ------- -------
Less Distributions <F5>
Distributions from Net Investment Income ... -0- (0.01) (0.02) (0.02)
Distributions from capital gains ........... (1.68) (0.88) -0- (0.61)
-------- ------- ------- -------
Total Distributions ........................ (1.68) (0.89) (0.02) (0.63)
-------- ------- ------- -------
Net Asset Value, End of Year ............... $ 4.48 $ 7.80 $ 7.60 $ 5.78
======== ======= ======= =======
Total Return <F4> ........................... (22.39%) 16.24% 31.94% 18.88%
Ratios/Supplemental Data
Ratios to Average Net Assets:
Operating and Management Expenses .......... 1.17% 0.81% 0.83% 0.85%
Investment Income (Deficit) -- Net ......... 0.03% 0.04% 0.07% 0.49%
Portfolio Turnover Rate<F3> ................. 80% 74% 83% 60%
Net Assets, End of Year(thousands) ......... $442,020 $679,281 $722,546 $643,201
</TABLE>
<F1> Calculation based on average shares outstanding.
<F2> Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both financial
statement and tax purposes as capital charges. On June 11, 1987, the
Securities and Exchange Commission adopted a rule which required for
financial statements for the periods ended on or after June 30, 1987, that
net commissions paid under rule 12b-1 Distribution Plans be treated as
operating expenses rather than capital charges. Accordingly, beginning with
the year ended May 31, 1988, the Fund's financial statements reflect 12b-1
Distribution Plan expenses (i.e., shareholder service fees plus commissions
paid net of deferred sales charges received by the Fund) as a component of
the net investment income section of the financial highlights.
<F3> Portfolio turnover rate for periods ended on or after May 31, 1986 includes
certain U.S. Government obligations.
<F4> Excluding applicable sales charges.
<F5> Effective June 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized capital gains." From January 31, 1990 until the date of
adoption of the Statement of Position, distribution amounts exceeding book
basis net investment income were charged to paid-in capital.
3
<PAGE>
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FUND DESCRIPTION
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The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was 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 twenty funds managed by Keystone Management, Inc.
("Keystone Management"), the Fund's investment manager, and is one of thirty-one
funds managed or advised by Keystone Custodian Funds, Inc., ("Keystone"), the
Fund's investment adviser. Keystone and Keystone Management are, from time to
time, also collectively referred to as "Keystone."
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FUND OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide shareholders with long-term
growth of capital. It is the policy of the Fund to invest its assets, as fully
as practicable, in common stocks, securities convertible into common stocks,
securities having common stock characteristics (including rights and warrants),
limited partnerships and master limited partnerships selected primarily for
prospective capital growth.
The class of securities from which these selections are made may be expected
to experience wide fluctuations in price in both rising and declining markets.
Investments in newer and smaller companies, particularly those believed to be in
the earlier phases of growth, are favored. While income is not an objective,
securities appearing to offer attractive possibilities for future growth of
income may be included in the portfolio whenever it seems possible to do so
without conflicting with the Fund's objective of capital growth. In addition to
its other investment options, the Fund may invest up to 25% of its total assets
in foreign securities.
When market conditions warrant, the Fund may adopt a defensive position to
preserve shareholders' capital by investing in money market instruments. Such
instruments, which must mature within one year of their purchase, consist of
United States ("U.S.") government securities; instruments, including
certificates of deposit, demand and time deposits and bankers' acceptances, of
banks that are members of the Federal Deposit Insurance Corporation and have
assets of at least $1 billion, including U.S. branches of foreign banks and
foreign branches of U.S. banks; prime commercial paper, including master demand
notes; and repurchase agreements secured by U.S. government 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, securities which may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the investment on its books
and (2) limiting its holdings of such securities to 15% of net assets.
The Fund may write covered call options and purchase call options, including
purchasing call options to close out existing positions, and may employ new
investment techniques with respect to such options. The Fund currently does not
intend to invest more than 5% of its assets in options transactions.
The Fund may enter into reverse repurchase agreements and firm commitment
agreements for securities and currencies. In addition, the Fund may enter into
currency and other financial futures contracts and engage in related options
transactions for hedging purposes and not for speculation and may employ new
investment techniques with respect to such futures contracts and related
options.
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 intends to 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
4
<PAGE>
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.
Investment in foreign securities, options securities, forward securities,
structured securities and other complex securities (also known as "derivative
instruments") transactions involves certain risks. For an explanation of these
risks, see the "Additional Investment Information" section at the back of the
prospectus and the statement of additional information.
For further information generally about the types of investments and
investment techniques available to the Fund and the risks associated, see
"Additional Investment Information" and the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment. The investment
objective of the Fund cannot be changed without a vote of the holders of a
majority (as defined in the 1940 Act) of the Fund's outstanding shares.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted the fundamental restrictions described below, which may
not be changed without the approval of a majority of the Fund's outstanding
shares. These restrictions and certain other fundamental restrictions are more
completely described in the statement of additional information.
Generally, the Fund may not do the following: (1) invest more than 5% of its
total assets, computed at market value at the time of purchase, 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)
borrow money, except that the Fund may 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 enter into reverse repurchase agreements provided
that bank borrowings and reverse repurchase agreements, in aggregate, shall not
exceed 10% of the value of the Fund's net assets; and (3) invest more than 25%
of its total assets in securities of issuers in the same industry.
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. Furthermore, the Trustees will not authorize implementation of
this policy so long as the Fund's shares are registered for sale in Japan and
Japanese law prohibits such investment. In the event of such implementation, the
Fund will comply with such requirements as to written notice to shareholders as
are then in effect.
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PRICING SHARES
- --------------------------------------------------------------------------------
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 currently is
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share 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.
5
<PAGE>
The Fund values portfolio securities traded on an established exchange on the
basis of the last sales price. 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.
The Fund values the money market instruments it purchases as follows:
short-term money market instruments purchased with 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; money market instruments maturing in more
than sixty days for which market quotations are readily available are valued at
current market value; and money market instruments maturing in more than sixty
days when purchased that are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market, in any case reflecting fair value as
determined by the Fund's Board of Trustees.
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. See "Valuation of Securities" in the Fund's statement
of additional information.
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DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code. The 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. Any such distributions would
be (1) declared on or before December 31 to shareholders of record in December,
(2) paid by the following January 31, and (3) includable in the taxable income
of shareholders for the year in which such distributions were declared. If the
Fund qualifies and if it distributes all of its net investment income and net
capital gains, if any, to shareholders, it will be relieved of any federal
income tax liability. The Fund distributes its net income to its shareholders
and net capital gains at least annually.
Commissions paid by the Fund on new sales of shares under the Fund's
Distribution Plan (see "Distribution Plan") and deferred sales charge receipts
are treated as capital charges and capital credits, respectively, in determining
net investment income for tax purposes. For financial statement purposes,
however, these commissions and receipts are treated as operating expenses and
expense offsets. As a result, the amount of dividend distributions required to
satisfy the requirements of the Internal Revenue Code might exceed net
investment income for financial statement purposes, resulting in a portion of
such dividends being a distribution in excess of net investment income for
financial statement purposes. Total investment return is equally affected by
both treatments.
The Fund makes distributions in additional shares of the Fund or at the
shareholder's election (which must be made before the record date for the
distribution) in cash. Income dividends and net short-term gains distributions
are taxable as ordinary income and net long-term gains are taxable as capital
gains regardless of how long the shareholder has held the Fund's shares. 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. 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.
6
<PAGE>
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FUND MANAGEMENT AND EXPENSES
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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,
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 Keystone Custodian Funds and to certain other funds
in the Keystone Group of Mutual Funds.
The Fund pays Keystone Management a fee for its services at the annual rate
of:
Annual 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 paid daily.
Pursuant to its Investment Management Agreement with the Fund, Keystone
Management has delegated its investment management functions, except for certain
administrative and management services to Keystone and has entered into an
Investment Advisory Agreement with Keystone 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 Internal Revenue 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; (3) providing services to the Fund's shareholders in
connection with federal and state taxation and distributions of income and
capital gains; and (4) storing documents relating to the Fund's activities.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Group, Inc. ("Keystone Group"), 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
Keystone Group is a corporation privately owned by current and former members
of management of Keystone and its affiliates. The shares of Keystone Group
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,
Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Group of Mutual Funds.
Pursuant to the Investment Advisory Agreement, Keystone receives for its
services an annual fee representing 85% of the management fee received by
Keystone Management under its Investment Management Agreement with the Fund.
During the year ended May 31, 1994, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of
$5,433,201, which represented 0.52% of the Fund's average net assets. Of such
amount paid to Keystone Management, $4,618,221 was paid to Keystone for its
services to the Fund.
FUND EXPENSES
In addition to the investment advisory and management fees discussed above,
the principal expenses the Fund is expected to pay include, but are not limited
7
<PAGE>
to, expenses of its transfer agent, its custodian and its independent auditors;
expenses under its Distribution Plan; fees of its Independent Trustees
("Independent Trustees"); expenses of shareholders' and Trustees' meetings; fees
payable to government agencies, including registration and qualification fees of
the Fund and its shares under federal and state securities laws; expenses of
preparing, printing and mailing Fund 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 May 31, 1994, the Fund paid 1.73% of its average net assets in
expenses.
During the fiscal year ended May 31, 1994, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, $24,577 for certain accounting and printing services
and $2,387,258 for transfer agent services. KIRC is a wholly-owned subsidiary of
Keystone.
PORTFOLIO MANAGER
Roland Gillis has been the Fund's Portfolio Manager since 1986. He is a
Keystone Vice President and Senior Portfolio Manager and has more than 19 years'
experience in equity investing.
SECURITIES TRANSACTIONS
Keystone selects broker-dealers to execute transactions subject to the receipt
of best execution. When selecting broker-dealers to execute portfolio
transactions for the Fund, Keystone may follow a policy of considering as a
factor the number of shares of the Fund sold by such broker-dealers. In
addition, broker-dealers may, from time to time, be affiliated with the Fund,
Keystone Management, Keystone, the Fund's principal underwriter or their
affiliates.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended May 31, 1993
and 1994 were 78% and 60%, respectively.
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HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Shares of the Fund may be purchased from any broker-dealer that has a selling
agreement with Keystone Distributors, Inc. ("KDI"), the Fund's principal
underwriter ("Principal Underwriter"). KDI, a wholly-owned subsidiary of
Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of a Fund by
mailing to the Fund, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121,
a completed account application and a check payable to the Fund. Or you may
telephone 1-800-343-2898 to obtain the number of an account to which you can
wire or electronically transfer funds and then send in a completed account
application. Subsequent investments in a Fund's shares in any amount may be made
by check, by wiring federal funds or by an electronic funds transfer ("EFT").
The Fund's shares are sold at the net asset value per share next computed
after it 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. The Fund does not
impose a sales charge 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, a contingent deferred sales charge may be imposed 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 contingent deferred sales charge is imposed on amounts
redeemed thereafter or on shares purchased through reinvestment of dividends. If
imposed, the contingent deferred sales charge is deducted from the redemption
8
<PAGE>
proceeds otherwise payable to the shareholder. Prior to July 8, 1992, the Fund
retained the contingent deferred sales charge. Since July 8, 1992, the
contingent deferred sales charge attributable to shares purchased prior to
January 1, 1992 has been retained by the Fund, and the contingent deferred sales
charge attributable to shares purchased after January 1, 1992 is, to the extent
permitted by the NASD, paid to KDI. For the fiscal year ended May 31, 1994, the
Fund recovered $128,350 in deferred sales charges.
The contingent deferred sales charge 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 deferred sales charge 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 four
consecutive calendar years.
In determining whether a contingent deferred sales charge is payable and, if
so, the percentage charge applicable, it is assumed that shares held the longest
are the first to be redeemed. No deferred sales charge is payable on permitted
exchanges of shares between Keystone funds that have adopted Distribution Plans
pursuant to Rule 12b-1 under the 1940 Act. Moreover, when shares of one such
fund have been exchanged for shares of another such fund, for purposes of any
future contingent deferred sales charge, the calendar year of the purchase of
the shares of the fund exchanged into is assumed to be the year shares tendered
for exchange were originally purchased.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder;
(2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified
under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3)
automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2
years old; (4) involuntary redemptions of accounts having an aggregate net asset
value of less than $1,000; or (5) automatic withdrawals under an automatic
withdrawal plan of up to 1-1/2% per month of the shareholder's initial account
balance.
WAIVER OF DEFERRED SALES CHARGES
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 an initial
sales charge or a deferred sales charge to (1) certain officers, Directors,
Trustees and employees of the Fund, Keystone Management, Keystone and certain of
their affiliates; (2) registered representatives of firms with dealer agreements
with KDI; and (3) a bank or trust company acting as trustee for a single
account.
- --------------------------------------------------------------------------------
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
The Fund bears some of the costs of selling its shares under its Distribution
Plan adopted on June 1, 1983 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 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 NASD currently 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 aggregate amount that the Fund may pay
for such distribution costs is limited 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 contingent deferred sales charges paid by
shareholders to KDI).
Amounts paid under the Distribution Plan are paid to the Fund's Principal
Underwriter, currently KDI, (1) as commissions for Fund shares sold under the
Distribution Plan, all or any part of which commissions may be reallowed by KDI
to others for selling the Fund's shares, and (2) to enable KDI to pay such
others shareholder service fees in respect of shares sold by them after the
9
<PAGE>
inception of the Distribution Plan and remaining outstanding on the Fund's books
for specified periods. Amounts paid or accrued to KDI under (1) and (2) in the
aggregate may not exceed the limitation referred to above. From the amounts
received by KDI in connection with the Distribution Plan, and subject to the
limitations discussed above, KDI generally pays brokers or others a commission
equal to 4% of the price paid to the Fund for each sale of Fund shares as well
as a shareholder service fee at a rate of 0.25% per annum of the net asset value
of shares sold by such brokers or others and remaining outstanding on the books
of the Fund for specified periods.
If the Fund is unable to pay KDI a commission on a new sale because the annual
maximum (0.75% of average daily net assets) has been reached, KDI 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 pay KDI such amounts that exceed the Distribution Plan
limitation, KDI intends to seek full payment of such charges from the Fund
(together with interest at the rate of prime 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. KDI currently intends to seek payment of interest only
on such charges paid or accrued by KDI subsequent to January 1, 1992. If the
Fund's 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,
KDI will ask the Independent Trustees to take whatever action they deem
appropriate under the circumstances with respect to payment of such amounts.
During the fiscal year ended May 31, 1994, the Fund paid KDI $9,900,583 under
the Distribution Plan. The amount paid by the Fund under its Distribution Plan,
net of deferred sales charges, was $9,772,233 (0.93% of the Fund's average daily
net asset value during the year). During the year, KDI retained $3,999,703 and
paid commissions on new sales and service fees to others of $7,941,992, of which
$2,041,112 was an advance. During the same year, KDI received $879,228 in
deferred sales charges. Total advances outstanding as of May 31, 1994 were
$2,344,026 (0.23% of the Fund's net asset value as of such year-end).
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.
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.
Whether any expenditure under the Distribution Plan is subject to a state
expense limit depends upon the nature of the expenditure and the terms of the
state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
10
<PAGE>
Upon written notice to dealers, KDI, at its own expense may periodically
sponsor programs that offer additional compensation in connection with sales of
Fund shares. Participation in such programs may be available to all dealers or
to selected dealers who have sold or are expected to sell significant amounts of
shares. Additional compensation may also include financial assistance to 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 Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
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HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
Fund shares may be redeemed for cash at the redemption value upon written
order by the shareholder(s) to the Fund c/o Keystone Investor Resource Center,
Inc., Box 2121, Boston, Massachusetts 02106-2121, and presentation to the Fund
of a properly endorsed share certificate if certificates have been issued. The
signature(s) of the shareholder(s) on the written order and certificates must be
guaranteed. The redemption value is the net asset value adjusted for fractions
of a cent and may be more or less than the shareholder's cost depending upon
changes in the value of the Fund's portfolio securities between purchase and
redemption. The Fund may impose a deferred sales charge at the time of
redemption of certain shares as explained in "How to Buy Shares." If imposed,
the Fund deducts the deferred sales charge from the redemption proceeds
otherwise payable to the shareholder.
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 or by bank wire of funds. 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 redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from the
shareholder. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made within seven days thereafter.
Shareholders may also redeem their shares through their broker-dealers. KDI,
acting as agent for the Fund, stands ready to repurchase Fund shares upon orders
from dealers as follows: redemption requests received by broker-dealers prior to
that day's close of trading on the Exchange and transmitted to the Fund prior to
its close of business that day will receive the net asset value price computed
at the close of trading on the Exchange on the same day. Redemption requests
received by broker-dealers after that day's close of trading on the Exchange and
transmitted to the Fund prior to the close of business on the next business day
will receive the next business day's net asset value price. If KDI has received
proper documentation, it will pay the redemption proceeds, less any applicable
deferred sales charge, to the dealer placing the order within seven days
11
<PAGE>
thereafter. KDI charges no fees for this service. Your broker-dealer, however,
may do so.
For the protection of shareholders, SIGNATURES ON CERTIFICATES, STOCK POWERS
AND ALL WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK
EXCHANGE MEMBER, A U.S. COMMERCIAL BANK OR TRUST COMPANY 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, but may also
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
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898.
In order to insure that instructions received by KIRC are genuine, when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value falls 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
contingent deferred sales charges 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 KDI 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 KDI 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, for the protection of shareholders, so orders.
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<PAGE>
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SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
The Keystone Automated Response Line 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 seven Keystone Custodian Funds,
Keystone Precious Metals Holdings, Inc. ("KPMH"), Keystone International Fund
Inc. ("KIF"), Keystone Tax Exempt Trust ("KTET"), Keystone Liquid Trust ("KLT")
or Keystone Tax Free Fund ("KTFF") on the basis of their respective net asset
values by calling toll free 1-800-343-2898 or by writing KIRC at Box 2121,
Boston, Massachusetts 02106-2121. Fund shares purchased by check may be
exchanged for shares of the named funds, other than KPMH, KTET or KTFF, after 15
days provided good payment for the purchase of Fund shares has been collected.
In order to exchange Fund shares for shares of KPMH, KTET or KTFF, a shareholder
must have held Fund shares for a period of at least six months. There is no
exchange fee for exchanges initiated by an individual investor through KARL;
other exchanges made by phone are subject to a $10 exchange fee. If the shares
being tendered for exchange have been held for less than four years and are
still subject to a contingent deferred sales charge, such charge will carry over
to the shares being acquired in the exchange transaction. The Fund reserves the
right, after providing shareholders with any required notice, 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 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. on any day
the funds are open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. 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 pension and profit-sharing plans available to investors,
including Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified
Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"); 401(k)
Plans; Keogh Plans; Corporate Profit-Sharing Plans; Pension and Target Benefit
Plans; Money Purchase Pension Plans; and Salary-Reduction 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.
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<PAGE>
AUTOMATIC INVESTMENT PLAN
Shareholders may take advantage of investing on an automatic basis by
establishing an automatic investment plan. Checks are drawn on a shareholder's
checking account monthly and used to purchase Fund shares.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal 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 Automatic
Withdrawal Plan is opened. Fixed withdrawal payments are not subject to a
deferred sales charge. Excessive withdrawals may decrease or deplete the value
of 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. Further details
may be obtained from KIRC by calling toll free 1-800-343-2898 or by writing KIRC
at P.O. Box 2121, Boston, Massachusetts 02106-2121.
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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 AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. 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 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 in advertising or
marketing the Fund's shares, such as data from Lipper Analytical Services, Inc.
or other industry publications.
- --------------------------------------------------------------------------------
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 Declaration of Trust and under the 1940
Act. As provided in the Fund's Declaration of Trust, shareholders have the right
to remove Trustees by an affirmative vote of two-thirds of the outstanding
shares. A special meeting of the shareholders will be held when 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
- --------------------------------------------------------------------------------
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
14
<PAGE>
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon 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.
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ADDITIONAL INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE FUND
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. 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. The Fund
has the right to increase the amount at any time up to the full amount provided
by the note agreement or to decrease the amount. The borrower may repay up to
the full amount of the note without penalty. Notes purchased by the Fund permit
the Fund to demand payment of principal and accrued interest at any time (on not
more than seven days' notice). Notes acquired by the Fund may have maturities of
more than one year, provided that (1) the Fund is entitled to payment of
principal and accrued interest upon not more than seven days notice, and (2) the
rate of interest on such notes is adjusted automatically at periodic intervals,
which normally will not exceed 31 days, but may extend up to one year. The notes
are deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the demand notice period. Because these types
of notes are direct lending arrangements between the lender and the borrower,
such instruments are not normally traded and there is no secondary market for
these notes, although they are redeemable and thus repayable by the borrower at
face value plus accrued interest at any time. Accordingly, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. In connection with master demand note arrangements, Keystone
considers, under standards established by the 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 the issuer meets the criteria established for commercial
paper.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
creditworthy. Such persons must be registered as U.S. government securities
dealers with appropriate regulatory organizations. Under such agreements, the
bank, primary dealer or other financial institution agrees to repurchase the
(i)
<PAGE>
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 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
the Fund is obligated to repurchase may decline below the repurchase price.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. The staff of the Securities and Exchange
Commission has taken the position that the 1940 Act treats reverse repurchase
agreements as being included in the percentage limit on borrowings imposed on a
Fund.
"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. The Fund will maintain a separate account of liquid assets equal to
the value of such purchase commitments until payment is made. When issued and
delayed delivery agreements are subject to risks from changes in value based
(ii)
<PAGE>
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 portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage.
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 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.). These
risks are carefully considered by Keystone prior to the purchase of these
securities.
OPTIONS TRANSACTIONS
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
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.
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.
The principal reason for writing call 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 for writing a call 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.
Purchasing Options. The Fund may purchase call options for the purpose of
offsetting previously written 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.
(iii)
<PAGE>
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 a 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 investment restrictions relating to
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,
currencies 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 currency and other financial futures contracts.
When a futures contract is sold by the Fund, the value of the 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 fix 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 currency and other
financial 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.
(iv)
<PAGE>
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 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 predict accurately 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 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
(v)
<PAGE>
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.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if, as a result, the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made, however, 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.
(vi)
<PAGE>
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<PAGE>
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KEYSTONE CUSTODIAN
FAMILY OF FUNDS
[Logo]
B-1 High Grade Bond Fund
B-2 Diversified Bond Fund
B-4 High Income Bond Fund
K-1 Balanced Income Fund
K-2 Strategic Growth Fund
S-1 Blue Chip Stock Fund
S-3 Capital Growth Fund
S-4 Small Company Growth Fund
International Fund
Precious Metals Holdings
Tax Free Fund
Tax Exempt Fund
Liquid Trust
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[Logo] KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034 [Recycled Paper Logo]
S4-P 9/84
50M-R
