<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION DECEMBER 9, 1996.
File Nos. 2-28183
and 811-1600
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. 27 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 31 [X]
KEYSTONE OMEGA FUND
(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) 210-3200
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
Boston, MA 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 January 25, 1996.
<PAGE>
KEYSTONE OMEGA FUND
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 27
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 27 to Registration
Statement No. 2-28183/811-1600 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
Principal Underwriter
Location of Accounts and Records
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE OMEGA FUND
Cross-Reference Sheet pursuant to Rules 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
Performance Data
4 Cover Page
The Fund
Investment Objective and Policies
Investment Restrictions
Risk Factors
5 Fund Management and Expenses
Additional Information
5A Not applicable
6 The Fund
Dividends and Taxes
Fund Shares
Shareholder Services
Pricing Shares
7 How to Buy Shares
Shareholder Services
8 How to Redeem Shares
9 Not applicable
10 Cover Page
11 Table of Contents
12 Not applicable
13 The Fund
Investment Objective and Policies
Investment Restrictions
Brokerage
Appendix
<PAGE>
KEYSTONE OMEGA FUND
Cross-Reference Sheet continued.
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- -------------------------------------------
14 Trustees and Officers
15 Additional Information
16 Investment Management
Principal Underwriter
Additional Information
17 Brokerage
18 Declaration of Trust
19 Valuation of Securities
Redemptions in Kind
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return and Yield Quotations
23 Financial Statements
<PAGE>
KEYSTONE OMEGA FUND
PART A
PROSPECTUS
<PAGE>
KEYSTONE OMEGA FUND
PROSPECTUS DECEMBER 10, 1996
CLASS Y
Keystone Omega Fund (the "Fund") is a mutual fund that seeks maximum capital
growth by investing in a varied portfolio consisting primarily of common stocks
and securities convertible into common stocks.
This prospectus provides information regarding the Fund's Class Y shares,
which the Fund will begin offering January 2, 1997. Information on share classes
may be found in the "Fund Shares" section of this prospectus.
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
Additional information about the Fund is contained in a statement of
additional information dated December 10, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number provided on this page.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
KEYSTONE OMEGA FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 7
Risk Factors 8
Pricing Shares 9
Dividends and Taxes 9
Fund Management and Expenses 10
How to Buy Shares 13
How to Redeem Shares 14
Shareholder Services 16
Performance Data 17
Fund Shares 17
Additional Information 18
Additional Investment Information (i)
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 OMEGA FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in Class Y shares of the Fund will bear
directly or indirectly. For more complete descriptions of the various costs and
expenses, see the following sections of this prospectus: "Fund Management and
Expenses;" "How to Buy Shares;" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS Y SHARES
NO LOAD
SHAREHOLDER TRANSACTION EXPENSES OPTION(1)
---------------
<S> <C>
Maximum Sales Load Imposed on Purchases ....................................................... None
(as a percentage of offering price)
Deferred Sales Load ........................................................................... None
(as a percentage of original purchase price or redemption proceeds, as applicable)
Exchange Fee (per exchange)(2) ................................................................ $10.00
ANNUAL FUND OPERATING EXPENSES(3)
(as a percentage of average net assets)
Management Fees ............................................................................... 0.75%
12b-1 Fees .................................................................................... None
Other Expenses ................................................................................ 0.69%
------
Total Fund Operating Expenses ................................................................. 1.44%
======
<CAPTION>
EXAMPLES(4) 1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each period:
Class Y .................................................................................. $ 15 $ 46
You would pay the following expenses on the same investment, assuming no redemption at the end
of each period:
Class Y .................................................................................. $ 15 $ 46
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
- ----------
(1) Class Y shares are available only through broker-dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(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 ratio is estimated for the Fund's fiscal year ending December 31, 1997. Total Fund Operating Expenses include
indirectly paid expenses. Excluding indirectly paid expenses, the expense ratio for Class Y shares is expected to be 1.23%.
The Fund also offers Class A, B and C shares which have different expenses and sales charges.
(4) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual return
for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE OMEGA FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund. The financial information for the years ended December 31, 1989 through
December 31, 1995 has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. The financial highlights for the years ended December 31,
1986 to December 31, 1988 were audited by other auditors. The financial
highlights for the six-month period ended June 30, 1996 are unaudited. The
audited portion of the table appears in the Fund's 1995 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 1995 financial statements, related notes, and
independent auditors' report as well as the Fund's unaudited Semi-Annual Report
for the six months ended June 30, 1996 have been incorporated by reference into
the statement of additional information. Additional information about the Fund's
performance is contained in its Annual and Semi-Annual Reports, which will be
made available upon request and without charge.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1996 ------------------------------------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(b) 1991 1990 1989 1988 1987 1986
------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR .. $ 19.56 $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37 $ 16.03 $ 13.66 $ 12.08 $ 13.44 $ 14.12
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations
Net investment
income (loss) .... (0.05) 0.00 0.04 (0.07) 0.00 (0.04) 0.11 0.17 0.30(d) 0.02 0.23
Net realized and
unrealized gains
(losses) on
investments ...... 0.70 5.58 (1.00) 3.07 0.39 6.92 (0.39) 4.30 1.40 1.11 1.49
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations ..... 0.65 5.58 (0.96) 3.00 0.39 6.88 (0.28) 4.47 1.70 1.13 1.72
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment
income ........... 0.00 0.00 0.00 0.00 0.00 (0.02) (0.25) (0.20) (0.12) (0.24) (0.28)
In excess of net
investment income 0.00 0.00 0.00 0.00 0.00 (0.05) (0.04) 0.00 0.00 0.00 0.00
Capital gains ...... (1.78) (1.56) (0.61) (1.73) (2.23) (2.50) (2.09) (1.90) 0.00 (2.25) (2.12)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (1.78) (1.56) (0.61) (1.73) (2.23) (2.57) (2.38) (2.10) (0.12) (2.49) (2.40)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE END
OF YEAR .......... $ 18.43 $ 19.56 $ 15.54 $ 17.11 $ 15.84 $ 17.68 $ 13.37 $ 16.03 $ 13.66 $ 12.08 $ 13.44
======== ======== ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (a) ... 3.24% 36.94% (5.66%) 19.33% 4.00% 54.49% (2.38%) 33.05% 14.05% 8.27% 12.07%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses ... 1.43%(c)(e) 1.38%(e) 1.41% 1.51% 1.52% 1.57% 1.73% 1.84% 1.78% 1.99% 1.47%
Net investment
income (loss) .. (0.34%) 0.00% 0.27% (0.48%) (0.01%) (0.31%) 0.70% 1.03% 2.22% 0.13% 1.60%
Portfolio turnover
rate ............. 112% 159% 137% 162% 176% 115% 108% 77% 84% 106% 178%
Average commission
rate paid ........ $0.0631 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Net assets end of
year (thousands) . $152,744 $135,079 $99,569 $90,404 $73,144 $58,671 $38,531 $39,682 $33,951 $30,246 $31,812
<FN>
- ----------
(a) Excluding applicable sales charges.
(b) Calculated on average shares outstanding.
(c) "Ratio of total expenses to average net assets" for the six months ended June 30, 1996 and the year ended December 31, 1995
includes indirectly paid expenses. Excluding indirectly paid expenses, the expense ratio would have been 1.42% and 1.37%,
respectively.
(d) Includes $0.17 per share relating to a special non-recurring distribution from Inco Limited.
(e) Annualized.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE OMEGA FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund. The financial information for the periods through December 31, 1995 has
been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The
financial highlights for the six months ended June 30, 1996 is unaudited. The
audited portion of the table appears in the Fund's 1995 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 1995 financial statements, related notes and
independent auditors' report as well as the Fund's unaudited Semi-Annual Report
for the six months ended June 30, 1996 have been incorporated by reference into
the statement of additional information. Additional information about the Fund's
performance is contained in its Annual and Semi-Annual Reports, which will be
made available upon request and without charge.
<TABLE>
<CAPTION>
AUGUST 2, 1993
SIX MONTHS (DATE OF INITIAL
ENDED YEAR ENDED DECEMBER 31, PUBLIC OFFERING)
JUNE 30, 1996 ------------------------- TO
(UNAUDITED) 1995 1994 DECEMBER 31, 1993
------------- ------ ------ -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR .. $19.10 $15.34 $17.06 $17.29
------ ------ ------ ------
Income from investment operations:
Net investment loss ................ (0.08) (0.09) (0.06) (0.05)
Net realized and unrealized gains
(losses) on investments .......... 0.63 5.41 (1.05) 1.55
------ ------ ------ ------
Total from investment operations . 0.55 5.32 (1.11) 1.50
------ ------ ------ ------
Less distributions from:
Capital gains ...................... (1.78) (1.56) (0.61) (1.73)
------ ------ ------ ------
Total distributions .............. (1.78) (1.56) (0.61) (1.73)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR ........ $17.87 $19.10 $15.34 $17.06
====== ====== ====== ======
TOTAL RETURN(b) .................... 2.78% 35.70% (6.57%) 9.02%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses ................... 2.30%(a)(c) 2.29%(c) 2.30% 2.57%(a)
Net investment loss .............. (1.20%)(a) (0.94%) (0.58%) (1.73%)(a)
Portfolio turnover rate ............ 112% 159% 137% 162%
Average commission rate paid ....... $0.0631 N/A N/A N/A
Net assets end of year (thousands) . $82,651 $71,636 $32,266 $7,423
<FN>
- ----------
(a) Annualized.
(b) Excluding applicable sales charges.
(c) "Ratio of total expenses to average net assets" for the six months ended June 30, 1996 and the year ended December 31, 1995
includes indirectly paid expenses. Excluding indirectly paid expenses, the expense ratio would have been 2.28% and 2.27%,
respectively.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE OMEGA FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund. The financial information for the periods through December 31, 1995 has
been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The
financial highlights for the six months ended June 30, 1996 is unaudited. The
audited portion of the table appears in the Fund's 1995 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 1995 financial statements, related notes and
independent auditors' report as well as the Fund's unaudited Semi-Annual Report
for the six months ended June 30, 1996 have been incorporated by reference into
the statement of additional information. Additional information about the Fund's
performance is contained in its Annual and Semi-Annual Reports, which will be
made available upon request and without charge.
<TABLE>
<CAPTION>
AUGUST 2, 1993
SIX MONTHS (DATE OF INITIAL
ENDED YEAR ENDED DECEMBER 31, PUBLIC OFFERING)
JUNE 30, 1996 ------------------------- TO
(UNAUDITED) 1995 1994 DECEMBER 31, 1993
------------- ------ ------ ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR .. $19.13 $15.37 $17.09 $17.29
------ ------ ------ ------
Income from investment operations:
Net investment loss ................ (0.05) (0.13) (0.07) (0.06)
Net realized and unrealized gains
(losses) on investments .......... 0.60 5.45 (1.04) 1.59
------ ------ ------ ------
Total from investment operations . 0.55 5.32 (1.11) 1.53
------ ------ ------ ------
Less distributions from:
Capital gains ...................... (1.78) (1.56) (0.61) (1.73)
------ ------ ------ ------
Total distributions .............. (1.78) (1.56) (0.61) (1.73)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR ........ $17.90 $19.13 $15.37 $17.09
====== ====== ====== ======
TOTAL RETURN(b) .................... 2.77% 35.62% (6.56%) 9.20%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses ................... 2.30%(a)(c) 2.30%(c) 2.30% 2.48%(a)
Net investment loss .............. (1.20%)(a) (0.91%) (0.63%) (1.64%)(a)
Portfolio turnover rate ............ 112% 159% 137% 162%
Average commission rate paid ....... $0.0631 N/A N/A N/A
Net assets end of year (thousands) . $18,008 $13,963 $9,900 $3,620
<FN>
- ----------
(a) Annualized.
(b) Excluding applicable sales charges.
(c) "Ratio of total expenses to average net assets" for the six months ended June 30, 1996 and the year ended December 31, 1995
includes indirectly paid expenses. Excluding indirectly paid expenses, the expense ratio would have been 2.28% and 2.29%,
respectively.
</TABLE>
<PAGE>
THE FUND
The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust.
Originally the Fund had been incorporated in Massachusetts on February 8, 1968.
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, collectively referred to as "Keystone."
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek maximum capital growth by investing
in a varied portfolio consisting primarily of common stocks and securities
convertible into common stocks.
The investment objective of the Fund is fundamental and may not be changed
without the vote of a majority of the Fund's outstanding shares (as defined in
the Investment Company Act of 1940 ("1940 Act")), which means the lesser of (1)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares (a "1940 Act Majority").
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective.
PRINCIPAL INVESTMENTS
The Fund pursues its objective by employing the techniques of the fully-
managed investment concept, meaning that Keystone will continuously review both
individual securities and relevant general conditions. Whenever, in the opinion
of Keystone, a security no longer seems to have the required characteristics, an
anticipated level of performance has been achieved, or other securities present
relatively greater opportunities for realizing the Fund's objective, appropriate
changes will be made in the Fund's portfolio. The Fund's equity position will be
changed as Keystone changes its evaluation of trends in general securities price
levels. Portfolio turnover rate will not be considered a limiting factor in the
execution of investment decisions.
Although the Fund invests predominantly in equity securities of United States
("U.S.") corporations, in pursuing its objective, the Fund may also invest up to
25% of its assets in foreign securities issued by issuers located in developed
countries as well as emerging markets countries, including certain formerly
communist 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 by the International Bank for Reconstruction and Development.
OTHER ELIGIBLE INVESTMENTS
When Keystone deems it advisable, the Fund may, for temporary defensive
purposes, invest without limit in investment grade bonds or debentures rated by
Moody's Investors Service ("Moody's") as Baa or better or by Standard & Poor's
Corporation ("S&P") as BBB or better or those having at least similar quality in
Keystone's judgment. Bonds that are rated Baa by Moody's are considered to be
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 have speculative characteristics as
well. Debt rated BBB by S&P is regarded as having an adequate capacity to pay
interest and repay principal. While 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. Under circumstances where
the Fund is investing for defensive purposes, it will not be pursuing its
investment objective.
The Fund also may invest in non-convertible preferred stocks of companies
considered creditworthy and able to sustain dividend payments and in short-term
money market instruments maturing in one year or less. Such money market
instruments may be U.S. government securities; certificates of deposit in banks
considered creditworthy; or commercial paper of companies, the bonds or
debentures of which are investment grade. While these securities are not without
risk of price fluctuation or default, they are generally less volatile than
common stock.
The Fund may enter into repurchase and reverse repurchase agreements, invest
in master demand notes, lend portfolio securities, purchase and sell securities
and currencies on a when-issued and delayed-delivery basis and purchase or sell
securities on a forward commitment basis, write covered call and put options and
purchase call and put options to close out existing positions and may employ new
investment techniques with respect to such options. The Fund may also enter into
currency and other financial futures contracts and related options transactions
for hedging purposes and not for speculation. The Fund 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, as amended
(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 the
liquidity of the Fund's Rule 144A securities is determined by Keystone and the
Board of Trustees monitors Keystone's implementation of such guidelines and
procedures.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of Trustees will consider what action, if any, is appropriate.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see the
sections of this prospectus entitled "Risk Factors" and "Additional Investment
Information" and the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions summarized below,
which may not be changed without the vote of a 1940 Act Majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in detail in the statement of
additional information.
The Fund may not: (1) invest more than 10% of its total assets in the
securities of any one issuer (except U.S. government securities); and (2)
borrow, unless, immediately after any such borrowing, such borrowing and all
other such borrowings and other liabilities do not exceed one-third of the value
of the Fund's total assets.
As a diversified investment company, the Fund has undertaken not to purchase a
security if, as a result, more than 10% of the outstanding voting securities of
any single issuer would be held by the Fund or more than 5% of its total assets
would be invested in securities of any one issuer.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid, securities that may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of net assets.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of risk.
Before you buy shares of the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
By itself, the Fund does not constitute a balanced investment program. The
Fund is best suited for investors who can afford to maintain their investment
over a relatively long period of time, and who are seeking a fund which is
relatively aggressive and has the potential for significant returns. The Fund
involves a high degree of risk and is not an appropriate investment for
conservative investors who are seeking preservation of capital and/or income.
You should take into account your own investment objectives as well as your
other investments when considering an investment in the Fund.
Certain risks related to the Fund are discussed below. In addition to the
risks not discussed in this section, specific risks relating to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.
FUND RISKS. Investing in common stocks, particularly those having growth
characteristics, frequently involves greater risks (and possibly greater
rewards) than investing in other types of securities. Common stock prices tend
to be more volatile and companies having growth characteristics may sometimes be
unproven.
A need for cash due to large liquidations from the Fund when prices of common
stocks are declining could result in losses to the Fund.
Investing in the Fund involves the risk common to investing in any security,
that is the value of the securities held by the Fund will fluctuate in response
to changes in economic conditions or public expectations about those securities.
The net asset value of the Funds' shares will change accordingly.
FOREIGN RISK. Investing in securities of foreign issuers generally involves
more risk than investing in a portfolio consisting solely of securities of
domestic issuers for the following reasons: publicly available information on
issuers and securities may be scarce; many foreign countries do not follow the
same accounting, auditing, and financial reporting standards as are used in the
U.S.; market trading volumes may be smaller, resulting in less liquidity and
more price volatility compared to U.S. securities of comparable quality; there
may be less regulation of securities trading and its participants; the
possibility may exist for expropriation, confiscatory taxation, nationalization,
establishment of exchange controls, political or social instability or negative
diplomatic developments; and dividend or interest withholding may be imposed at
the source.
Investing in securities of issuers in emerging market countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging market countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
companies in emerging markets countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities. Furthermore, investing in
securities of companies in the formerly communist countries of Eastern Europe
and the People's Republic of China involves additional risks to those associated
with investments in companies in non-formerly communist emerging markets
countries. Specifically, those countries could convert back to a single economic
system, and the claims of property owners prior to the expropriation by the
communist regime could be settled in favor of the former property owners, in
which case the Fund could lose its entire investment in those countries.
Fluctuations in foreign exchange rates impose an additional level of risk,
possibly affecting the value of the Fund's foreign investments and earnings, as
well as gains and losses realized through trades, and the unrealized
appreciation or depreciation of investments. The Fund may also incur costs when
it shifts assets from one country to another.
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 portfolio
securities do not affect the current net asset value of its shares. The Exchange
is currently closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is arrived at by determining the value
of the Fund's assets, subtracting its liabilities and dividing the result by the
number of its shares outstanding.
For purposes of calculating the net asset value of a Fund share on any given
day, securities traded on national securities exchanges or reported on the
National Association of Securities Dealers' Automated Quotation System
("NASDAQ") National Market are valued at the last sale price. If there were no
transactions on that day, securities will be valued at the mean of the closing
bid and asked prices or at such other value as shall be determined in good
faith, by or under the direction of the Fund's Board of Trustees, to be the fair
market value of such securities. Commercial paper is generally valued at cost,
which approximates market.
Other securities, including unlisted securities, are valued at the last
reported bid price if such prices are available. Prices for such securities are
considered to be unavailable if, for example, the securities are restricted
securities, or if there exists a "thin market" in the securities. In such
situations, the value is determined in good faith by or under the direction of
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 of 1986, as amended (the
"Code"). The Fund qualifies if, among other things, it distributes to its
shareholders at least 90% of its net investment income for its fiscal year. The
Fund also intends to make timely distributions, if necessary, sufficient in
amount to avoid the nondeductible 4% excise tax imposed on a regulated
investment company to the extent that it fails to distribute, with respect to
each calendar year, at least 98% of its ordinary income for such calendar year
and 98% of its net capital gains for the one-year period ending October 31 of
such calendar year.
Any taxable dividend declared in October, November or December to shareholders
of record in such month and paid by the following January 31 will be includable
in the taxable income of the shareholder as if paid on December 31 of the year
in which the dividend was declared.
If the Fund qualifies and if it distributes substantially all of its net
investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
The Fund will make distributions from its net investment income and net
capital gains, if any, at least annually.
Shareholders receive Fund distributions in the form of additional shares of
that class of shares upon which the distribution is based or, at the
shareholder's option, in cash. Fund distributions in the form of additional
Class Y shares are made at net asset value.
Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains dividends are taxable as
ordinary income. Net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, such loss will be treated for tax
purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received.
The Fund advises its shareholders annually as to the federal tax status of all
distributions made during the year.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the general supervision of the Fund's Board of Trustees, Keystone
Management, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is
responsible for the overall management of the Fund's business
and affairs.
INVESTMENT MANAGER
Keystone Management was organized in 1989 and is a wholly-owned subsidiary of
Keystone. Its directors and principal executive officers have been affiliated
with Keystone, a seasoned investment adviser, for a number of years. Keystone
Management also serves as investment manager to some of the other Keystone
America Funds 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 provided 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; (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.
The Fund pays Keystone Management a fee for its services at the annual rate
set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
0.75% of the first $ 250,000,000, plus
0.675% of the next $ 250,000,000, plus
0.60% of the next $ 500,000,000, plus
0.50% of amounts over $1,000,000,000
computed as of the close of business on each business day and payable daily.
During the fiscal year ended December 31, 1995, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,280,436, which amount represented 0.75% of the Fund's average net assets. Of
such amount paid to Keystone Management, $1,088,371 was paid to Keystone for its
services to the Fund.
To the extent the Fund's management fee equals 0.75%, the fee would be higher
than that paid by most mutual funds, but would not necessarily be higher than
that paid by funds with similar objectives.
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 predominately owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr., and Rosemary D. Van
Antwerp. Keystone Investments provides accounting, bookkeeping, legal, personnel
and general corporate services to Keystone Management, Keystone, their
affiliates and the Keystone Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee equal to 85% of the management fee received by Keystone Management
under the Management Agreement.
The Management Agreement and the Advisory Agreement continue in effect from
year to year only so long as such continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund. In either case, the terms of both the Management Agreement
and the Advisory Agreement and continuance thereof must be approved by the vote
of a majority of the Independent Trustees (Trustees, including a majority of the
Trustees who are not interested persons of the Fund, as defined in the 1940 Act,
and who have no direct or indirect financial interest in any of the Fund's
Distribution Plans or any agreement related thereto) cast in person at a meeting
called for the purpose of voting on such approval.
The Management Agreement may be terminated, without penalty, on 60 days'
written notice by the Fund or Keystone Management or by a vote of shareholders
of the Fund. The Advisory Agreement may be terminated, without penalty, on 60
days' written notice by the Fund, Keystone Management or Keystone, or by a vote
of shareholders of the Fund.
The Management Agreement and the Advisory Agreement will terminate
automatically upon their assignments.
Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant to
which Keystone Investments will be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC") (the
"Merger"). The surviving corporation will assume the name "Keystone Investments,
Inc." Subject to a number of conditions being met, it is currently anticipated
that the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.
If consummated, the proposed Merger will be deemed to cause an assignment,
within the meaning of the 1940 Act, of both the Management Agreement and the
Advisory Agreement. Consequently, the completion of the Merger is contingent
upon, among other things, the approval by 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 fees payable thereunder, that are substantively
identical to those in the current agreements.
In addition to an assignment of the Fund's 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 LLC'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.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Maureen E. Cullinane has been the Fund's Portfolio Manager since 1989. Ms.
Cullinane is a Keystone Senior Vice President and Senior Portfolio Manager and
has more than 20 years of investment experience.
FUND EXPENSES
The Fund pays 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 Independent
Trustees; transfer, dividend disbursing and shareholder servicing agent
expenses; custodian expenses; fees of its independent auditors and legal counsel
to its Independent Trustees; fees payable to government agencies, including
registration and qualification fees of the Fund and its shares under federal and
state securities laws; and certain extraordinary expenses. In addition, each
class will pay all of the expenses attributable to it. Such expenses are
currently limited to Distribution Plan expenses for the Class A, B and C shares.
The Fund also pays its brokerage commissions, interest charges and taxes.
During the fiscal year ended December 31, 1995, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), $565,768 for services rendered
as the Fund's transfer and dividend disbursing agent, and $39,461 to Keystone
Investments for certain accounting and printing services. KIRC, a wholly-owned
subsidiary of Keystone is located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
SECURITIES TRANSACTIONS
Under policies established by the Fund's Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may consider as a factor the number of shares of the Fund sold by the
broker-dealer. 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 rates for the fiscal years ended December 31,
1994 and 1995 were 137% and 159%, respectively. High portfolio turnover may
involve correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund, as well as additional realized
gains and/or losses to shareholders.
For further information about brokerage and distributions, see the statement
of additional information.
HOW TO BUY SHARES
Class Y shares are offered at net asset value, without a front-end or back-end
sales load. Class Y shares are not offered to the general public and are
available only to (1) persons who at or prior to December 31, 1994 owned shares
in a mutual fund advised by Evergreen Asset Management Corp. ("Evergreen Asset")
of Purchase, New York, (2) certain institutiional investors and (3) investment
advisory clients of Capital Management Group of First Union National Bank of
North Carolina, Evergreen Asset or their affiliates.
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. See "Fund Management and Expenses" for more
information on how the Merger will affect the Fund's underwriting arrangements.
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 sending in a completed
account application. Subsequent investments in any amount may be made by check,
by wiring federal funds, by direct deposit or by an electronic funds transfer
("EFT").
Orders for the purchase of Class Y shares of the Fund will be confirmed at the
public offering price which is equal to the net asset value per share next
determined after receipt of the order in proper form by the Principal
Underwriter (generally as of the close of the Exchange on that day). Orders
received by broker-dealers or other firms prior to the close of the Exchange and
received by the Principal Underwriter prior to the close of its business day
will be confirmed at the offering price effective as of the close of the
Exchange on that day.
Orders for Class Y shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined
(generally, the next business day's offering price).
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable. Broker-dealers and other financial services
firms are obligated to transmit orders promptly.
The initial purchase amount must be at least $1,000, which may be waived in
certain circumstances. There is no minimum amount for subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free
1-800-343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives to certain broker-dealers whose representatives have sold or are
expected to sell significant amounts of Fund shares. In addition, broker-dealers
may, from time to time, receive additional cash payments. The Principal
Underwriter may also provide written information to broker-dealers with whom it
has dealer agreements that relates to sales incentive campaigns conducted by
such broker-dealers for their representatives as well as financial assistance in
connection with pre-approved seminars, conferences and advertising. No such
programs or additional compensation will be offered to the extent they are
prohibited by the laws of any state or any self-regulatory agency such as the
NASD.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers that satisfy certain criteria
established from time to time by the Principal Underwriter. These conditions
relate to increasing sales of shares of the Keystone funds over specified
periods and certain other factors. Such payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to 0.25% of
the value of shares sold by such dealer.
The 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 broker-dealers pursuant to state
law.
HOW TO REDEEM SHARES
You may redeem Class Y shares of the Fund for cash at their net redemption
value by writing to the Fund, c/o KIRC, and presenting a properly endorsed share
certificate (if certificates have been issued) to the Fund. Your signature(s) on
the written order and certificates must be guaranteed as described below. In
order to redeem by telephone or to engage in telephone transactions generally,
you must complete the authorization in your account application. Proceeds for
shares redeemed on telephonic order will be deposited by wire or EFT only to the
bank account designated in your account application.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds to the broker-dealer placing the order within seven days thereafter.
The Principal Underwriter charges no fee for this service. Your broker-dealer,
however, may charge a service fee.
The redemption value equals the net asset value per share then determined and
may be more or less than your cost depending upon changes in the value of the
Fund's portfolio securities between purchase and redemption.
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 or the wiring or EFT of redemption
proceeds may be delayed, the redemption value will be determined and the
redemption processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after the redemption and prior to the release of
the proceeds, no appreciation or depreciation will occur in the value of the
redeemed shares, and no interest will be paid on the redemption proceeds. If the
payment of a redemption has been delayed, the check will be mailed or the
proceeds wired or sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption 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 or KIRC may waive this
requirement or may require additional documents in certain cases. Currently, the
requirement for a signature guarantee has been waived on redemptions of $50,000
or less when the account address of record has been the same for a minimum
period of 30 days. The Fund and KIRC reserve the right to withdraw this waiver
at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to engage
in telephone transactions generally, you must complete the appropriate sections
of the Fund's application.
In order to insure that instructions received by 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 herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained by writing to KIRC or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange Class Y
shares of the Fund for Class Y shares of certain other Keystone America Funds at
net asset value by calling or writing to KIRC.
The exchange fee is $10. The exchange fee is waived for individual investors
who make an exchange using KARL. The Fund reserves the right to terminate this
exchange offer or to change its terms, including the right to change the fee for
any exchange.
Orders for exchanges received by the Fund prior to 4:00 p.m. eastern time on
any day the funds are open for business will be executed at the respective net
asset values of each fund's Class Y shares determined as of the close of
business that day. Orders for exchanges received after 4:00 p.m. eastern time on
any business day will be executed at the respective net asset values determined
at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange constitutes a sale for federal income tax purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $100 per month or quarter from your bank account or Keystone Liquid
Trust 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 may take up to 30 days.
RETIREMENT PLANS
The Fund has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary-Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans (TSAs),
403(b)(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and
Money Purchase Plans. For details, including fees and application forms,
call toll free 1-800-247-4075 or write to KIRC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when a Systematic Income Plan is opened. Excessive withdrawals may
decrease or deplete the value of your account.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high and
may result in a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and (2) the fund
in which the investment is to be made. Thereafter, on the first day of the
designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any Class Y
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of certain other Keystone America Funds. You may select
this service on your application and indicate the Keystone America Fund (s) into
which distributions are to be invested.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield".
ALL DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
and current yield are computed separately for each class of shares of the Fund.
Total return refers to average annual compounded rates of return over
specified periods determined by comparing the initial amount invested in a
particular class to the ending redeemable value of that amount. The resulting
equation assumes reinvestment of all dividends and distributions and deduction
of the maximum sales charge or applicable contingent deferred sales charge and
all recurring charges, if any, applicable to all shareholder accounts. The
exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc., Standard & Poor's Corporation,
Ibbotson Associates or other industry publications.
FUND SHARES
The Fund issues Class A, B, C and Y shares, which participate proportionately
based on their relative net asset values in dividends and distributions and have
equal voting, liquidation and other rights except that (1) expenses related to
the distribution of Class A, B and C shares or other expenses that the Board of
Trustees may designate as class expenses from time to time, are borne solely by
the relevant class; (2) each class of shares having a Distribution Plan has
exclusive voting rights with respect to its Distribution Plan; (3) each class
has different exchange privileges; and (4) each class generally has a different
designation.
Class A shares bear most of the costs of distribution of such shares through
payment of a front-end sales load while Class B and Class C shares bear such
expenses through a higher annual distribution fee. As a result, expenses
attributable to Class B shares and Class C shares will generally be higher, and
income distributions paid by the Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B and Class C shares.
Class Y shares are not subject to a front-end sales load or a contingent
deferred sales charge and pay no distribution expenses. Therefore, income
distributions paid by the Fund on Class Y shares will be greater than those paid
with respect to Class A, B and C shares.
When issued and paid for, the shares will be fully paid and nonassessable by
the Fund. Class Y shares may be exchanged as explained under "Shareholder
Services," but will have no other preference, conversion, exchange or preemptive
rights. Shares are redeemable, transferable and freely assignable as collateral.
The Fund is authorized to issue additional series or classes of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by series or class. The Fund does not have
annual meetings. The Fund will have special meetings, from time to time, as
required under its Declaration of Trust and under the 1940 Act. As provided in
the Fund's Declaration of Trust, shareholders have the right to remove Trustees
by an affirmative vote of two-thirds of the outstanding shares. A special
meeting of the shareholders will be held when holders of 10% of the outstanding
shares request a meeting for the purpose of removing a Trustee. The Fund is
prepared to assist shareholders in communications with one another for the
purpose of convening such a meeting, as presecribed by Section 16(c) of the 1940
Act.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and the Fund may be subject to the risks associated with the
holding of such property overseas. 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 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 acquired 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 will be 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 may invest in them only if at the time of an investment the
issuer meets the criteria established for commercial paper.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements; i.e., the Fund purchases a
security subject to its obligation to resell and the seller's obligation to
repurchase that security at an agreed upon price and date, such date usually
being not more than seven days from the date of purchase. The resale price is
based on the purchase price plus an agreed upon market rate of interest that is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement imposes an obligation on the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security.
The value of the underlying security is at least equal to the amount of the
agreed upon resale price and marked to market daily. The Fund may enter into
such agreements only with respect to U.S. government securities. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been definitively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. It does not
presently appear possible to eliminate all risks involved in repurchase
agreements. These risks include the possibility of a decline in the market value
of the underlying securities, as well as delay and costs to the Fund in
connection with bankruptcy proceedings. Therefore, it is the policy of the Fund
to enter into repurchase agreements only with large, well-capitalized banks that
are members of the Federal Reserve System and with primary dealers in U.S.
government securities (as designated by the Federal Reserve Board) whose
creditworthiness has been reviewed and found satisfactory by Keystone.
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 United States. While investment in foreign
securities is intended to reduce risk by providing further diversification, such
investments involve sovereign risk in addition to the credit and market risks
normally associated with domestic securities. Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States. Investments in foreign securities may also be
subject to other risks different from those affecting U.S. investments,
including local political or economic developments, expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments and currency blockage (which would prevent cash from being
brought back to the United States). 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. However, no payment or delivery is made by the Fund
until it receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments will be maintained until payment is made.
When issued and delayed delivery agreements are subject to risks from changes
in value based upon changes in the level of interest rates, currency rates and
other market factors, both before and after delivery. The Fund does not accrue
any income on such securities or currencies prior to their delivery. To the
extent the Fund engages in when issued and delayed delivery transactions, it
will do so consistent with its investment objective and policies and not for the
purpose of investment leverage.
SHORT SALES
The Fund may make short sales of securities "against the box." A short sale
involves the borrowing of a security, which must eventually be returned to the
lender. A short sale is "against the box" if, at all times when the short
position is open, the Fund owns the securities sold short or owns an equal
amount of securities convertible into, or exchangeable without further
consideration for, securities identical to the securities sold short. Short
sales against the box are used to defer recognition of gains or losses or in
order to receive a portion of the interest earned by the executing broker from
the proceeds of such sale. The proceeds of a short sale are held by the broker
until the settlement date when the Fund delivers the security or convertible
security to close out its short position. Although prior to such delivery the
Fund will have to pay an amount equal to any dividends paid on the securities
sold short, the Fund will receive the dividends from the securities convertible
into the securities sold short plus a portion of the interest earned from the
proceeds of the short sale. The Fund will not make short sales of securities
subject to outstanding call options written by it. The Fund will segregate the
securities sold short or appropriate convertible securities in a special account
with the Fund's custodian in connection with its short sales "against the box."
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. These securities, which include
bonds, debentures, corporate notes, preferred stocks and other securities, are
securities that the holder can convert into common stock. Convertible securities
rank senior to common stock in a corporation's capital structure and, therefore,
entail less risk than a corporation's common stock. The value of a convertible
security is a function of its investment value (its market worth without a
conversion privilege) and its conversion value (its market worth if exchanged).
If a convertible security's investment value is greater than its conversion
value, its price primarily will reflect its investment value and will tend to
vary inversely with interest rates (the issuer's creditworthiness and other
factors also may affect its value). If a convertible security's conversion value
is greater than its investment value, its price will tend to be higher than its
conversion value and it will tend to fluctuate directly with the price of the
underlying equity security.
DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes, although the Fund generally uses derivatives
primarily as direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options for hedging purposes. Derivatives are a valuable tool which,
when used properly, can provide significant benefit to Fund shareholders.
Keystone is not an aggressive user of derivatives with respect to the Fund.
However, the Fund may take positions in those derivatives that are within its
investment policies if, in Keystone's judgement, this represents an effective
response to current or anticipated market conditions. Keystone's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objective and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures, is provided
later in this section and is provided in the Fund's statement of additional
information. The Fund does not presently engage in the use of swaps.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. No more than 25% of its net assets will be subject to covered 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 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 eligible 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 liquid assets having a value equal to or greater than the exercise
price of the option with its custodian in a segregated account.
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. 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 call and put options.
The Fund would normally purchase call options to hedge against an increase in
the market value of its securities. The Fund will not engage in such
transactions for speculation. The purchase of a call option would entitle the
Fund, in return for the premium paid, to purchase specified securities at a
specified price upon exercise of the option during the option period. The Fund
would ordinarily realize a gain if, during the option period, the value of such
securities exceeds the sum of the exercise price, the premium paid and
transaction costs. Otherwise, the Fund would realize a loss on the purchase of
the call option.
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 until the options expire or are exercised.
The Fund would normally purchase put options to hedge against a decline in the
market value of securities in its portfolio (protective puts) or securities of
the type in which it is permitted to invest. The purchase of a put option would
entitle the Fund, in exchange for the premium paid, to sell specified securities
at a specified price during the option period. The purchase of protective puts
is designed to offset or hedge against a decline in the market value of the
Fund's securities. Gains and losses on the purchase of protective put options
would tend to be offset by countervailing changes in the value of underlying
portfolio securities. Put options may also be purchased by the Fund for the
purpose of affirmatively benefitting from a decline in the price of securities
that the Fund does not own. The Fund would ordinarily realize a gain if, during
the option period, the value of the underlying securities declined below the
exercise price sufficiently to cover the premium and transaction costs.
Otherwise, the Fund would realize a loss on the purchase of the put option.
The Fund may purchase put and call options on securities indices for the same
purposes as the purchase of options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
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 which the Fund will trade are generally listed
on national securities exchanges. Exchanges on which such options currently are
traded are the Chicago Board Options Exchange and the New York, American,
Pacific and Philadelphia Stock Exchanges.
FUTURES TRANSACTIONS
The Fund may enter into futures contracts for the purchase or sale of
securities or currency or futures contracts based on stock indices and write
options on such contracts. The Fund intends to enter into such contracts and
related options for hedging purposes. The Fund may enter into other types of
futures contracts that may become available and relate to the securities held by
the Fund. The Fund will enter into futures contracts in order to hedge against
changes in securities prices. A futures contract is an agreement to buy or sell
securities or currencies at a specified price during a designated month. 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 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 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 would sell futures
contracts in order to offset a possible decline in the value of its securities
or currencies. If a futures contract were purchased by the Fund, the value of
the contract would tend to rise when the value of the underlying securities
increased and to fall when the value of such securities declined. 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 may also purchase put and call options on securities and currency
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 write (sell) put and call options on futures contracts for
hedging purposes. The writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, the Fund becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price.
Conversely, the writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the Fund's assets.
By writing a call option, the Fund becomes obligated, in exchange for the
premium, to sell a futures contract, which may have a value higher than the
exercise price.
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 risk, unanticipated changes in market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone correctly predicts market price 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 positions may be caused by differences
between the futures and securities markets or by differences between the
securities underlying the Fund's futures position and the securities 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. The Fund
may not purchase or sell futures contracts or options on futures, except for
closing purchase or sale transactions, if immediately thereafter the sum of
margin deposits on the Fund's outstanding futures and options positions and
premiums paid for outstanding options on futures would exceed 5% of the market
value of the Fund's total assets. These transactions involve brokerage costs,
require margin deposits and, in the case of contracts and options obligating the
Fund to purchase securities, require the Fund to segregate assets to cover such
contracts and options. In addition, the Fund's activities in futures contracts
may be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.
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 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. The
Fund may also purchase and sell options related to foreign currencies in
connection with hedging strategies.
ZERO COUPON BONDS
A zero coupon (interest) "stripped" bond represents ownership in serially
maturing interest or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. These bonds mature on the payment
dates of the interest on principal which they represent. Each zero coupon bond
entitles the holder to receive a single payment at maturity. There are no
periodic interest payments on a zero coupon bond. Zero coupon bonds are offered
at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights and
privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individually against the issuer and are not required to act in concert with
other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds or
coupon zero coupon bond (either initially or in the secondary market) is treated
as if the buyer had purchased a corporate obligation issued on the purchase date
with an original issue discount equal to the excess of the amount payable at
maturity over the purchase price. The purchaser is required to take into income
each year as ordinary income an allocable portion of such discounts determined
on a "constant yield" method. Any such income increases the holder's tax basis
for the zero coupon bond, and any gain or loss on a sale of the zero coupon
bonds relative to the holder's basis, as so adjusted, is a capital gain or loss.
If the holder owns coupon bonds and coupon zero bonds representing separate
interests in the coupon (interest) payments and the principal payments from the
same underlying issue of securities, a special basis allocation rule (requiring
the aggregate basis to be allocated among the items sold and retained based on
their relative fair market value at the time of sale) may apply to determine the
gain or loss on a sale of any such zero coupon bonds.
If and when the Fund invests in zero coupon bonds, the Fund does not expect to
have enough zero coupon bonds to have a material effect on dividends. The Fund
has undertaken to a state securities authority to disclose that zero coupon
securities pay no interest to holders prior to maturity, and the interest on
these securities is reported as income to the Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income producing securities with cash used to
make such distributions and its current income ultimately may be reduced as a
result.
LOANS OF SECURITIES
The Fund may lend its securities to brokers and dealers or other institutional
borrowers for use in connection with their short sales, arbitrages or other
securities transactions. Such loan transactions afford the Fund an opportunity
to continue to earn income on the securities loaned and at the same time to earn
income on the collateral held by it to secure the loan. Loans of portfolio
securities will be made (if at all) in strict conformity with applicable federal
and state rules and regulations. There may be delays in recovery of loaned
securities or even a loss of rights in collateral should the borrower fail
financially. Therefore, loans will be made only to firms deemed by Keystone to
be of good standing and will not be made unless, in the judgment of Keystone,
the consideration to be earned from such loans justifies the risk.
The Fund understands that it is the current view of the staff of the
Securities and Exchange Commission that it is permitted to engage in loan
transactions only if it meets the following conditions: (1) the Fund must
receive 100% collateral in the form of cash or cash equivalents, e.g., U.S.
Treasury bills or notes, from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities (determined on a daily
basis) exceeds the value of the collateral; (3) the Fund must be able to
terminate the loan, after notice, at any time; (4) the Fund must receive
reasonable interest on the loan or a flat fee from the borrower, as well as
amounts equivalent to any dividends, interest or other distributions on the
securities loaned and any increase in the securities' market values; (5) the
Fund may pay only reasonable custodian fees in connection with the loan; and (6)
voting rights on the securities loaned may pass to the borrower; however, if a
material event affecting the securities occurs, the Fund must be able to
terminate the loan and vote proxies or enter into an alternative arrangement
with the borrower to enable the Fund to vote proxies. Excluding Items (1) and
(2), these procedures may be amended from time to time, as regulatory policies
may permit, by the Fund's Board of Trustees without shareholder approval. Such
loans may not exceed 25% of the Fund's total assets.
<PAGE>
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KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
[logo]KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[recycle logo]
---------------------------------------
KEYSTONE
[graphic omitted]
OMEGA
FUND
---------------------------------------
[logo]
PROSPECTUS AND
APPLICATION
Class Y Shares
<PAGE>
KEYSTONE OMEGA FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE OMEGA FUND
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 10, 1996
This statement of additional information pertains to all classes of
shares of Keystone Omega Fund (the "Fund"). It is not a prospectus, but relates
to, and should be read in conjunction with, either the prospectus offering Class
A, B and C shares dated April 29, 1996 or the separate prospectus offering Class
Y shares, dated December 10, 1996. Copies of each 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.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Restrictions 2
Distributions and Taxes 5
Valuation of Securities 6
Brokerage 7
Sales Charges 9
Distribution Plans 13
Trustees and Officers 17
Investment Management 21
Principal Underwriter 25
Declaration of Trust 27
Standardized Total Return
and Yield Quotations 28
Financial Statements 29
Semi-Annual Financial Statements 30
Additional Information 31
Appendix A-1
<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's investment objective is maximum
capital growth by investing in a varied portfolio consisting primarily of common
stocks and securities convertible into common stocks.
Certain information about the Fund is contained in its prospectuses.
This statement of additional information provides additional information about
the Fund that may be of interest to some investors.
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INVESTMENT RESTRICTIONS
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FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (the
"1940 Act")). Unless otherwise stated, all references to the Fund's assets are
in terms of current market value.
The Fund may not do the following:
(1) purchase securities on margin, provided that the Fund may obtain
such short-term credits as may be necessary for the clearance of purchases and
sales of securities;
(2) make short sales of securities or maintain a short position,
unless, at all times when a short position is open, it owns an equal amount of
such securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short and unless not more than 15% of the Fund's net assets
(taken at market or fair value as determined by the Fund's Board of Trustees) is
held as collateral for such sales at any one time (a reason for making such a
sale would be to defer realization of gain or loss for federal income tax
purposes);
(3) make loans, except by the purchase of a portion of an issue of
bonds, notes, debentures or other obligations publicly distributed or of a type
customarily purchased by financial institutions, or by entering into loan
transactions with respect to portfolio securities not in excess of 25% of the
Fund's total assets (taken at current value) immediately after such transaction;
the Fund will not lend any of its assets to any investment adviser or principal
underwriter for the Fund or to any officer, trustee or employee of either of
them or of the Fund;
(4) borrow, unless, immediately after any such borrowing, such
borrowing and all other such borrowings and other liabilities do not exceed
one-third of the value of the Fund's total assets (including all such
borrowings), taken at market or other fair value;
(5) invest more than 10% of the Fund's total assets (taken at market or
fair value as determined by the Fund's Board of Trustees) in the securities of
any one issuer (except United States ("U.S.") government securities);
(6) purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if such purchase
would cause the Fund's investments in such companies taken at cost to exceed 5%
of the Fund's total assets taken at market value;
(7) purchase or sell real estate or interests in real estate;
(8) purchase or sell commodities or commodity contracts, except that
the Fund may engage in transactions in commodity futures contracts and options
on commodity futures contracts, other than physical commodity futures contracts;
(9) purchase or acquire the securities of any other investment company;
except that it may make such a purchase or acquisition in the open market
involving no commission or profit to a sponsor or dealer (other than the
customary broker's commission); provided that, immediately after such purchase
or acquisition, the Fund and any company or companies controlled by the Fund do
not own in the aggregate:
(a) more than 3% of the total outstanding voting stock of the
acquired company;
(b) securities issued by the acquired company having an aggregate
value in excess of 5% of the value of the total assets of the
Fund; or
(c) securities issued by the acquired company and all other
investment companies having an aggregate value in excess of 10%
of the value of the total assets of the Fund; and provided that,
immediately after such purchase or acquisition, the Fund, other
investment companies having the same investment adviser, and
companies controlled by the Fund and/or such investment companies
do not own more than 10% of the total outstanding voting stock of
any closed-end investment company so purchased or acquired;
(10) purchase or retain the securities of any issuer if those officers
and trustees of the Fund or its investment adviser owning individually more than
one-half of 1% of the securities of such issuer together own more than 5% of the
securities of such issuer;
(11) act as a securities underwriter, or act as a distributor of
securities of which it is the issuer, except that the Fund may issue, sell and
distribute securities of which it is the issuer, including additional shares of
its capital stock, and may act as its own distributor of such securities to the
extent that such action is not in contravention of such rules and regulations as
the Securities and Exchange Commission (the "Commission") may prescribe in
respect thereof, and except that the Fund might be deemed an underwriter within
the meaning of Section 2(11) of the Securities Act of 1933 ("1933 Act") in
making sales of restricted securities;
(12) concentrate its investments in any particular industry.
A borrowing limitation in excess of 5% is generally associated with a
leveraged fund. The Fund anticipates borrowing only for temporary purposes. To
the extent the Fund's total borrowings exceed 5%, no additional investments will
be made until such borrowings are reduced to 5%.
As a diversified investment company, the Fund has undertaken not to
purchase a security if, as a result, more than 10% of the outstanding voting
securities of any single issuer would be held by the Fund or more than 5% of its
total assets would be invested in the securities of any one issuer.
A purchase by the Fund of securities of other investment companies
would result in a layering of expenses such that the Fund's shareholders would
indirectly bear a proportionate share of the expenses of those investment
companies, including operating costs, investment advisory fees and
administrative fees. The Fund does not anticipate purchasing the securities of
other investment companies.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the non-fundamental policies set forth below,
which may be changed without shareholder approval or notification in order to
permit the sale of shares in certain states.
The Fund will not do the following:
(1) pledge, mortgage, or hypothecate its assets, except that the Fund
may pledge not more than one-third of its total assets; provided that the Fund
may make initial and variation margin payments in connection with purchases or
sales of futures contracts or options on futures contracts or forwards or other
similar instruments;
(2) invest in warrants, valued at the lower of cost or market,
exceeding 5%, or, in the case of warrants not listed on the New York or American
Stock Exchanges, 2% of the value (taken at market or fair value as determined by
the Board of Trustees) of the Fund's net assets immediately after the making of
any such investment; warrants acquired in units or attached to securities may be
deemed to be without value;
(3) invest in oil, gas or other mineral leases or exploration programs;
(4) use leverage except for temporary and emergency purposes, and
leverage will not be used generally for making additional investments; and
(5) purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest in real
estate).
Whenever an investment policy or restriction states a maximum
percentage of the Fund's assets that may be invested in any security or other
asset, it is intended that such minimum or maximum percentage limitation be
determined immediately after and as a result of the acquisition of such security
or other asset. Accordingly, any later increase or decrease resulting from a
change in values, net assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
and restrictions.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund will make distributions to its shareholders of dividends from
net investment income and net realized capital gains, if any annually in shares
or, at the option of the shareholder, in cash. Shareholders who have not opted,
prior to the record date for any distribution, tp 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 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 within seven days after
the Fund pays the distribution. Unless the Fund receives instructions to the
contrary from a shareholder before the record date, it will assume that the
shareholder wishes to receive that distribution and future gains and income
distributions in shares. Instructions continue in effect until changed in
writing.
Distributed long-term capital gains are taxable as such to the
shareholder and regardless of how long the Shareholder has held Fund shares. If
such shares are held less than six months and redeemed at a loss, however, the
shareholder will recognize a long-term capital loss on such shares to the extent
of the long-term capital gain distribution received in connection with such
shares. If the net asset value of the Fund's shares is reduced below a
shareholder's cost by a capital gains distribution, such distribution, to the
extent of the reduction, would be a return of investment though taxable as
stated above. Since distributions of capital gains depend upon profits actually
realized from the sale of securities by the Fund, they may or may not occur. The
foregoing comments relating to the taxation of dividends and distributions paid
on the Fund's shares relate solely to federal income taxation. Such dividends
and distributions may also be subject to state and local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) common stock, preferred stock and other equity securities listed on
the New York Stock Exchange (the "Exchange") are valued on the basis of the last
sale price on the Exchange. In the absence of any sales, such securities are
valued at the last bid price;
(2) common stock, preferred stock and other equity securities listed on
other U.S. or foreign exchanges will be valued as described in (1) above using
quotations on the exchange on which the security is most extensively traded;
(3) common stock, preferred stock and other equity securities unlisted
and quoted on the National Market System ("NMS") are valued at the last sale
price, provided a sale has occurred. In the absence of any sales, such
securities are valued at the high or "inside" bid, which is the bid supplied by
the National Association of Securities Dealers Automated Quotation system
("NASDAQ") for securities traded in the over-the-counter market;
(4) common stock, preferred stock and other equity securities quoted on
the NASDAQ system but not listed on NMS are valued at the high or "inside" bid;
(5) common stock, preferred stock and other equity securities not
listed and not quoted on the NASDAQ system and for which over-the-counter market
quotations are readily available are valued at the mean between the current bid
and asked prices for such securities;
(6) non-U.S. common stock, preferred stock and other equity securities
not listed or listed and subject to restrictions on sale are valued at prices
supplied by a dealer selected by Keystone;
(7) bonds, debentures and other debt securities, whether or not listed
on any national securities exchange, are valued at a price supplied by a pricing
service or a bond dealer selected by Keystone;
(8) short-term debt securities maturing in sixty days or less are
valued at amortized cost if their original term to maturity from the date of
purchase was sixty days or less, or by amortizing their value on the sixty-first
day prior to maturity if their term to maturity from the date of purchase
exceeds sixty days, unless the Trustees determine that such valuation does not
represent fair market value;
(9) options, futures contracts and options on futures listed or traded
on a national exchange are valued at the last sale price on such exchange prior
to the time of determining net asset value, or, if no sale is reported, are
valued at the mean between the most recent bid and asked prices;
(10) forward currency contracts are valued at their last sale as
reported by a pricing service and, in the absence of a report, at a value
determined on the basis of the underlying currency at prevailing exchange rates;
(11) securities subject to restrictions on resale are valued at fair
value at least monthly by a pricing service under the direction of the Fund's
Board of Trustees; and
(12) all other assets are valued at fair market value as determined by
or under the direction of the Fund's Board of Trustees.
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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 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 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. Management weighs such considerations 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 its Investment Management Agreement
("Management Agreement") or by Keystone under its Investment Advisory Agreement
("Advisory Agreement"). The cost, value and specific application of such
information are indeterminable and cannot be practicably 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 both its Management Agreement and
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 in order to take
advantage of the lower purchase price available to members of such a group.
Neither Keystone Management, Keystone nor the Fund intends 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. In the event of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the Board of Trustees may change,
modify or eliminate any of the foregoing practices.
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, in other cases, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
Portfolio securities are not purchased from or sold to Keystone
Management, Keystone, the Principal Underwriter, or any of their "affiliated
persons," as defined in the 1940 Act.
For the fiscal years ended December 31, 1993, 1994 and 1995, the Fund
paid $380,450, $592,800 and $735,203, respectively, in brokerage commissions.
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SALES CHARGES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers Class A, B, C and Y shares. Class A shares are offered
with a maximum sales charge of 5.75% payable at the time of purchase ("Front-End
Load Option"). Class B shares purchased on or after June 1, 1995 are subject to
a contingent deferred sales charge ("CDSC") payable upon redemption during the
72-month period following the month of purchase ("Back-End Load Option"). Class
B shares purchased prior to June 1, 1995 are subject to a CDSC upon redemption
within three calendar years after the first year of purchase. Class B shares
purchased on or after June 1, 1995 that have been outstanding eight years
following the month of purchase will automatically convert to Class A shares
without the imposition of a front-end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 that have been outstanding during seven
calendar years will similarly convert to Class A shares. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to Keystone Investor Resource Center, Inc.("KIRC"), the Fund's
transfer and dividend disbursing agent.) Class C shares are sold subject to a
CDSC payable upon redemption within one year after purchase ("Level Load
Option"). Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Principal Underwriter.
Class Y shares are offered at net asset value without a front-end or back-end
sales charge and do not bear any Rule 12b-1 distribution expenses. Class Y
shares are not offered to the general public and are available only to (1)
persons who at or prior to December 31, 1994 owned shares in a mutual fund
advised by Evergreen Asset Management Corp. ("Evergreen Asset") of Purchase, New
York, (2) certain institutional investors and (iii) investment advisory clients
of Capital Management Group of First Union National Bank of North Carolina,
Evergreen Asset or their affiliates.
The prospectus for the Class A, B and C shares contains a general
description of how investors may buy Class A, B and C shares of the Fund as well
as a table of applicable sales charges for Class A shares; a discussion of
reduced sales charges that may apply to subsequent purchases; and a description
of applicable CDSCs. A separate prospectus describes the Class Y shares and
contains a general description of how investors may buy Class Y shares.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (See "Distribution Plans"), a CDSC may be imposed at the time
of redemption of certain Fund shares, as described below. If imposed, the CDSC
is deducted from the redemption proceeds otherwise payable to you and retained
by the Principal Underwriter. See "Calculation of Contingent Deferred Sales
Charge" and "Waiver of Sales Charges" as follows.
CLASS A SHARES
With certain exceptions, purchases of Class A shares (1) in an amount
equal to or exceeding $1,000,000, and/or (2) purchased by a corporate qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA Plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), in either case without a front-end
sales charge, will be subject to a CDSC of 1.00% during the 24-month period
following the date of purchase.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, The
Fund, with certain exceptions, will impose a CDSC as a percentage of net asset
value or net cost of Class B shares redeemed during succeeding twelve-month
periods as follows: 5.00% during the first twelve-month period; 4.00% during the
second twelve-month period; 3.00% during the third twelve-month period; 3.00%
during the fourth twelve-month period; 2.00% during the fifth twelve-month
period, and 1.00% during the sixth twelve-month period. No CDSC is imposed on
amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the
Fund, with certain exceptions, will impose a CDSC of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No CDSC is imposed on amounts redeemed thereafter.
Amounts received by the Principal Underwriter under the Class B
Distribution Plans are reduced by CDSCs retained by the Principal Underwriter.
CLASS C SHARES
With certain exceptions, the Fund will impose a CDSC of 1.00% on Class
C shares redeemed within one year after the date of purchase. No CDSC is imposed
on amounts redeemed thereafter.
CLASS Y SHARES
No CDSC is imposed on the redemption of Class Y shares.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net asset value at the time of purchase of such shares.
No CDSC is imposed when you redeem amounts derived from
(1) increases in the value of your account above the net cost of the Fund shares
due to increases in the net asset value per share of the Fund; (2) certain
shares with respect to which the Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and capital
gains distributions; (3) certain Class A shares held for more than 24 months;
(4) Class B shares held for more than four consecutive calendar years or more
than 72, as the case may be; or (5) Class C shares held for more than one year
from the date of purchase.
Upon request for redemption, shares not subject to a CDSC will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed. There is no CDSC imposed when the shares of a class are exchanged for
the shares of the same class of another Keystone America Fund. Moreover, for the
purpose of computing CDSCs, when shares of one fund are exchanged for shares of
another fund, the date of the purchase of the shares being acquired by exchange
is deemed to be the date shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone Management, Keystone, Keystone Investments, Inc. ("Keystone
Investments"), the Principal Underwriter, and their affiliates and who have been
such for not less than ninety days; (2) a pension and profit-sharing plan
established by such companies, their subsidiaries and affiliates for the benefit
of their Directors, Trustees, officers, full-time employees and sales
representatives; or (3) a registered representative of a firm with a dealer
agreement with the Principal Underwriter; provided, however, that all such sales
are made upon the written assurance that the purchase is made for investment
purposes and that the securities will not be resold except through redemption by
the Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of the Fund by a bank or trust company in a single account in the name
of such bank or trust company as trustee if the initial investment in shares of
the Fund or any Fund in the Keystone Investments Family of Funds purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
If you were a Fund shareholder of record as of May 1, 1987, you have
the perpetual right, so long as you remain a Fund shareholder, to invest and
reinvest in additional Class A shares of the Fund without imposition of a sales
charge or a CDSC.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan, as
a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.5% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Fund's Class A, B and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees"). The Fund's Class Y shares have not
adopted a Distribution Plan and incur no Distribution Plan expenses.
The National Association of Securities Dealers (the "NASD") limits the
amount that the Fund may pay annually in distribution costs for sale of its
shares and shareholder service fees. The NASD limits annual expenditures to
1.00% of the aggregate average daily net asset value of its shares, of which
0.75% may be used to pay such distribution costs and 0.25% may be used to pay
shareholder service fees. The NASD also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales since the
inception of the Distribution Plan, plus interest at the prime rate plus 1% on
such amounts (less any CDSCs paid by shareholders to the Principal Underwriter)
remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to up to 0.25% of the
Fund's average daily net asset value attributable to Class A shares, to finance
any activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at such
intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipients and outstanding on the books of the
Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
Each Class B Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter of the Fund (1)
to enable the Principal Underwriter to pay to others commissions in respect of
Class B shares sold since inception of the Distribution Plans; and (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipients and outstanding on the books of the
Fund for specified periods.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class B share sold. Beginning approximately 12 months after the
purchase of a Class B share, the broker-dealer or other party receives service
fees at an annual rate of 0.25% of the average daily net asset value of such
Class B share maintained by the recipient and outstanding on the books of the
Fund for specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with a Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursement of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by a Class B
Distribution Plan.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, the Principal Underwriter has
sold to a financial institution substantially all of its 12b-1 fee collection
rights and CDSC collection rights in respect of Class B shares sold during the
two-year period commencing approximately June 1, 1995. The Fund has agreed not
to reduce payment of 12b-1 fees in respect of such Class B shares unless it
terminates such shares' Distribution Plan completely. If it terminates such
Distribution Plan, the Fund may be subject to adverse distribution consequences.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter of the Fund (1)
to enable the Principal Underwriter to pay to others commissions in respect of
Class C shares sold since inception of the Distribution Plan; and (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipients and outstanding on the books of the
Fund for specified periods.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately 15 months
after purchase, broker-dealers or others receive a commission at an annual rate
of 0.75% (subject to NASD rules) plus service fees at the annual rate of 0.25%
of the average daily net asset value of each Class C share maintained by the
recipients and outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by a Distribution Plan as
stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Fund's Independent Trustees, or by vote of a majority of the outstanding
voting shares of the respective class of Fund shares. If a Class B Distribution
Plan is terminated, the Principal Underwriter will ask the Independent Trustees
to take whatever action they deem appropriate under the circumstances with
respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent 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 Plans are
expected to benefit the Fund.
During the fiscal year ended December 31, 1995, the Fund paid the
Principal Underwriter $152,234 under its Class A Distribution Plan; $422,149 for
Class B shares sold prior to June 1, 1995 and $57,588 for Class B shares sold on
or after June 1, 1995 under its Class B Distribution Plans; and $113,669 under
its Class C Distribution Plan.
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TRUSTEES AND OFFICERS
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The Trustees and officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President and Chief Executive Officer of
Keystone Investments, Keystone, Keystone Management and Keystone Software,
Inc. ("Keystone Software"); President, Chief Executive Officer and Trustee
or Director of all other funds in the Keystone Investments Family of Funds;
Chairman of the Board and Director of Keystone Institutional Company, Inc.
("Keystone Institutional")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).
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 Director, Coalition of Essential
Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; and former Director, Peoples
Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Trustee, Treasurer, and Chairman
of the Finance Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chairman and President,
Oldways Preservation and Exchange Trust (education); Former Chairman of the
Board, Director, and Executive Vice President, The London Harness Company;
former Managing Partner, Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former Chairman, Gifford, Drescher &
Associates (environmental consulting); and former Director, Keystone
Investments and Keystone.
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman of the Board and Chief
Executive Officer, Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Chairman and Of Counsel,
Keyser, Crowley, Meub, Layden, Kulig & Sullivan P.C.; Member, Governor's
(VT) Council of Economic Advisers; Chairman of the Board and Director,
Central Vermont Public Service Corporation and Lahey Hitchcock Clinic;
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 International, Inc. (executive recruitment);
former Senior Vice President, Boyden International Inc. (executive
recruitment); and Director, Commerce and Industry Association of New
Jersey, 411 International, Inc., and J & M Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman, Environmental Warranty,
Inc. (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.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
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 December 31, 1995, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund.
During the same period, the unaffiliated Trustees received $7,189 in annual
retainers and meeting fees. 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. As of November 30, 1996, the Trustees and officers beneficially owned
less than 1.00% of the Fund's then outstanding Class A, Class B or Class C
shares.
The address of all the Fund's Trustees and officers and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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INVESTMENT MANAGEMENT
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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 and its directors
and principal executive officers have been affiliated with Keystone, a seasoned
investment adviser, for a number of years. Keystone Management also serves as
investment manager to some of the funds in the Keystone America Fund Family and
to certain other funds in the Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to its Management Agreement,
and subject to the supervision of the Fund's Board of Trustees, 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 objectives and restrictions. The Management Agreement stipulates that
Keystone Management shall (i) provide office space and all necessary office
facilities, equipment and personnel in connection with its services under the
Management Agreement and (ii) pay or reimburse the Fund for the compensation of
officers and Trustees of the Fund who are affiliated with the investment manager
as well as pay all expenses of Keystone Management and (iii) pay all expenses of
Keystone Management incurred in connection with the provisions of its services.
The Fund shall bear all other charges and expenses, including, but not
limited to (i) custodian charges and expenses; (ii) bookkeeping and auditors'
charges and expenses; (iii) transfer agent charges and expenses; (iv) fees of
Independent Trustees; (v) brokerage commissions; (vi) brokers' fees and expenses
and issue and transfer taxes; (vii) costs and expenses under the Distribution
Plans; (viii) taxes and trust fees payable to governmental agencies; (ix) the
cost of share certificates; (x) 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; (xi)
expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Portfolio; (xii) expenses of shareholders' and Trustees' meetings; (xiii)
charges and expenses of legal counsel for the Fund and for the Independent
Trustees on matters relating to the Fund; (xiv) charges and expenses of filing
annual and other reports with the SEC and other authorities; and (xi) all
extraordinary charges and expenses of the Fund.
Services currently performed by Keystone Management include (1)
performing research and planning with respect to (a) the Fund's qualification as
a regulated investment company under 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; and (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.
The Fund pays Keystone Management a fee for its services at the annual
rate of:
Management Aggregate Net Asset Value
Fee of the Shares of the Fund
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0.75% of the first $ 250,000,000 plus
0.675% of the next $ 250,000,000 plus
0.60% of the next $ 500,000,000 plus
0.50% of amounts over $1,000,000,000
computed as of the close of business on each business day and payable daily.
The Management Agreement continues in effect from year to year only if
approved at least annually by (i) the Board of Trustees of the Fund or by a vote
of a majority of the outstanding shares, and (ii) by the vote of a majority of
the Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval. The Management Agreement may be terminated, without
penalty, 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 its Management Agreement, Keystone Management has delegated
its investment management functions, except for certain administrative and
management services, to Keystone and has entered into the Advisory Agreement
with Keystone under which Keystone provides investment advisory and management
services to the Fund.
Keystone has provided investment advisory and management services to
investment companies and private accounts since 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.
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 its Management Agreement.
During the fiscal year ended December 31, 1993, the Fund paid or
accrued to Keystone Management investment management and administrative services
fees of $627,879, which represented 0.75% of the Fund's average daily net
assets. Of such amount paid to Keystone Management, $533,697 was paid to
Keystone for its services to the Fund.
During the fiscal year ended December 31, 1994, the Fund paid or
accrued to Keystone Management investment management and administrative services
fees of $924,625, which represented 0.75% of the Fund's average daily net
assets. Of such amount paid to Keystone Management, $785,931 was paid to
Keystone its services to the Fund.
During the fiscal year ended December 31, 1995, the Fund paid or
accrued to Keystone Management investment management and administrative services
fees of $1,280,436, which represented 0.75% of the Fund's average daily net
assets. Of such amount paid to Keystone Management, $1,088,371 was paid to
Keystone for its services to the Fund.
Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant to
which Keystone Investments will be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC")(the
"Merger"). The surviving corporation will assume the name "Keystone Investments,
Inc." Subject to a number of conditions being met, it is currently anticipated
that the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.
If consummated, the proposed Merger will be deemed to cause an
assignment, within the meaning of the 1940 Act, of both the Management Agreement
and the Advisory Agreement. Consequently, the completion of the Merger is
contingent upon, among other things, the approval of the Fund's shareholders of
a new investment advisory 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 fees payable thereunder, that are substantively
identical to those in the current agreements.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with the Principal Underwriter, a Delaware
corporation and wholly-owned subsidiary of Keystone.
The Principal Underwriter, as agent, currently has the right to obtain
subscriptions for and to sell shares of the Fund to the public. In so doing, the
Principal Underwriter may retain and employ representatives to promote
distribution of the shares and may obtain orders from brokers, dealers or
others, acting as principals, for sales of shares. No such representative,
dealer or broker has any authority to act as agent for the Fund. The Principal
Underwriter has not undertaken to buy or to find purchasers for any specific
number of shares. The Principal Underwriter may receive payments from the Fund
pursuant to the Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Fund's Declaration of Trust, By-Laws, current prospectuses and
statement of additional information. All orders are subject to acceptance by the
Fund, and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Underwriting Agreements, the Fund is not liable to
anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the Commission
as well as auditing and filing fees in connection with the registration of its
shares under the various state "blue-sky" laws.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software and Fund data files.
The Principal Underwriter has agreed that it will, in all respects,
duly conform to all state and federal laws applicable to the sale of the shares.
The Principal Underwriter has also agreed that it will indemnify and hold
harmless the Fund, and each person who has been, is or may be a Trustee or
officer of the Fund, against expenses reasonably incurred by any of them in
connection with any claim, action, suit or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
The Underwriting Agreements will remain in effect as long as its terms
and continuance are approved at least annually by a majority of (i) the
Independent Trustees cast in person at a meeting called for that purpose, and by
(ii) by vote of a majority of Trustees, or by vote of a majority of outstanding
shares.
The Underwriting Agreement may be terminated by the Fund, without
penalty, on 60 days' written notice by the Fund's Board of Trustees or by a vote
of a majority of the Fund's outstanding shares. The Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
In addition to an assignment of both 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 Agreements. 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 EFD 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 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.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated September 21, 1994 (the "Declaration of Trust"). The
Fund is similar in most respects to a business corporation. The principal
distinction between the Fund and a corporation relates to the shareholder
liability described below. A copy of the Declaration of Trust is on file as an
exhibit to the Registration Statement of which this statement of additional
information is a part. This summary is qualified in its entirety by reference to
the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues Class A, B, C and Y shares, but may issue additional classes or series of
shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
the Fund's Declaration of Trust (1) contains an express disclaimer of
shareholder liability for obligations of the Fund and (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 the Fund's property for any shareholder held personally
liable for the obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. Classes of shares of the
Fund have equal voting rights except that each class of shares has exclusive
voting rights with respect to its respective Distribution Plan. No amendment may
be made to the Declaration of Trust which adversely affects any class of shares
without the approval of a majority of the shares of that class. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees to
be elected at a meeting and, in such event, the holders of the remaining 50% or
less of the shares voting will not be able to elect any Trustees.
After an initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by Shareholders at which time the Trustees then
in office will call a shareholders meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, if applicable, and the
maximum sales charge deducted and all recurring fees charged to all shareholder
accounts are deducted. The ending redeemable value assumes a complete redemption
at the end of the relevant periods.
The Class A cumulative total return figures for the one, five and ten
year periods ended December 31, 1995 were 29.07% (including CDSCs), 133.46% and
319.63%, respectively. The Class A one year, five year and ten year average
annual total returns were 29.07%, 18.48% and 15.42%, respectively (including
CDSCs).
The Class B cumulative total return figure for the one year period
ended December 31, 1995 was 31.70% (including CDSCs). The Class B average annual
total returns for the one year period ended December 31, 1995 and for the period
from August 2, 1993 (date of initial public offering) through December 31, 1995
were 31.70% and 13.31% (including CDSCs), respectively.
The Class C cumulative total return figure for the one year period
ended December 31, 1995 was 35.62% (including CDSCs). The Class C average annual
total returns for the one year period ended December 31, 1995 and for the period
from August 2, 1993 (date of initial public offering) through December 31, 1995
were 35.62% and 14.41% including CDSCs), respectively.
Information on Class Y shares is not yet available.
- --------------------------------------------------------------------------------
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 December 31, 1995;
Financial Highlights for each of the years in the ten-year period ended
December 31, 1995 for Class A shares;
Financial Highlights for each of the years in the two-year period ended
December 31, 1995 and the period from August 2, 1993 through December
31, 1993 for Class B and Class C shares;
Statement of Assets and Liabilities as of December 31, 1995;
Statement of Operations for the year ended December 31, 1995;
Statements of Changes in Net Assets for each of the years in the
two-year period ended December 31, 1995;
Notes to Financial Statements; and
Independent Auditors' Report dated January 23, 1996.
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SEMI-ANNUAL FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Semi-Annual Report, as filed with the
Commission:
Schedule of Investments as of June 30, 1996;
Financial Highlights for each of the years in the five-year period
ended December 31, 1995 and the six-month period ended June 30, 1996
for Class A shares;
Financial Highlights for each of the years in the two-year period ended
December 31, 1995 and the period from August 2, 1993 through December
31, 1995 and the six-month period ended June 30, 1996 for Class B and
Class C shares;
Statement of Assets and Liabilities as of June 30, 1996;
Statement of Operations for the six months ended June 30, 1996;
Statements of Changes in Net Assets for the six months ended June 30,
1996 and the year ended December 31, 1995; and
Notes to Financial Statements.
A copy of the Fund's Annual and Semi-Annual Reports 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.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, locate at 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian ("Custodian") of all securities
and cash of the Fund. The Custodian, 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, serve as independent auditors for the Fund.
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.
As of November 30, 1996, The Keystone Group, Savings & Investment Trust
#21936, C/O ADQ, Inc., ATTN: Paula Werkowski, P.O. Box 8992, Waltham,
Massachusetts 02254-8992, owned of record 6.27% of the outstanding Class A
shares of the Fund.
As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Drive East, 3rd Floor, Jacksonville, Florida 32246-6484, owned of record
8.94% of the outstanding Class B shares of the Fund.
As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Drive East, 3rd Floor, Jacksonville, Florida 32246-6484, owned of record
30.09% of the outstanding Class C shares of the Fund.
Except as otherwise stated in its prospectuses or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectuses without shareholder approval, including the right to impose or
change fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectuses, 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 prospectuses and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Fund Family consists of the
following Funds having the various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
KEYSTONE BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of principal.
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of four separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term capital growth by
investing primarily in equity securities with small market capitalizations.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND - Seeks long-term capital growth
by investing primarily in equity securities.
<PAGE>
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APPENDIX
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COMMON AND PREFERRED STOCK RATINGS
A. S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others, S&P
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. S&P rankings,
however, do not reflect all of the factors, tangible or intangible, that bear on
stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per-share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
B. MOODY'S COMMON STOCK RANKINGS
Moody's presents a concise statement of the important characteristics
of a company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten year comparative
statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. aa: An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
3. a: An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater then in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. baa: An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be questionable
over any great length of time.
5. ba: An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. b: An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
7. caa: An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. ca: An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
ZERO COUPON BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Coupon zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond. Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon bonds have the right upon default
on the underlying coupon obligations or principal obligations to proceed
directly and individually against the issuer and are not required to act in
concert with other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or coupon zero coupon bonds (either initially or in the secondary market)
is treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
coupon bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market values at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds items.
PAYMENT-IN-KIND SECURITIES
Payment-in-kind (PIK) securities pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
issuer's option to pay in additional securities typically ranges from one to six
years, compared to an average maturity for all PIK securities of eleven years.
Call protection and sinking fund features are comparable to those offered on
traditional debt issues.
PIKs, like zero coupon bonds, are designated to give an issuer
flexibility in managing cash flow. Several PIKs are senior debt. In other cases,
where PIKs are subordinated, most senior lenders view them as equity
equivalents.
An advantage of PIKs for the issuer - as with zero coupon securities -
is that interest payments are automatically compounded (reinvested) at the
stated coupon rate, which is not the case with cash-paying securities. However,
PIKs are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest).
Their price is expected to reflect an amount representing accreted interest
since the last payment. PIKs generally trade at higher yields than comparable
cash-paying securities of the same issuer. Their premium yield is the result of
the lesser desirability of non-cash interest, the more limited audience for
non-cash paying securities, and the fact that many PIKs have been issued to
equity investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount, because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital. Sixty-eight percent of the PIK debentures issued prior
to 1987 have already been redeemed, and approximately 35% of the over $10
billion PIK debentures issued through year-end 1988 have been retired.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper and obligations issued or guaranteed by the United States
("U.S.") government, its agencies or instrumentalities, some of which may be
subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1, A-2 or higher by Standard & Poor's Corporation ("S&P"), PRIME-1 or PRIME-2
by Moody's Investors Service, Inc. ("Moody's"), or, if not rated, will be issued
by companies which have an outstanding debt issue rated at the time of purchase
Aaa, Aa or A by Moody's, or AAA, AA or A by S&P, or will be determined by
Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of PRIME-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance on
debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
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 United States banks, including their branches abroad, and of
U.S. branches of foreign banks, which are members of the Federal Reserve System
or the Federal Deposit Insurance Corporation, and have at least $1 billion in
deposits as of the date of their most recently published financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and 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 non U.S. branches of foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' 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.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States government include
a variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association ("GNMA"). 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. GNMA securities include GNMA mortgage pass-through certificates. Such
securities are supported by the full faith and credit of the U.S. government
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, 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 securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. 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 under standards established by the Board of Directors that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
FOREIGN SECURITIES
The Fund may invest in securities principally traded in securities
markets outside the United States. While investment in foreign securities is
intended to reduce risk by providing further diversification, such investments
involve sovereign risk in addition to the credit and market risks normally
associated with domestic securities. Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid or more volatile than securities of U.S. companies,
and foreign brokerage commissions and custodian fees are generally higher than
in the United States. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets,
imposition of withholding taxes on dividend or interest payments and currency
blockage (which would prevent cash from being brought back to the United
States). These risks are carefully considered by Keystone prior to the purchase
of these securities.
OPTIONS TRANSACTIONS
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options with respect to up to
25% of its net assets. A call option gives the purchaser of the option the right
to buy, and the writer the obligation to sell, the underlying security at the
exercise price during the option period. Conversely, a put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the exercise price during the option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker/dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time that the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges") to secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is required to deposit in escrow
the underlying security or other assets in accordance with the rules of the OCC,
an institution created to interpose itself between buyers and sellers of
options. Technically, the OCC assumes the order side of every purchase and sale
transaction on an Exchange and by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times 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. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available, the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
WRITING COVERED OPTIONS
The Fund writes only covered options. Call and put options written by
the Fund will normally have expiration dates of not more than nine months from
the date written. The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities at the times the
options are written.
Unless the option has been exercised, the Fund may close out an option
it has written by effecting a closing purchase transaction, whereby it purchases
an option covering the same underlying security and having the same exercise
price and expiration date (of the same series) as the one it has written. If the
Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. 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.
Because the Fund intends to qualify as a regulated investment company
under the Internal Revenue Code, the extent to which the Fund may write covered
call options and enter into so-called "straddle" transactions involving put and
call options may be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation ("OCC"),
a clearing corporation which assumes responsibility for the completion of
options transactions.
PURCHASING PUT AND CALL OPTIONS
The Fund can close out a put option it has purchased by effecting a
closing sale transaction; for example, the Fund may close out a put option it
has purchased by selling a put option. If, however, a secondary market does not
exist at a time the Fund wishes to effect a closing sale transaction, the Fund
will have to exercise the option to realize any profit.
The Fund may also purchase call options for the purpose of offsetting
previously written call options of the same series.
The Fund's ability to purchase put and call options may be limited by
the Internal Revenue Code's requirements for qualification as a regulated
investment company.
OPTIONS TRADING MARKETS
Options which the Fund will trade are generally listed on 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.
The staff of the Commission currently is of the view that the premiums
which 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 fundamental investment restriction
prohibiting it from investing more than 10% of its total assets (taken at
current value) in any combination of illiquid assets and securities. The Fund
intends to request that the Commission staff reconsider its current view. It is
the intention of the Fund to comply with the staff's current position and the
outcome of such reconsideration.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with its Custodian liquid assets maturing no
later than those which would be deliverable in the event of an assignment of an
exercise notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options
should they commence trading on any Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or 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 closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or brokers to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options issued
as a result of trades would generally continue to be exercisable in accordance
with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into futures contracts as a hedge against
changes in prevailing levels of interest or currency exchange rates to seek
relative stability of principal and to establish more definitely the effective
return on securities held or intended to be acquired by the Fund or as a hedge
against changes in the prices of securities or currencies held by the Fund or to
be acquired by the Fund. The Fund's hedging may include sales of futures as an
offset against the effect of expected increases in interest or currency exchange
rates or securities prices and purchases of futures as an offset against the
effect of expected declines in interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions which are related to
currency 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. The Fund has represented
to the Commodity Futures Trading Commission (CFTC) that the Fund will not enter
into any futures contract or related option if, as a result, the sum of initial
margin deposits on futures contracts and options and premiums paid for options
the Fund purchased, after taking in account unrealized profits and losses on
such contracts, would exceed 5% of the Fund's total assets.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the United States are: The Board of
Trade of the City of Chicago; the Chicago Mercantile Exchange; the International
Monetary Market (a division of the Chicago Mercantile Exchange); the New York
Futures Exchange; and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant (Broker) effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
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
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
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.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency or other financial
futures contracts is analogous 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 and other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on financial futures contracts may be
purchased to hedge against an interest rate increase or a market advance when
the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described 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 and premiums on options on 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 the 90% 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.
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. In addition
futures contract transactions involve the remote risk that a party will be
unable to fulfill its obligation and that the amount of the obligation will be
beyond the ability of the clearing broker to satisfy. 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 option 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 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 foreign securities. 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 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 income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark, Swiss and French Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the United States and Europe. On the Philadelphia
Stock Exchange, for example, contracts for half the size of the corresponding
futures contracts on the Chicago Board Options Exchange are traded with up to
nine months maturity in marks, sterling, yen, Swiss francs 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
analogous 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.
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.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone 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.
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 controls 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>
EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor
who is the holder or buyer of an outstanding option or futures contract
liquidates his position as a holder or seller by selling an option of the same
series as the option previously purchased or futures contract identical to the
futures contract previously purchased. (Such sale does not result in the
investor assuming the obligations of a writer or seller).
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security or
holds on a share for share basis a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills, or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
brokerdealer carrying the writer's position or holds on a share for share basis
a put on the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or,
if less than the exercise price of the put written, the difference is maintained
by the writer in cash, U.S. Treasury bills, or other high grade, short term
obligations in a segregated account with the writer's broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange, in the
Netherlands, the European Options Exchange, and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for option transactions are published in various
financial publications.
COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago; Chicago Mercantile Exchange,
International Monetary Market; (a division of the Chicago Mercantile Exchange);
the Kansas City Board of Trade; and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlying security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the put
at the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. The Fund will sell ("write") and purchase puts
only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer and
writer or their agents in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise price and expiration date.
STOCK INDEX. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the common stocks so included.
UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
KEYSTONE OMEGA FUND
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24 (a). Financial Statements
The following financial statements of the Fund are incorporated by
reference to the Registrant's Annual and Semi-Annual Reports previously filed
with the Commission:
Annual Financial Statements
---------------------------
Schedule of Investments as of December 31, 1995;
Financial Highlights for each of the years in the ten-year period ended
December 31, 1995 for Class A shares;
Financial Highlights for each of the years in the two-year period ended
December 31, 1995 and the period from August 2, 1993 through December 31,
1993 for Class B and Class C shares;
Statement of Assets and Liabilities as of December 31, 1995;
Statement of Operations for the year ended December 31, 1995;
Statements of Changes in Net Assets for each of the years in the two-year
period ended December 31, 1995;
Notes to Financial Statements; and
Independent Auditors' Report dated January 23, 1996.
Semi-Annual Financial Statements
--------------------------------
Schedule of Investments as of June 30, 1996;
Financial Highlights for each of the years in the five-year period ended
December 31, 1995 and the six-month period ended June 30, 1996 for
Class A shares;
Financial Highlights for each of the years in the two-year period ended
December 31, 1995 and the period from August 2, 1993 through December 31,
1995 and the six-month period ended June 30, 1996 for Class B and Class
C shares;
Statement of Assets and Liabilities as of June 30, 1996;
Statement of Operations for the six months ended June 30, 1996;
Statements of Changes in Net Assets for the six months ended June 30, 1996
and the year ended December 31, 1995; and
Notes to Financial Statements.
All other schedules are omitted as the required information is inapplicable.
<PAGE>
Item 24(b) Exhibits
(1) Registrant's Declaration of Trust(1)
(2) By-Laws(1)
(3) Not applicable.
(4) (A) Declaration of Trust, as amended Articles III, V VI and VIII(1)
(B) By-Laws, Article 2(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) Form of Principal Underwriting Agreement for Registrant's
Class Y shares(3)
(B) Forms of Principal Underwriting Agreements for Registrant's
Class A, B and C shares, between Registrant and Keystone
Investment Distributors Company(2)
(C) Forms of Dealer Agreements for Class A, B and C shares used by
Keystone Investment Distributors Company(2)
(7) Not applicable.
(8) (A) Form of Custodian, Fund Accounting and Recordkeeping Agreement
between Registrant and State Street Bank and Trust Company (1)
(B) Form of Election to become a party to the Master Transfer and
Recordkeeping Agreement with Keystone Investor Resource
Center, Inc.(2)
(9) Not applicable.
(10) Opinion and consent of counsel(2)
(11) Consent of the Independent Auditors'(3)
(12) Not applicable.
(13) Not applicable.
(14) Forms of model plans used in the establishment of retirement
plans, in connection with which Registrant offers its
securities(4)
(15) Forms of Registrant's Class A, Class B and Class
C Distribution Plans(2)
(16) Schedules for the computation of total return(3)
(17) Financial data schedules(3)
(18) Registrant's Multiple Class Plan, as amended(3)
(19) Powers of Attorney.
(1) Filed with Post-Effective Amendment No. 24 ("Post-Effective Amendment
No. 24") to Registration Statement No. 2-28183/811-1600 (the "Registration
Statement") and incorporated by reference herein.
(2) Filed with Post-Effective Amendment No. 26 to the Registration Statement.
(3) Filed herewith.
(4) Filed with Post-Effective Amendment No. 66 to Registration Statement
No. 2-10527/811-96.
<PAGE>
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 November 30, 1996
- -------------- --------------------------------
Class A 1,257
Class B 10,228
Class C 6,288
Item 27. Indemnification
Provisions for the indemnification of Registrant's Trustees and
officers are contained in Article VIII of Registrant's form of Declaration of
Trust, a copy of which was filed with Post-Effective Amendment No. 24 as
Exhibit 24(b)(1) and is incorporated by reference herein.
Provisions for the indemnification of Keystone Investment Distributors
Company, Registrant's principal underwriter, are contained in Section 9 of
the Principal Underwriting Agreements between Registrant and Keystone Investment
Distributors Company, copies of which were filed with Post-Effective Amendment
No. 26 as Exhibit 24(b)(6)(A).
Provisions for the indemnification of Keystone Management, Inc. and
Keystone Investment Management Company, Registrant's investment manager and
adviser, respectively, are contained in Section 6 of the Investment Management
Agreement between Registrant and Keystone Management, Inc. and, a copy of the
form of which was filed with Post-Effective Amendment No. 24 and is incorporated
by reference herein.
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.
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.
Former 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. Medvedeff 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 (formerly named Keystone
Distributors, Inc.), the Registrant's principal underwriter, also acts
as principal underwriter for the following entities:
Keystone Quality Bond 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 Growth and Income Fund (S-1)
Keystone Small Company Growth Fund (S-4)
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Balanced Fund II
Keystone Capital Preservation and Income Fund
Keystone Emerging Markets Fund
Keystone Fund for Total Return
Keystone Fund of the Americas
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 its 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 in The
Commonwealth of Massachusetts, on the 10th day of December, 1996.
KEYSTONE OMEGA FUND
/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 10th 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 J. 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 Declaration of Trust, as amended(3)
2 By-Laws(3)
5 Form of Investment Management Agreement(3)
Form of Investment Advisory Agreement(3)
6 (a) Form of Principal Underwriting Agreement for
Class Y(6)
(b) Principal Underwriting Agreements for
Class A, B and C(5)
(c) Dealer Agreements for Class A, B and C(5)
8 (a) Custodian, Fund Accounting and
Recordkeeping Agreement(3)
(b) Form of Election to become a party to
the Master Transfer and Recordkeeping
Agreement(3)
10 Opinion and Consent of Counsel(4)
11 Independent Auditors' Consent(6)
14 Model Retirement Plans(1)
15 Class A, B and C Distribution Plans(5)
16 Performance Data Schedules(6)
17 Financial Data Schedules(6)
18 Form of Multiple Class Plan, as amended(6)
19 Powers of Attorney(6)
- ----------------------------------
1 Incorporated herein by reference to Post-Effective Amendment
No. 66 to Registration Statement for Keystone Balanced Fund (K-1)
(File No. 2-10527/811-96).
2 Incorporated herein by reference to Post-Effective Amendment
No. 25 to the Registration Statement.
3 Incorporated herein by reference to Post-Effective Amendment
No. 24 to the Registration Statement.
4 Incorporated herein by reference to Rule 24f-2 Notice filed
January 25, 1996 to the Registration Statement.
5 Incorporated by reference to Post-Effective Amendment No. 26 to the
Registration Statement.
6 Filed herewith.
<PAGE>
EXHIBIT 99.6(A)
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS Y SHARES OF
KEYSTONE OMEGA FUND
AGREEMENT made this 10th day of December, 1996 by and between Keystone
Omega Fund, a Massachusetts business trust ("Fund"), and Keystone Investment
Distributors Company, a Delaware corporation ("Principal Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a principal
underwriter of the Class Y shares of beneficial interest of the Fund ("Shares")
as an independent contractor upon the terms and conditions hereinafter set
forth. Except as the Fund may from time to time agree, Principal Underwriter
will act as agent for the Fund and not as principal.
2. Principal Underwriter will use its best efforts to find purchasers
for the Shares, to promote distribution of the Shares and may obtain orders from
brokers, dealers or other persons for sales of Shares to them. No such brokers,
dealers or other persons shall have any authority to act as agent for the Fund;
such brokers, dealers or other persons shall act only as principal in the sale
of Shares.
3. Sales of Shares by Principal Underwriter shall be at the applicable
public offering price determined in the manner set forth in the prospectus
and/or statement of additional information of the Fund current at the time of
the Fund's acceptance of the order for Shares; provided that Principal
Underwriter also shall have the right to sell Shares at net asset value, if such
sale is permissible under and consistent with applicable statutes, rules,
regulations and orders. All orders shall be subject to acceptance by the Fund,
and the Fund reserves the right, in its sole discretion, to reject any order
received. The Fund shall not be liable to anyone for failure to accept any
order.
4. On all sales of Shares, the Fund shall receive the current net asset
value.
5. Payment to the Fund for Shares shall be in New York or Boston
Clearing House funds received by Principal Underwriter within ten (10) business
days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such ten-day period, the Fund reserves the right,
without further notice, forthwith to cancel its acceptance of any such order.
The Fund shall pay such issue taxes as may be required by law in connection with
the issuance of the Shares.
6. Principal Underwriter shall not make in connection with any sale or
solicitation of a sale of the Shares any representations concerning the Shares
except those contained in the then current prospectus and/or statement of
additional information covering the Shares and in printed information approved
by the Fund as information supplemental to such prospectus and statement of
additional information. Copies of the then current prospectus and statement of
additional information and any such printed supplemental information will be
supplied by the Fund to Principal Underwriter in reasonable quantities upon
request.
7. Principal Underwriter agrees to comply with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
8. The Fund appoints Principal Underwriter as its agent to accept
orders for redemptions and repurchases of Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
9. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon
a) any untrue statement or alleged untrue statement of a
material fact contained in the Fund's registration statement,
prospectus or statement of additional information (including amendments
and supplements thereto), or
b) any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement, prospectus
or statement of additional information necessary to make the statements
therein not misleading, provided, however, that insofar as losses,
claims, damages, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or
omission made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration statement, prospectus or statement of additional
information, such indemnification is not applicable. In no case shall
the Fund indemnify the Principal Underwriter or its controlling person
as to any amounts incurred for any liability arising out of or based
upon any action for which the Principal Underwriter, its officers and
Directors or any controlling person would otherwise be subject to
liability by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of the
reckless disregard of its obligations and duties under this Agreement.
10. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers, Directors and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Directors or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
a) may be based upon any wrongful act by the Principal
Underwriter or any of its employees or representatives, or
b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information (including
amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
or confirmed in writing to the Fund by the Principal Underwriter.
11. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by Principal
Underwriter for the purpose of qualifying the Shares for sale under the
so-called "blue sky" laws of any state or for registering Shares under the 1933
Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). Principal
Underwriter shall bear the expense of preparing, printing and distributing
advertising, sales literature, prospectuses and statements of additional
information. The Fund shall bear the expense of registering Shares under the
1933 Act and the Fund under the 1940 Act, qualifying Shares for sale under the
so-called "blue sky" laws of any state, the preparation and printing of
prospectuses, statements of additional information and reports required to be
filed with the Securities and Exchange Commission and other authorities, the
preparation, printing and mailing of prospectuses and statements of additional
information to shareholders of the Fund, and the direct expenses of the issuance
of Shares.
12. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated or continued as provided below, shall expire after two
years. This Agreement shall continue in effect after such term if its
continuance is specifically approved by a majority of the Trustees of the Fund
and a majority of any 12b-1 Trustees referred to in any 12b-1 Plan of the Fund
("Rule 12b-1 Trustees") at least annually in accordance with the 1940 Act and
the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of any Rule 12b-1 Trustees or by a vote of a
majority of the Fund's outstanding Shares on not more than sixty (60) days
written notice to any other party to the Agreement; and shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
13. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE OMEGA FUND
By: ---------------------------
Rosemary D. Van Antwerp
Senior Vice President and
Secretary
KEYSTONE INVESTMENT DISTRIBUTORS
COMPANY
By: ---------------------------
Ralph J. Spuehler, Jr.
President
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Omega Fund
We consent to the use of our report dated January 23, 1996 incorporated
by reference herin and to the references to our firm under the caption
"FINANCIAL HIGHLIGHTS" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
December 9, 1996
<PAGE>
<TABLE>
<CAPTION>
KOF CLASS A MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
28-Jun-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.75% LOAD -2.70% 14.91% 38.55% 11.48% 96.38% 14.45% 267.59% 13.90%
no load -2.80% 3.24% 21.92% 47.00% 13.70% 108.36% 15.81% 290.01% 14.58%
Beg dates 31-May-96 29-Dec-95 30-Jun-95 30-Jun-93 30-Jun-93 28-Jun-91 28-Jun-91 30-Jun-86 30-Jun-86
Beg Value (LOAD) 137,934 129,870 109,969 91,210 91,210 64,350 64,350 34,378 34,378
Beg Value (no load) 130,003 122,403 103,646 85,965 85,965 60,650 60,650 32,401 32,401
End Value 126,369 126,369 126,369 126,369 126,369 126,369 126,369 126,369 126,369
TIME 3 5 10
INCEPTION DATE 31-Dec-77
<PAGE>
<CAPTION>
KOF CLASS B MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
28-Jun-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
with cdsc N/A -1.90% 16.80% 39.05% 11.98% NA NA NA NA
W/O CDSC -2.88% 2.78% 20.80% 42.05% 12.80% NA NA NA NA
Beg dates 31-May-96 29-Dec-95 30-Jun-95 02-Aug-93 02-Aug-93 02-Aug-93 02-Aug-93 02-Aug-93 02-Aug-93
Beg Value (no load) 14,626 13,821 11,759 10,000 10,000 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 14,205 14,205 14,205 14,205 14,205 14,205 14,205 14,205 14,205
End Value (with cdsc) 13,558 13,734 13,905 13,905 14,105 14104.6990896777 14,205 14204.6990896777
beg nav 18.40 19.10 17.71 17.29 17.29 17.29 17.29 17.29 17.29
end nav 17.87 17.87 17.87 17.87 17.87 17.87 17.87 17.87 17.87
shares originally
purchased 794.89 723.61 663.97 578.37 578.37 578.37 578.37 578.37 578.37
5% cdsc thru 31-Jul-94
TIME 4% cdsc thru 31-Jul-95 2.91388888888889 2.91388888888889 2.91388888888889
INCEPTION DATE 02-Aug-93 3% cdsc effect. 31-Jul-97 31-Dec-96
2% cdsc effect. 31-Jul-98
1% cdsc effect. 31-Jul-99
<PAGE>
<CAPTION>
KOF CLASS C MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
28-Jun-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
with cdsc N/A 1.84% 20.76% 42.22% 12.85% 42.22% 12.85% NA NA
W/O CDSC -2.88% 2.77% 20.76% 42.22% 12.85% 42.22% 12.85% NA NA
Beg dates 31-May-96 29-Dec-95 30-Jun-95 02-Aug-93 02-Aug-93 02-Aug-93 02-Aug-93 02-Aug-93 02-Aug-93
Beg Value (no load) 14,644 13,839 11,777 10,000 10,000 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 14,222 14,222 14,222 14,222 14,222 14,222 14,222 14,222 14,222
End Value (with cdsc) 14,093 14,222 14,222 14,222 14,222 4222.4907766314 14,222 14222.4907766314
beg nav 18.43 19.13 17.74 17.29 17.29 17.29 17.29 17.29 17.29
end nav 17.90 17.90 17.9 17.9 17.9 17.9 17.9 17.9 17.9
shares originally
purchased 794.55 723.41 663.88 578.37 578.37 578.37 578.37 578.37 578.37
TIME 2.913888888888888889 2.913888888888888889 2.913888888888888889
INCEPTION DATE 02-Aug-93 1% cdsc effect. 01-Jan-96 31-Dec-96
1% cdsc thru date^
Compound Return Time Period: BEGINNING Dec-95
</TABLE>
<PAGE>
EXHIBIT 99.18
MULTIPLE CLASS PLAN FOR KEYSTONE OMEGA FUND
Keystone Omega Fund (the "Fund") currently offers four classes of shares with
the following class provisions and current offering and exchange
characteristics. Additional classes of shares (such classes being shares having
characteristics referred to in Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act")), when created, may have characteristics that
differ from those described.
I. CLASSES
A. Class A Shares
1. Class A Shares have a distribution plan adopted pursuant to Rule
12b-1 under the 1940 Act (a "12b-1 Distribution Plan") and/or a
shareholder services plan. The plans provide for annual payments of
distribution and/or shareholder services fees that are based on a
percentage of average daily net assets of Class A shares, as
described in the Fund's current prospectus.
2. Class A Shares are offered with a front-end sales load, except that
purchases of Class A Shares made under certain circumstances are not
subject to the front-end load or may be subject to a contingent
deferred sales charge ("CDSC"), as described in the Fund's current
prospectus.
3. Shareholders may exchange Class A Shares of the Fund for Class A
Shares of any other fund described in the Fund's prospectus.
B. Class B Shares
1. Class B Shares have adopted a 12b-1 Distribution Plan and/or a
shareholder services plan. The plans provide for annual payments of
distribution and/or shareholder services fees that are based on a
percentage of average daily net assets of Class B shares, as
described in the Fund's current prospectus.
2. Class B Shares are offered at net asset value without a front-end
sales load, but may be subject to a CDSC as described in the Fund's
current prospectus.
3. Class B Shares automatically convert to Class A Shares without a
sales load or exchange fee after designated periods.
4. Shareholders may exchange Class B Shares of the Fund for Class B
Shares of any other fund described in the Fund's prospectus.
C. Class C Shares
1. Class C Shares have adopted a 12b-1 Distribution Plan and/or a
shareholder services plan. The plans provide for annual payments of
distribution and/or shareholder services fees that are based on a
percentage of average daily net assets of Class C shares, as
described in the Fund's current prospectus.
2. Class C Shares are offered at net asset value without a front-end
sales load, but may be subject to a CDSC as described in the Fund's
current prospectus.
3. Shareholders may exchange Class C Shares of the Fund for Class C
Shares of any other fund described in the Fund's prospectus.
D. Class Y Shares
1. Class Y Shares have no distribution or shareholder services plans.
2. Class Y Shares are offered at net asset value without a front-end
sales load or CDSC.
3. Shareholders may exchange Class Y Shares of the Fund for Class Y
Shares of any other fund described in the Fund's prospectus.
II. CLASS EXPENSES
Each class bears the expenses of its 12b-1 Distribution Plan and/or
shareholder services plan. There currently are no other class specific
expenses.
III. EXPENSE ALLOCATION METHOD
All income, realized and unrealized capital gains and losses and
expenses not assigned to a class will be allocated to each class based
on the relative net asset value of each class.
IV. VOTING RIGHTS
A. Each class will have exclusive voting rights on any matter submitted to
its shareholders that relates solely to its class arrangement.
B. Each class will have separate voting rights on any matter submitted to
shareholders where the interests of one class differ from the interests
of any other class.
C. In all other respects, each class has the same rights and obligations
as each other class.
V. EXPENSE WAIVERS OR REIMBURSEMENTS
Any expense waivers or reimbursements will be in compliance with Rule 18f-3
issued under the 1940 Act.
Exhibit 99.19
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 OMEGA FUND CLASS A
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 225,357,258
<INVESTMENTS-AT-VALUE> 252,159,162
<RECEIVABLES> 1,901,766
<ASSETS-OTHER> 46,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 254,107,535
<PAYABLE-FOR-SECURITIES> 547,715
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 157,595
<TOTAL-LIABILITIES> 705,310
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 118,909,325
<SHARES-COMMON-STOCK> 8,286,847
<SHARES-COMMON-PRIOR> 6,907,644
<ACCUMULATED-NII-CURRENT> 306,868
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,882,714
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,644,932
<NET-ASSETS> 152,743,839
<DIVIDEND-INCOME> 517,242
<INTEREST-INCOME> 241,774
<OTHER-INCOME> 0
<EXPENSES-NET> (994,472)
<NET-INVESTMENT-INCOME> (235,456)
<REALIZED-GAINS-CURRENT> 15,981,982
<APPREC-INCREASE-CURRENT> (3,950,388)
<NET-CHANGE-FROM-OPS> 11,796,138
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (12,256,195)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,147,730
<NUMBER-OF-SHARES-REDEEMED> (1,376,015)
<SHARES-REINVESTED> 607,488
<NET-CHANGE-IN-ASSETS> 17,653,250
<ACCUMULATED-NII-PRIOR> 542,324
<ACCUMULATED-GAINS-PRIOR> 5,156,927
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (522,761)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,006,504)
<AVERAGE-NET-ASSETS> 141,174,757
<PER-SHARE-NAV-BEGIN> 19.56
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 0.70
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.78)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.43
<EXPENSE-RATIO> 1.43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<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> 102
<NAME> KEYSTONE OMEGA FUND CLASS B
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 225,357,258
<INVESTMENTS-AT-VALUE> 252,159,162
<RECEIVABLES> 1,901,766
<ASSETS-OTHER> 46,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 254,107,535
<PAYABLE-FOR-SECURITIES> 547,715
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 157,595
<TOTAL-LIABILITIES> 705,310
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,551,713
<SHARES-COMMON-STOCK> 4,624,132
<SHARES-COMMON-PRIOR> 3,751,051
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (895,938)
<ACCUMULATED-NET-GAINS> 1,174,364
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,820,685
<NET-ASSETS> 82,650,824
<DIVIDEND-INCOME> 286,047
<INTEREST-INCOME> 135,821
<OTHER-INCOME> 0
<EXPENSES-NET> (891,425)
<NET-INVESTMENT-INCOME> (469,557)
<REALIZED-GAINS-CURRENT> 8,967,887
<APPREC-INCREASE-CURRENT> (6,310,808)
<NET-CHANGE-FROM-OPS> 2,187,522
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (7,395,517)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 985,123
<NUMBER-OF-SHARES-REDEEMED> (496,921)
<SHARES-REINVESTED> 384,879
<NET-CHANGE-IN-ASSETS> 11,024,305
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (426,381)
<OVERDIST-NET-GAINS-PRIOR> (398,006)
<GROSS-ADVISORY-FEES> (291,650)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (898,130)
<AVERAGE-NET-ASSETS> 78,670,771
<PER-SHARE-NAV-BEGIN> 19.10
<PER-SHARE-NII> (0.08)
<PER-SHARE-GAIN-APPREC> 0.63
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.78)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.87
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<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> 103
<NAME> KEYSTONE OMEGA FUND CLASS C
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 225,357,258
<INVESTMENTS-AT-VALUE> 252,159,162
<RECEIVABLES> 1,901,766
<ASSETS-OTHER> 46,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 254,107,535
<PAYABLE-FOR-SECURITIES> 547,715
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 157,595
<TOTAL-LIABILITIES> 705,310
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,709,152
<SHARES-COMMON-STOCK> 1,005,821
<SHARES-COMMON-PRIOR> 730,073
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (213,600)
<ACCUMULATED-NET-GAINS> 175,723
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 336,287
<NET-ASSETS> 18,007,562
<DIVIDEND-INCOME> 59,545
<INTEREST-INCOME> 28,219
<OTHER-INCOME> 0
<EXPENSES-NET> (185,421)
<NET-INVESTMENT-INCOME> (97,657)
<REALIZED-GAINS-CURRENT> 1,859,039
<APPREC-INCREASE-CURRENT> (1,319,161)
<NET-CHANGE-FROM-OPS> 442,221
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1,549,997)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 294,931
<NUMBER-OF-SHARES-REDEEMED> (97,981)
<SHARES-REINVESTED> 78,798
<NET-CHANGE-IN-ASSETS> 4,046,280
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (115,943)
<OVERDIST-NET-GAINS-PRIOR> (133,320)
<GROSS-ADVISORY-FEES> (60,529)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (186,812)
<AVERAGE-NET-ASSETS> 16,321,148
<PER-SHARE-NAV-BEGIN> 19.13
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 0.60
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.78)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.90
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>