<PAGE>
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JUNE 28, 1994
PROSPECTUS SUPPLEMENTED OCTOBER 21, 1994
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KEYSTONE PRECIOUS METALS HOLDINGS, INC.
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
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Keystone Precious Metals Holdings, Inc. (the "Fund") is a mutual fund that
seeks long-term capital appreciation while protecting the purchasing power of
shareholders' capital. Obtaining current income is a secondary objective.
The Fund invests primarily in common stocks of established companies
directly or indirectly engaged in mining, processing or dealing in gold or other
precious metals and minerals.
Your purchase payment is fully invested. There is no sales charge when you
buy the Fund's shares. The Fund may, however, impose a deferred sales charge,
which declines from 4% to 1%, if you redeem your shares within four calendar
years of purchase.
The Fund has adopted a Distribution Plan (the "Distribution Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") under
which it bears some of the costs of selling its shares to the public.
This prospectus sets forth concisely the information about the Fund that
you should know before investing. Please read it and retain it for future
reference.
Additional information about the Fund is contained in a statement of
additional information dated June 28, 1994 and supplemented September 12, 1994,
which has been filed with the Securities and Exchange Commission and is
incorporated by reference into this prospectus. For a free copy, or for other
information about the Fund, write to the address or call the telephone number
listed above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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TABLE OF CONTENTS
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Page Page
<S> <C> <S> <C>
Fee Table .................................. 2 How to Buy Shares ...................... 9
Financial Highlights ....................... 3 Distribution Plan ...................... 10
Fund Description ........................... 4 How to Redeem Shares ................... 12
Fund Objectives and Policies ............... 4 Shareholder Services ................... 14
Investment Restrictions .................... 5 Performance Data ....................... 15
Risk Factors ............................... 5 Fund Shares ............................ 15
Pricing Shares ............................. 6 Additional Information ................. 15
Dividends and Taxes ........................ 6 Additional Investment Information ..... (i)
Fund Management and Expenses ............... 7
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<PAGE>
FEE TABLE
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
The purpose of the fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plan"; and "Shareholder Services."
SHAREHOLDER TRANSACTION EXPENSES
Contingent Deferred Sales Charge\1/ .................... 4.00%
(as a percentage of the lesser of total
cost or net asset value of shares redeemed)
Exchange Fee\2/ ....................................... $10.00
(per exchange)
ANNUAL FUND OPERATING EXPENSES\3/
(as a percentage of average net assets)
Management Fee ......................................... 0.69%
12b-1 Fee\4/ ........................................... 0.94%
Other Expenses ......................................... 0.71%
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Total Fund Operating Expenses .......................... 2.34%
=====
EXAMPLE\5/
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption
at the end of each period: ............. $64.00 $93.00 $125.00 $268.00
You would pay the following expenses
on the same investment, assuming no
redemption: ............................ $24.00 $73.00 $125.00 $268.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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(1) The deferred sales charge declines from 4% to 1% of amounts redeemed within
four calendar years after purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
(2) There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services".)
(3) Expense ratios are for the Fund's fiscal year ended February 28, 1994.
(4) The 12b-1 fee represents, on a financial statement basis, the net
percentage attributable to 12b-1 expenses for the fiscal year ended February
28, 1994 after deduction from gross 12b-1 expenses of deferred sales charges
recovered by the Fund during such year. Long-term shareholders may pay more
than the economic equivalent of the maximum front end sales charge permitted
by rules adopted by the National Association of Securities Dealers, Inc.
("NASD"). For a further description of the 12b-1 expenses, see the
"Distribution Plan" section of this prospectus.
(5) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
PER SHARE INCOME AND CAPITAL CHANGES
(For a share outstanding throughout the year)
The following table contains significant financial information with respect
to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. The table has been taken from the Fund's Annual Report and
should be read in conjunction with the Fund's financial statements and related
notes, which also appear, together with the auditors' report, in the Fund's
Annual Report. The Fund's financial statements, related notes, and auditors'
report are included in the statement of additional information. Additional
information about the Fund's performance is contained in its Annual Report,
which will be made available upon request and without charge.
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YEAR ENDED
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FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28,
1994<F1> 1993<F1> 1992<F1> 1991<F1> 1990<F1> 1989<F1> 1988<F1> 1987 1986 1985
--------- -------- -------- -------- -------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $14.38 $15.37 $14.22 $19.15 $16.82 $15.50 $17.31 $12.80 $12.21 $21.37
Income From Investment
Operations
Investment Income
(Loss) -- Net ....... (0.17) (0.12) (0.02) -0- 0.06 0.05 (0.01) 0.25 0.34 0.41
Realized Gains
(Losses) on 10.88 (0.76) 1.30 (4.61) 2.27 1.59 (0.17) 4.85 1.10 (8.23)
Net Commissions Paid
on Fund
Share Sales <F2> ..... -0- -0- -0- -0- -0- -0- -0- (0.14) (0.11) (0.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment
Operations .......... 10.71 (0.88) 1.28 (4.61) 2.33 1.64 (0.18) 4.96 1.33 (7.86)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from
Investment Income --
Net ................. -0- -0- -0- (0.06) -0- (0.12) (0.41) (0.37) (0.29) (0.63)
Distributions in
Excess of Investment
Income -- Net <F3> ... -0- (0.11) (0.13) (0.26) -0- -0- -0- -0- -0- -0-
Distributions from
Realized Capital
Gains -- Net ........ -0- -0- -0- -0- -0- (0.20) (1.22) (0.08) (0.45) (0.67)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions .. -0- (0.11) (0.13) (0.32) -0- (0.32) (1.63) (0.45) (0.74) (1.30)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End
of Year ............. $25.09 $14.38 $15.37 $14.22 $19.15 $16.82 $15.50 $17.31 $12.80 $12.21
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN <F4> ..... 74.48% (5.74%) 9.07% (24.37%) 13.85% 10.64% (2.86%) 40.12% 10.72% (38.82%)
RATIOS/SUPPLEMENTAL DATA
Ratios to Average Net Assets:
Operating and
Management Expenses . 2.34% 2.83% 2.70% 2.76% 2.20% 1.68% 1.84% 1.41% 1.44% 1.47%
Investment Income
(Loss) -- Net ....... (0.75%) (0.86%) (0.14%) (0.02%) 0.32% 0.28% (0.05%) 1.98% 3.17% 2.51%
Portfolio Turnover
Rate ................ 73% 58% 53% 68% 95% 82% 62% 89% 42% 27%
Net Assets, End of
Period (thousands) .. $200,489 $114,364 $131,356 $150,200 $195,837 $222,079 $222,646 $98,433 $63,929 $41,468
<FN>
<F1>Calculation based on average shares outstanding.
<F2>Prior to June 30, 1987, net commissions paid on new sales of shares under the Fund's Rule 12b-1 Distribution Plan had been
treated for both financial statement and tax purposes as capital charges. On June 11, 1987, the Securities and Exchange
Commission adopted a rule which required for financial statements for the periods ended on or after June 30, 1987, that net
commissions paid under Rule 12b-1 Distribution Plans be treated as operating expenses rather than capital charges.
Accordingly, beginning with the year ended February 29, 1988, the Fund's financial statements reflect 12b-1 Distribution Plan
expenses (i.e., shareholder service fees plus commissions paid net of deferred sales charges received by the Fund) as a
component of net investment income.
<F3>Effective March 1, 1993 the Fund adopted Statement of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies. As a result, distribution
amounts exceeding book basis net investment income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of net investment income." Similarly, capital gain distributions in excess of book basis capital
gains (or tax basis capital gains on a temporary basis) are presented as "Distributions in excess of realized capital gains."
For the fiscal years ended February 28, 1993, February 29, 1992, and February 28, 1991, distributions in excess of book basis
net income were charged to paid-in capital.
<F4>Excluding applicable sales charges.
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FUND DESCRIPTION
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The Fund (formerly Precious Metals Holdings, Inc.) is an open-end,
diversified management investment company, commonly known as a mutual fund. The
Fund was incorporated in Delaware in 1972 and began operating in 1974. In 1984,
the Fund became a member of the Keystone Group of Mutual Funds. The Fund is one
of thirty-one funds managed or advised by Keystone Custodian Funds, Inc.
("Keystone"), the Fund's investment adviser.
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FUND OBJECTIVES AND POLICIES
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The Fund's primary investment objective is to provide shareholders with
long-term capital appreciation and with protection of the purchasing power of
their capital. Obtaining current income is a secondary objective.
The Fund pursues its objectives by investing in common stocks of companies
that are engaged in, or which receive at least half of their revenue from other
companies engaged in, mining, processing or dealing in gold or other precious
metals and minerals, such as silver, platinum, palladium and diamonds. A company
will be considered engaged in a business or an activity if it derives at least
50% of its assets, revenues and/or operating earnings from that business or
activity. The Fund's policy is to invest at least 80% of its assets in such
securities. However, when deemed appropriate by the Fund's investment adviser,
the Fund may invest up to 100% of its assets in cash, cash equivalents and
United States ("U.S.") government securities and repurchase agreements for
temporary, defensive purposes. The Fund may not change this policy or its
objectives without the approval of a majority of the Fund's outstanding shares.
The Fund "concentrates" (for purposes of the 1940 Act) its assets in
securities related to mining, processing or dealing in gold or other precious
metals and minerals referred to above, which means that at least 25% of its
assets will be invested in the securities of these industries.
Currently, the Fund also has a policy, which it may change without the
approval of a majority of the Fund's outstanding shares, of investing a
substantial part of its assets in companies or foreign issuers that operate in
the Republic of South Africa, the principal location of the known free-world
gold ore reserves. The Fund generally makes such investments by purchasing
American Depositary Receipts, which are certificates issued by U.S. banks
representing the right to receive securities of foreign issuers deposited in
those banks.
While the Fund does not invest directly in precious metals and minerals, it
may invest up to 25% of its total assets in common or preferred stock of
wholly-owned subsidiaries that do make such investments. Investments in metals
and minerals do not generate yields, but a subsidiary may realize capital gains
from the sale of metals and minerals and pay dividends to the Fund from such
gains. Precious Metals (Bermuda) Ltd. is the Fund's only subsidiary at present.
In addition to the investments mentioned above, the Fund may write covered
call options and purchase call options to close out existing positions and
employ new investment techniques involving such options.
The Fund may also enter into reverse repurchase agreements and firm
commitment agreements for securities and currencies; enter into currency and
other financial futures contracts and engage in related options transactions for
hedging purposes and not for speculation; employ new investment techniques with
respect to such futures contracts and related options; invest in obligations
denominated in foreign currencies; and warrants.
The Fund may invest in restricted securities, including securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933
Act"). Generally, Rule 144A establishes a safe harbor from the registration
requirements of the 1933 Act for resales by large institutional investors of
securities not publicly traded in the U.S. The Fund intends to purchase Rule
144A securities when such securities present an attractive investment
opportunity and otherwise meet the Fund's selection criteria. Keystone and/or
Harbor Capital determines the liquidity of the Fund's Rule 144A securities in
accordance with guidelines adopted by the Board of Directors.
At the present time, the Fund cannot accurately predict exactly how the
market for Rule 144A securities will develop. A Rule 144A security that was
readily marketable upon purchase may subsequently become illiquid. In such an
event, the Board of Directors will consider what action, if any, is appropriate.
For further information about the types of investments and investment
techniques available to the Fund, including the risks associated therewith, see
the section of this prospectus entitled "Additional Investment Information" and
the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its
investment objectives since there is uncertainty in every investment.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions set forth below, which
may not be changed without the approval of a majority of the Fund's outstanding
shares. These restrictions and certain other fundamental restrictions are set
forth in the statement of additional information.
The Fund may not do the following: (1) invest more than 5% of its total
assets in the securities of any one issuer (other than U.S. government
securities and its instrumentalities and securities of one or more domestic or
foreign wholly owned subsidiaries); (2) borrow money, except that the Fund may
(a) borrow money from banks for emergency or extraordinary purposes in aggregate
amounts up to 5% of its net assets, and (b) enter into reverse repurchase
agreements; and (3) pledge more than 15% of its net assets to secure borrowings.
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.
As a matter of practice, the Fund treats reverse repurchase agreements as
borrowings subject to the limitations of the 1940 Act. As a matter of practice,
the Fund does not pledge its assets except in the course of portfolio trading.
For further information about reverse repurchase agreements, see the section of
this prospectus entitled "Additional Investment Information."
Although not fundamental restrictions or policies requiring a shareholders'
vote to change, the Fund has undertaken to a state securities authority that, so
long as the state authority requires and shares of the Fund are registered for
sale in that state, the Fund will limit its purchase of warrants to 5% of net
assets, of which 2% may be warrants not listed on the New York or American Stock
Exchange.
The Fund may, not withstanding any other investment policy or restriction,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Fund. The Fund does not currently
intend to implement this policy and would do so only if the Directors were to
determine such action to be in the best interest of the Fund and its
shareholders. Furthermore, the Directors will not authorize implementation of
this policy so as long as the Fund's shares are registered for sale in Germany,
and German law prohibits such investment. In the event of such implementation,
the Fund will comply with such requirements as to written notice to shareholders
as are then in effect.
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RISK FACTORS
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The Fund's investments in foreign securities involve special risks
including the following: (1) there may be less public information available
about foreign companies than is available about U.S. companies; (2) foreign
companies are not generally subject to the uniform accounting, auditing and
financial reporting standards and practices applicable to U.S. companies; (3)
foreign stock markets have less volume than the U.S. markets, and the securities
of some foreign companies are less liquid and more volatile than the securities
of comparable U.S. companies; (4) there may be less governmental regulation of
stock exchanges, brokers, listed companies and banks in foreign countries than
in the U.S.; (5) the Fund may incur fees on currency exchanges when it changes
investments from one country to another; (6) the Fund's foreign investments
could be affected by expropriation, confiscatory taxation, nationalization of
bank deposits, establishment of exchange controls, political or social
instability or diplomatic developments; and (7) fluctuations in foreign exchange
rates will affect the value of the Fund's portfolio securities, the value of
dividends and interest earned, gains and losses realized on the sale of
securities, net investment income and unrealized appreciation or depreciation of
investments.
Furthermore, the profits of the companies in which the Fund invests, and
thus the value of the Fund's securities, are directly affected by the price of
gold. The price of gold, in turn, is subject to dramatic upward and downward
movements, often over short periods of time, and is affected by, among other
things, industrial and commercial demand, investment and speculation, the
monetary and fiscal policies of central banks, governments and their agencies,
including gold auctions conducted by the U.S. Treasury Department and the
International Monetary Fund, and changes in international balances of payments
and governmental responses to them, including currency devaluations and exchange
controls.
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PRICING SHARES
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The net asset value of a Fund share is computed each day on which the New
York Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing the Fund's
shares) except on days when changes in the value of the Fund's securities do not
affect the current net asset value of its shares. The Exchange is currently
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share is arrived at by determining the value of all of the Fund's
assets, subtracting all liabilities and dividing the result by the number of
shares outstanding.
Generally speaking, all investments other than short-term instruments are
valued at market value or, where market quotations are not readily available,
and, in the case of the Fund's investment in any subsidiary, at fair value as
determined in good faith by the Fund's Board of Directors.
The Fund values short-term instruments with maturities of sixty days or
less at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; short-term instruments maturing in more than sixty days for
which market quotations are readily available are valued at current market
value; and short-term instruments maturing in more than sixty days when
purchased which are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; and in any case reflects fair value as determined by the
Fund's Board of Directors. For further discussion regarding the pricing of
shares, see the "Valuation of Securities" section of the statement of additional
information.
DIVIDENDS AND TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code. The Fund qualifies if, among
other things, it distributes to its shareholders at least 90% of its net
investment income for its fiscal year. The Fund also intends to make timely
distributions, if necessary, sufficient in amount to avoid the nondeductible 4%
excise tax imposed on a regulated investment company to the extent that it fails
to distribute, with respect to each calendar year, at least 98% of its ordinary
income for such calendar year and 98% of its net capital gains for the one-year
period ending on October 31 of such calendar year. Any such taxable
distributions would be (1) declared by December 31 to shareholders of record in
December, (2) paid by the following January 31, and (3) includable in the
taxable income of shareholders for the year in which such distributions were
declared. If the Fund qualifies and if it distributes all of its net investment
income and net capital gains, if any, to shareholders, it will be relieved of
any federal income tax liability. The Fund distributes all its net income to its
shareholders by the 15th day of April and October each year and its net capital
gains, if any, at least annually.
Commissions paid by the Fund on new sales of shares under the Fund's
Distribution Plan (see "Distribution Plan") and deferred sales charge receipts
are treated as capital charges and capital credits, respectively, in determining
net investment income for tax purposes. For financial statement purposes,
however, these expenses and receipts are treated as operating expenses and
expense offsets. As a result, the amount of dividend distributions required to
satisfy the requirements of the Internal Revenue Code might exceed net
investment income for financial statement purposes, resulting in a portion of
such dividends being a distribution in excess of net investment income for
financial statement purposes, but not for tax purposes. Total investment return
has been unaffected by both treatments.
A portion of the Fund's dividends may qualify for the corporate dividends
received deduction.
Fund distributions are payable in shares of the Fund or, at the
shareholder's option, in cash. Income dividends and net short-term gains
distributions are taxable as ordinary income, and net long-term gains are
taxable as capital gains regardless of how long Fund shares have been held.
However, if Fund shares held for less than six months are sold at a loss, such
loss will be treated for tax purposes as a long-term capital loss to the extent
of any long-term capital gains dividend received. Dividends and distributions
may also be subject to state and local taxes. The Fund advises its shareholders
annually as to the federal tax status of all distributions made during the year.
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FUND MANAGEMENT AND EXPENSES
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BOARD OF DIRECTORS
Under Delaware law, the Fund's Board of Directors has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Fund's Board of Directors, Keystone, located at
200 Berkeley Street, Boston, Massachusetts 02116-5034, serves as investment
adviser to the Fund and is responsible for the overall management of the Fund's
business and affairs.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("Keystone
Group"), 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Group is a corporation privately owned by members of management of
Keystone and its affiliates. The shares of Keystone Group common stock
beneficially owned by management are held in a number of voting trusts, the
trustees of which are George S. Bissell, Albert H. Elfner, III, Roger T.
Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group provides
accounting, bookkeeping, legal, personnel and general corporate services to
Keystone Management, Inc., Keystone, their affiliates and the Keystone Group of
Mutual Funds.
Pursuant to its Investment Advisory Agreement, with Keystone (the "Advisory
Agreement") the Fund pays Keystone a fee for its services at the annual rate of:
3/4 of 1% of the first $100,000,000, plus
5/8 of 1% of the next $100,000,000, plus
1/2 of 1% of amounts over $200,000,000.
The fee is somewhat higher than fees paid by non-gold funds because of the
higher costs involved in managing a portfolio of predominantly international
securities. The fee is reduced, however, by the amount of any compensation
Keystone receives from the Fund's subsidiary.
The Advisory Agreement continues in effect from year to year only so long
as such continuance is specifically approved at least annually by the Fund's
Board of Directors or by vote of a majority of the outstanding shares of the
Fund. In either case, the terms of the Advisory Agreement and continuance
thereof must be approved by the vote of a majority of Independent Directors in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated, without penalty, on 60 days' written
notice by the Fund, or by a vote of a majority of outstanding shares of the
Fund. Keystone may terminate the Advisory Agreement, without penalty, on 90
days' written notice to the Fund. The Advisory Agreement will terminate
automatically upon its assignment.
SUB-ADVISER
Pursuant to the terms of the Advisory Agreement, Keystone has entered into
a Sub-Advisory Agreement (the "Sub-Advisory Agreement") with Harbor Capital
Management Company, Inc. ("Harbor Capital") to provide the Fund, its
subsidiaries and Keystone with investment research, advice and supervision and
recommendations concerning investments in securities, precious metals and
minerals.
Harbor Capital, 125 High Street, Boston, Massachusetts 02110, is an
investment management firm which has been providing counsel both to individuals
and institutions, including endowment funds, foundations and pension and
profit-sharing trusts, since 1979. For its services under the Sub-Advisory
Agreement, Harbor Capital receives a fee generally equal to 50% of the amount
remaining from Keystone's management fee after the deduction of certain
expenses, but, in any event, not less than 70% of Keystone's fee on the first
$50.1 million of the consolidated average daily net assets of the Fund and its
subsidiary, 40% of Keystone's fee on the next $20 million, 10% of Keystone's fee
on the next $50 million, and 17.5% of Keystone's fee on assets that exceed
$120.1 million, the total not to exceed 90% of Keystone's fee. For further
discussion regarding fees paid to Harbor Capital for its services, see the "Fund
Management and Discussion" section of the statement of additional information.
During the fiscal year ended February 28, 1994, the Fund paid or accrued
management fees of $1,189,670 to Keystone, which represented 0.69% of the Fund's
average net assets. Keystone paid or accrued a sub-advisory fee of $404,777 to
Harbor Capital for the year ended February 28, 1994.
For the fiscal year ended February 28, 1994, the Fund paid 2.34% of its
average net assets in expenses.
During the fiscal year ended February 28, 1994, the Fund paid or accrued
$27,774 to Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer
and dividend disbursing agent, and Keystone Group, as reimbursement for the cost
of certain accounting services. During the year ended February 28, 1994,
$820,771 was paid or accrued to KIRC for shareholder services. KIRC is a
wholly-owned subsidiary of Keystone.
PORTFOLIO MANAGERS
Frederick G. P. Thorne has been the Fund's co-manager for 20 years. Mr.
Thorne has been President and a Managing Director of Harbor Capital for 15
years.
Malcolm Pirnie, III has been the Fund's co-manager for 15 years. Mr. Pirnie
has been a Managing Director of Harbor Capital for 15 years.
SECURITIES TRANSACTIONS
The Fund's Adviser and Sub-Adviser select broker-dealers to execute
transactions subject to the receipt of best execution. When selecting
broker-dealers to execute portfolio transactions for the Fund, they may follow a
policy of considering as a factor the number of shares of the Fund sold by such
companies. In addition, broker-dealers executing portfolio transactions may,
from time to time, be affiliated with the Fund, Keystone, Harbor Capital, the
Fund's Principal Underwriter or their affiliates.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended February 28,
1994 and February 28, 1993 were 73% and 58%, respectively.
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HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Shares of the Fund may be purchased from any broker-dealer that has a
selling agreement with Keystone Distributors, Inc. ("KDI"), the Fund's principal
underwriter ("Principal Underwriter"). KDI, a wholly-owned subsidiary of
Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
You may open an account for the purchase of shares of the Fund by mailing
to the Fund, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121, a
completed account application and a check payable to the Fund. You may also open
an account by telephoning 1-800-343-2898 to obtain the number of an account to
which you can wire or electronically transfer funds and then send in a completed
account application. Subsequent investments in Fund shares in any amount may be
made by check, by wiring Federal funds or by electronic funds transfer ("EFT").
The Fund's shares are sold at the net asset value per share next computed
after the Fund receives the purchase order. The initial purchase must be at
least $1,000 except for purchases by participants in certain retirement plans
for which the minimum is waived. There is no minimum for subsequent purchases.
Purchase payments are fully invested at net asset value. There are no sales
charges on purchases of Fund shares at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE
With certain exceptions, when shares are redeemed within four calendar
years after their purchase, a deferred sales charge may be imposed at rates
ranging from a maximum of 4% of amounts redeemed during the calendar year of
purchase to 1% of amounts redeemed during the third calendar year after the year
of purchase. No deferred sales charge is imposed on amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to the shareholder. Prior to July 8, 1992, the Fund retained
the contingent deferred sales charge. Since July 8, 1992, the contingent
deferred sales charge attributable to shares purchased prior to January 1, 1992
has been retained by the Fund, and the contingent deferred sales charge
attributable to shares purchased after January 1, 1992 is, to the extent
permitted by the NASD, paid to KDI. For the fiscal year ended February 28, 1994,
the Fund recovered $124,209 in deferred sales charges.
The contingent deferred sales charge is a declining percentage of the
lesser of (1) the net asset value of the shares redeemed or (2) the total cost
of such shares. No contingent deferred sales charge is imposed when the
shareholder redeems amounts derived from (1) increases in the value of his
account above the total cost of such shares due to increases in the net asset
value per share of the Fund; (2) certain shares with respect to which the Fund
did not pay a commission on issuance, including shares acquired through
reinvestment of dividend income and capital gains distributions; or (3) shares
held in all or part of more than four consecutive calendar years.
In determining whether a contingent deferred sales charge is payable and,
if so, the percentage charge applicable, it is assumed that shares held the
longest are the first to be redeemed. No deferred sales charge is payable on
exchanges of shares between the Keystone Group of Funds that have adopted
Distribution Plans pursuant to Rule 12b-1 under the 1940 Act. When shares of one
such fund have been exchanged for shares of another such fund, for purposes of
any future contingent deferred sales charge, the calendar year of the purchase
of the shares of the fund exchanged into is assumed to be the year shares
tendered for exchange were originally purchased.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employment Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; or (5) automatic withdrawals
under an automatic withdrawal plan of up to 1% per month of the shareholder's
initial account balance.
WAIVER OF DEFERRED SALES CHARGES
Shares also may be sold, to the extent permitted by applicable law, at net
asset value without the payment of commissions or the imposition of a deferred
sales charge to (1) certain officers, Directors, Trustees and employees of the
Fund, Keystone and certain of their affiliates; (2) registered representatives
of firms with dealer agreements with KDI; and (3) a bank or trust company acting
as trustee for a single account.
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DISTRIBUTION PLAN
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The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted on November 20, 1984 pursuant to Rule 12b-1 under the 1940 Act. The
Fund's Distribution Plan provides that the Fund may expend up to 0.3125%
quarterly (approximately 1.25% annually) of the average daily net asset value of
its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. NASD rules limit such annual expenditures to 1% of
which 0.75% may be used to pay such distribution costs and 0.25% may be used to
pay shareholder service fees. The aggregate amount that the Fund may pay for
such distribution costs is limited to 6.25% of gross share sales since the
inception of the Fund's Distribution Plan plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges paid by
shareholders to KDI).
Amounts paid under the Distribution Plan are paid to the Fund's Principal
Underwriter, currently KDI (1) as commissions for Fund shares sold under the
Distribution Plan, all or any part of which commissions may be reallowed by KDI
to others, and (2) to enable KDI to pay such others shareholder service fees in
respect of shares sold by them after inception of the Distribution Plan and
remaining outstanding on the Fund's books for specified periods. Amounts paid or
accrued to KDI under (1) and (2) in the aggregate may not exceed the annual
limitation referred to above.
In connection with the Distribution Plan, and subject to the limitations
discussed above, Fund shares are offered for sale at net asset value without any
initial sales charge, and KDI currently pays commissions to others in accordance
with the following schedule:
KDI PAYS
SELLING
BROKER-
AMOUNT OF SALE DEALERS
Less than $100,000 4.0%
$100,000-$249,999 2.0%
$250,000-$499,999 1.0%
Over $500,000 0.5%
In addition, the Fund pays KDI amounts sufficient for KDI to pay others a
service fee at a rate of 0.25% per annum of the net asset value of the shares
sold by such others and remaining outstanding on the books of the Fund for
specified periods. Such commissions and shareholder service fees are included in
the Fund's operating expenses.
If the Fund is unable to pay KDI a commission on a new sale because the
annual maximum (0.75% of average daily net assets) has been reached, KDI
intends, but is not obligated, to continue to accept new orders for the purchase
of Fund shares and to pay or accrue commissions and service fees to others in
excess of the amount it currently receives from the Fund. While the Fund is
under no contractual obligation to pay KDI advances made by KDI in excess of the
Distribution Plan limitation, KDI intends to seek full payment of such charges
from the Fund (together with interest at the rate of prime plus one percent) at
such time in the future as, and to the extent that, payment thereof by the Fund
would be within permitted limits. KDI currently intends to seek payment of
interest only on such charges paid or accrued by KDI subsequent to January 1,
1992. If the Fund's Independent Directors (the "Independent Directors")
authorize such payments, the effect will be to extend the period of time during
which the Fund incurs the maximum amount of costs allowed by the Distribution
Plan. If the Distribution Plan is terminated, KDI will ask the Independent
Directors to take whatever action they deem appropriate under the circumstances
with respect to payment of such amounts. If under changing conditions KDI were
to seek payment of interest on such amounts, any such interest payments also
would have to be approved by the Independent Directors (and possibly the
shareholders).
During the fiscal year ended February 28, 1994, the Fund recovered $124,209
in deferred sales charges. During the year, the Fund paid KDI $1,747,768. The
amount paid by the Fund under its Distribution Plan, net of deferred sales
charges, was $1,623,559 (0.94% of the Fund's average daily net asset value
during the year). During the year ended February 28, 1994, KDI paid or accrued
commissions on new sales and shareholder service fees to others of $6,105,599,
of which $3,149,186 was an advance. During the year ended February 28, 1994,
aggregate commissions on new sales and shareholder service fees were paid or
accrued in the amount of $4,896,954, of which $3,149,186 constituted an advance.
As of February 28, 1994, total advances outstanding were $11,401,953 (5.69% of
the Fund's net asset value as of February 28, 1994). The right to certain
portions of this amount, if and when receivable, was assigned by KDI in 1988 in
connection with a financing transaction. As of February 28, 1994, $8,473,473 of
the amount assigned remained outstanding.
Accordingly, KDI intends to seek total payments of $11,401,953 with respect
to sales of the Fund's shares from inception of the Distribution Plan to
February 28, 1994 to such extent that such payments together with payments for
future sales will not exceed the limitations discussed above. At each Directors'
meeting (usually quarterly), the Independent Directors of the Fund consider
whether to authorize payments to such extent until the next quarterly Directors'
meeting and, pursuant to such authorizations, such payments are made. Except as
described above, the Fund has no obligation to pay any portion of this amount,
and the times, conditions and amounts, if any, to be paid by the Fund are solely
within the discretion of the Fund's Independent Directors.
The amounts and purposes of expenditures under the Distribution Plan must
be reported to the Independent Directors quarterly. The Independent Directors
may require or approve changes in the operation of the Distribution Plan and may
require that total expenditures by the Fund under the Distribution Plan be kept
within limits lower than the maximum amount permitted by the Distribution Plan
as stated above. If such costs are not limited by the Independent Directors,
such costs could, for some period of time, be higher than such costs permitted
by most other plans presently adopted by other investment companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Directors or by vote of a majority of the Fund's outstanding shares.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of a majority of both (1) the Fund's Directors and (2) the Independent Directors
cast in person at a meeting called for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund is required to commit
the selection and nomination of candidates for Independent Directors to the
discretion of the Independent Directors.
Whether any expenditure under the Distribution Plan is subject to a state
expense limit depends upon the nature of the expenditure and the terms of the
state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
Upon written notice to dealers, KDI, at its own expense, may periodically
sponsor programs that offer additional compensation in connection with sales of
Fund shares. Participation in such programs may be available to all dealers or
to selected dealers who have sold or are expected to sell significant amounts of
shares. Additional compensation may also include financial assistance to dealers
in connection with preapproved seminars, conferences and advertising. No such
programs or additional compensation will be offered to the extent they are
prohibited by the laws of any state or any self-regulatory agency, such as the
NASD.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payment under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Directors will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
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HOW TO REDEEM SHARES
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Fund shares may be redeemed for cash at the redemption value upon written
order by the shareholder(s) to the Fund c/o Keystone Investor Resource Center,
Inc., Box 2121, Boston, Massachusetts 02106-2121 and presentation to the Fund of
a properly endorsed share certificate if certificates have been issued. The
signature(s) of the shareholder(s) on the written order and certificates must be
guaranteed. The redemption value is the net asset value adjusted for fractions
of a cent and may be more or less than the shareholder's cost depending upon
changes in the value of the Fund's portfolio securities between purchase and
redemption. A deferred sales charge may be imposed by the Fund at the time of
redemption of certain shares as explained in "How to Buy Shares." If imposed,
the deferred sales charge is deducted from the redemption proceeds otherwise
payable to the shareholder.
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case, the Fund may delay the
mailing of a redemption check or the wiring of redemption proceeds until good
payment has been collected for the purchase of such shares. This may take up to
15 days or more. Any delay may be avoided by purchasing shares either with a
certified check or by bank wire of funds. Although the mailing of a redemption
check or the wiring 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 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 check has been delayed, the
check will be mailed or the proceeds wired promptly after good payment has been
collected.
The Fund computes the redemption value at the close of the Exchange at the
end of the day on which it has received all proper documentation from the
shareholder. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made within seven days thereafter.
Shareholders also may redeem their shares through their broker-dealers.
KDI, acting as agent for the Fund, stands ready to repurchase Fund shares upon
orders from dealers as follows: redemption requests received by broker-dealers
prior to that day's close of trading on the Exchange and transmitted to the Fund
prior to its close of business that day will receive the net asset value per
share computed at the close of trading on the Exchange on the same day.
Redemption requests received by broker-dealers after the day's close of trading
on the Exchange and transmitted to the Fund prior to the close of business on
the next business day will receive the next business day's net asset value
price. KDI will pay the redemption proceeds, less any applicable deferred sales
charge, to the dealer placing the order within seven days thereafter, assuming
it has received proper documentation. KDI charges no fees for this service, but
the shareholder's broker-dealer may do so.
For the protection of shareholders, SIGNATURES ON CERTIFICATES, STOCK
POWERS AND ALL WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S.
STOCK EXCHANGE MEMBER, OR BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES
UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC
may waive this requirement, but may also require additional documents in certain
cases. Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less 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 or repurchase order but the shareholder
has not clearly indicated the amount of money or number of shares involved, the
Fund cannot execute the order. In such cases, the Fund will request the missing
information from the shareholder and process the order the day it receives such
information.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your
account by telephone by calling toll free 1-800-343-2898. You must complete the
appropriate section of the Fund's application to elect this service.
In order to insure that instructions received by KIRC are genuine, when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by
check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to
your previously designated bank account as you direct. If you do not specify how
you wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves
the right to redeem your account if its value has fallen below $1,000, the
current minimum investment level, as a result of your redemptions (but not as a
result of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No
contingent deferred sales charges are applied to such redemptions.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor KDI assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Keystone Automated Response Line
("KARL") or by telephone. KIRC will employ reasonable procedures to confirm that
instructions received over KARL or by telephone are genuine. Neither the Fund,
KIRC nor KDI will be liable when following instructions received over KARL or by
telephone that KIRC reasonably believes to be genuine. If, for any reason,
reasonable procedures are not followed, the Fund, KIRC or KDI may be liable for
any losses due to unauthorized or fraudulent instructions.
The Fund may temporarily suspend the right to redeem its shares when (1)
the Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or
by calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
The Keystone Automated Response Line offers shareholders specific fund
account information and price, total return and yield quotations as well as the
ability to effect account transactions, including investments, exchanges and
redemptions. Shareholders may access KARL by dialing toll free 1-800-346-3858
on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange
shares of the Fund for shares of the eight Keystone Custodian Series Funds,
Keystone International Fund Inc. ("KIF"), Keystone Tax Exempt Trust ("KTET"),
Keystone Tax Free Fund ("KTFF") or Keystone Liquid Trust ("KLT") on the basis of
their respective net asset values by calling toll free 1-800-343-2898 or by
writing KIRC at Box 2121, Boston, Massachusetts 02106-2121. To do telephone
exchanges, you must complete the appropriate section of the Fund's application.
Fund shares purchased by check may be exchanged for shares of the named
funds, other than KTET or KTFF, after 15 days. In order to exchange Fund shares
for shares of KTET or KTFF, a shareholder must have held Fund shares for a
period of at least six months. There is a $10.00 service charge for each
exchange. There is no exchange fee for exchange orders received by the Fund over
KARL. If the shares being tendered for exchange have been held for less than
four years and are still subject to a contingent deferred sales charge, such
charge will carry over to the shares being acquired in the exchange transaction.
The Fund reserves the right to terminate this exchange offer or to change its
terms, including the right to change the service charge for any exchange.
Orders to exchange shares of the Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing shares of KLT at the net asset
value of KLT shares determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Fund prior to 4:00 p.m. on any day
the funds are open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
RETIREMENT PLANS
The Fund has various pension and profit-sharing plans available to
investors, including Individual Retirement Accounts ("IRAs"); Rollover IRAs;
Simplified Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans
("TSAs"); 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; Pension and
Target Benefit Plans; Money Purchase Pension Plans; and Salary-Reduction Plans.
For details, including fees and application forms, call toll free at 1-
800-247-4075 or write to KIRC.
AUTOMATIC INVESTMENT PLAN
Shareholders may take advantage of investing on an automatic basis by
establishing an automatic investment plan. Checks are drawn on a shareholder's
checking account monthly and used to purchase Fund shares.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, shareholders may arrange for regular
monthly or quarterly fixed withdrawal payments. Each payment must be at least
$100 and may be as much as 1% per month or 3% per quarter of the total net asset
value of the Fund shares in the shareholder's account when the Automatic
Withdrawal Plan is opened. Fixed withdrawal payments are not subject to a
deferred sales charge. Excessive withdrawals may decrease or deplete the value
of a shareholder's account.
OTHER SERVICES
Under certain circumstances shareholders may, within 30 days after a
redemption, reinstate their accounts at current net asset value.
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PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise "total return" and "current
yield." BOTH FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE.
Total return refers to the Fund's average annual compounded rates of return
over specified periods determined by comparing the initial amount invested to
the ending redeemable value of that amount. The resulting equation assumes
reinvestment of all dividends and distributions and deduction of all recurring
charges, if any, applicable to all shareholder accounts. The deduction of the
contingent deferred sales charge is reflected in the applicable years. The
exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share
during the base period by the maximum offering price per share on the last day
of the base period. The Fund currently does not intend to advertise current
yield.
The Fund may also include comparative performance information in
advertising or marketing the Fund's shares, such as data from Lipper Analytical
Services, Inc. or other industry publications.
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FUND SHARES
- --------------------------------------------------------------------------------
The Fund currently issues one class of shares that participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares may be exchanged as explained under "Shareholder Services," but
will have no other preference, conversion, exchange or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares are redeemable, transferable and freely
assignable as collateral. There are no sinking fund provisions. The Fund may
establish additional classes or series of shares.
Under Delaware law, the Fund is required to hold annual meetings for the
election of Directors and other matters.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
KIRC, 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon written notice to those shareholders, the Fund intends, when an
annual report or semi-annual report of the Fund is required to be furnished, to
mail one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
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ADDITIONAL INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTIONS OF CERTAIN INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE FUND
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such securities
may be held outside the U.S. and the Fund may be subject to the risks associated
with the holding of such property overseas. Examples of governmental actions
would be the imposition of currency controls, interest limitations, withholding
taxes, seizure of assets or the declaration of a moratorium. Various provisions
of federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
FIRM COMMITMENT AGREEMENTS
The Fund may 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 and other market factors, both before and
after delivery. The Fund does not accrue any income on such securities or
currencies prior to their delivery. To the extent the Fund engages in when
issued and delayed delivery transactions, it will do so for the purpose of
acquiring portfolio securities or currencies consistent with its investment
objectives and policies and not for the purpose of investment leverage. The Fund
currently does not intend to invest more than 5% of its assets in when issued or
delayed delivery transactions.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System that have at least $1 billion in assets, primary dealers
in U.S. government securities or other financial institutions believed by
Keystone or Harbor Capital to be credit-worthy. Such persons are required to be
registered as U.S. government securities dealers with an appropriate regulatory
organization. Under such agreements, the bank, primary dealer or other financial
institution agrees upon entering into the contract to repurchase the security at
a mutually agreed upon date and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. Under a repurchase agreement, the seller
must maintain the value of the securities subject to the agreement at not less
than the repurchase price, and such value will be determined on a daily basis by
marking the underlying securities to their market value. Although the securities
subject to the repurchase agreement might bear maturities exceeding a year, the
Fund only intends to enter into repurchase agreements that provide for
settlement within a year and usually within seven days. Securities subject to
repurchase agreements will be held by the Fund's custodian or in the Federal
Reserve book entry system. The Fund does not bear the risk of a decline in the
value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and losses including (1) possible declines in the value of
the underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Directors has established procedures to evaluate the creditworthiness of each
party with whom the Fund enters into repurchase agreements by setting guidelines
and standards of review for Keystone or Harbor Capital and monitoring Keystone
or Harbor Capital's actions with regard to repurchase agreements. The Fund
currently does not intend to invest more than 10% of its assets in repurchase
agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having to
sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement, it
will establish a segregated account with the Fund's custodian containing liquid
assets having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the account to maintain such value.
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. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. The staff of the Securities and Exchange
Commission has taken the position that the 1940 Act treats reverse repurchase
agreements as being included in the percentage limit on borrowings imposed on a
Fund.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price.
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills.
The principal reason for writing call options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call
option, which it retains whether or not the option is exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open.
PURCHASING OPTIONS. The Fund may purchase call options for the purpose of
offsetting previously written call options of the same series. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised.
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 objectives.
The Fund currently does not intend to invest more than 5% of its assets in
options transactions.
OPTIONS TRADING MARKETS. Options which the Fund will trade generally are
listed on the London Stock Exchange or a national securities exchange. National
exchanges on which such options currently are traded are the Chicago Board
Options Exchange and the New York, American, Pacific and Philadelphia Stock
Exchanges. Options on some securities may not be listed on any exchange, but
rather traded in the over-the-counter market. Options traded in the
over-the-counter market involve the additional risk that securities dealers
participating in such transactions could fail to meet their obligations to the
Fund. The use of options traded in the over-the-counter market may be subject to
limitations imposed by certain state securities authorities. In addition to the
limits on its use of options discussed herein, the Fund is subject to the
investment restrictions described in this prospectus and in the statement of
additional information.
The staff of the Securities and Exchange Commission is of the view that the
premiums 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 policies pertaining to illiquid
assets and securities.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into securities,
currency or index-based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies is an agreement to buy or sell securities or currencies
at a specified price during a designated month. A futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. The Fund does not make payment or deliver securities upon entering into a
futures contract. Instead, it puts down a margin deposit, which is adjusted to
reflect changes in the value of the contract and which continues until the
contract is terminated.
The Fund may sell or purchase currency and other financial futures
contracts. When a futures contract is sold by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies declines and to fall when the value of such securities or currencies
increases. Thus, the Fund sells futures contracts in order to offset a possible
decline in the value of its securities or currencies. If a futures contract is
purchased by the Fund, the value of the contract will tend to rise when the
value of the underlying securities or currencies increases and to fall when the
value of such securities or currencies declines. The Fund intends to purchase
futures contracts in order to fix what is believed by Keystone or Harbor Capital
to be a favorable price and rate of return for securities or favorable exchange
rate for currencies the Fund intends to purchase.
The Fund also intends to purchase put and call options on currency and
other financial futures contracts for hedging purposes. A put option purchased
by the Fund would give it the right to assume a position as the seller of a
futures contract. A call option purchased by the Fund would give it the right to
assume a position as the purchaser of a futures contract. The purchase of an
option on a futures contract requires the Fund to pay a premium. In exchange for
the premium, the Fund becomes entitled to exercise the benefits, if any,
provided by the futures contract, but is not required to take any action under
the contract. If the option cannot be exercised profitably before it expires,
the Fund's loss will be limited to the amount of the premium and any transaction
costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case, it would continue to bear market
risk on the transaction.
Although futures and related options transactions are intended to enable
the Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates, exchange rates or market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone or Harbor Capital correctly predicts interest or exchange rate
movements, a hedge could be unsuccessful if changes in the value of the Fund's
futures position did not correspond to changes in the value of its investments.
This lack of correlation between the Fund's futures and securities or currencies
positions may be caused by differences between the futures and securities or
currencies markets or by differences between the securities or currencies
underlying the Fund's futures position and the securities or currencies held by
or to be purchased for the Fund. Keystone or Harbor Capital will attempt to
minimize these risks through careful selection and monitoring of the Fund's
futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
The Fund currently does not intend to invest more than 5% of its assets in
futures transactions.
FOREIGN CURRENCY TRANSACTIONS
As discussed in the prospectus, 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 or Harbor Capital'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. Although the Fund does not currently
intend to do so, the Fund may also purchase and sell options related to foreign
currencies. The Fund does not intend to enter into foreign currency transactions
for speculation or leverage.
<PAGE>
KEYSTONE CUSTODIAN
FAMILY OF FUNDS
B-1 High Grade Bond Fund
B-2 Diversified Bond Fund
B-4 High Income Bond Fund
K-1 Balanced Income Fund
K-2 Strategic Growth Fund
S-1 Blue Chip Stock Fund
S-3 Capital Growth Fund
S-4 Small Company Growth Fund
International Fund
Precious Metals Holdings
Tax Free Fund
Tax Exempt Trust
Liquid Trust
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
KEYSTONE
PRECIOUS
METALS
HOLDINGS,
INC.
PROSPECTUS AND
APPLICATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
JUNE 28, 1994
SUPPLEMENTED SEPTEMBER 12, 1994
This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone Precious
Metals Holdings, Inc. (the "Fund") dated June 28, 1994, supplemented September
12, 1994. A copy of the prospectus may be obtained from Keystone Distributors,
Inc. ("KDI"), the Fund's principal underwriter ("Principal Underwriter"), 200
Berkeley Street, Boston, Massachusetts 02116-5034, or your broker-dealer.
TABLE OF CONTENTS
Page
The Fund's Objectives and Policies 2
Investment Restrictions 4
Valuation of Securities 7
Distributions and Taxes 7
Sales Charges 9
Distribution Plan 10
Redemptions in Kind 13
Fund Management and Expenses 13
Directors and Officers 16
Principal Underwriter 22
Brokerage 22
Standardized Total Return and Yield Quotations 24
Additional Information 24
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-12
<PAGE>
THE FUND'S OBJECTIVES AND POLICIES
The Fund's primary investment objective is to provide shareholders with
long-term capital appreciation and with protection of the purchasing power of
their capital. Obtaining current income is a secondary objective. Keystone
Custodian Funds, Inc. ("Keystone") acts as the Fund's investment adviser. Harbor
Capital Management Company, Inc. ("Harbor Capital") acts as the Fund's
sub-adviser.
The Fund pursues its objectives by investing in common stocks of companies
that are engaged in, or receive at least half of their revenue from other
companies engaged in, mining, processing or dealing in gold, gold bullion or
other precious metals and minerals such as silver, platinum, palladium and
diamonds. (A company will be considered "engaged" in a business or activity if
it derives at least 50% of its assets, reserves and/or operating earnings from
that business or activity.)
The Fund invests in securities of South African mining companies only after
considering such factors as profitability of operations, adequacy of ore
reserves and the prices at which the metals and minerals mined by these
companies are selling in the free market.
When investing in securities of South African companies or other foreign
issuers, the Fund may purchase American Depositary Receipts. An American
Depositary Receipt ("ADR") is a certificate issued by a United States ("U.S.")
bank representing the right to receive securities of a foreign issuer deposited
in that bank or a correspondent bank. While there are variations as to
marketability, ADRs representing shares of most of the better known South
African gold mining and mining finance companies are characterized by relatively
active trading markets. The Fund may purchase the foreign securities directly
when it is in its best interests to do so. The Fund will purchase only foreign
securities that are listed on recognized domestic or foreign securities
exchanges.
The Fund's normal expectation in purchasing a security is that its
anticipated performance level will be reached over the longer rather than
shorter term, although the rate of portfolio turnover will not be a limiting
factor when portfolio changes are deemed appropriate. It is anticipated,
however, that the Fund's annual portfolio turnover rate, exclusive of
investments made in or by any subsidiary, will not exceed 100%. A 100% portfolio
turnover rate would occur, for example, if the value of the lesser of cost of
purchases or proceeds from sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during such
year, excluding in each case short-term securities. The turnover rate may also
be affected by cash requirements for redemptions of the Fund's shares. A high
turnover rate would result in increased costs to the Fund for brokerage
commissions or their equivalent.
The Fund will not invest directly in precious metals and minerals or
contracts relating thereto. Any wholly-owned subsidiary of the Fund, however,
may invest in precious metals and minerals, subject to the limitation that no
investment in precious metals and minerals may be made by any wholly-owned
subsidiary or subsidiaries of the Fund if at the time thereof the market value
of all such investments by subsidiaries exceeds, or by virtue of such investment
would exceed, an amount equal to 25% of the then market value of the Fund's
total assets. In the event that, because of fluctuations in the market value of
a subsidiary's investments or in the market value of the Fund's total assets, or
other reasons, the Fund's investments in a subsidiary or subsidiaries represent
more than 25% of the market value of the Fund's total assets, the Fund will not
be required to take any action to reduce such investments, although it will do
so when it is in its best interests.
In making purchases of precious metals and minerals, a wholly-owned
subsidiary may utilize contracts that contemplate delivery of the metal or
mineral at a future date, provided in each case that it instructs the custodian
of its assets to segregate and maintain in a separate account cash or short-term
U.S. government securities at least equal to the aggregate contract price less
the aggregate margin deposit. However, the Fund has undertaken to a state
securities authority that, so long as shares of the Fund are registered for sale
in such state, it will not, as a matter of operating policy, permit any
subsidiary to utilize such contracts. A wholly-owned subsidiary may, from time
to time, engage in short-term trading in metals and minerals, that is, selling
metals and minerals held for a relatively brief period of time, usually less
than three months. Short-term trading will be used primarily to preserve capital
when a subsidiary anticipates there will be a market decline, or to realize gain
after a market increase when a subsidiary anticipates that continued increases
are unlikely. A wholly-owned subsidiary will engage in short-term trading only
if it believes that the transaction, net of costs, including any commissions,
will be in the best interest of the Fund. Whether short-term trading will be
advantageous to a subsidiary will depend on its anticipation and evaluation of
relevant market factors. A wholly-owned subsidiary will not engage in any
activity other than investing in precious metals and minerals, or contracts
relating thereto.
A wholly-owned subsidiary will not incur any obligations for which the Fund
may be directly or indirectly liable. The assets of a wholly-owned subsidiary
will be held either by the Fund's custodian or by a foreign branch of a major
U.S. banking institution.
The Fund concentrates (for purposes of the Investment Company Act of 1940
(the "1940 Act")) its assets in securities related to mining, processing or
dealing in gold or other precious metals and minerals referred to above, which
means that at least 25% of its assets will be invested in the securities of
these industries at all times.
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions set forth below, which are
fundamental policies and cannot be changed without the vote of the holders of a
majority of the Fund's outstanding voting securities. The Fund may not do the
following:
(1) issue any senior securities;
(2) sell securities short, unless at the time it owns an equal amount of
such securities or, by virtue of ownership of convertible or exchangeable
securities, it has the right to obtain through conversion or exchange of such
other securities an amount equal to the securities sold short, in which case the
Fund will retain such securities as long as it is in a short position;
(3) purchase or sell securities on margin, but it may obtain such
short-term credits as may be necessary for the clearance of purchased and sold
securities;
(4) invest in oil and gas interests, puts, calls, straddles, spreads and
options, except that the Fund may write covered call options traded on the
London Stock Exchange, a national securities exchange or the over-the-counter
market and purchase call options to close out previously written call options;
this restriction shall not apply to the extent the investments of one or more
domestic or foreign wholly-owned subsidiaries in metals or minerals contracts
might be considered options;
(5) borrow money, except that the Fund may (a) borrow money from banks for
emergency or extraordinary purposes in aggregate amounts up to 5% of its net
assets and (b) enter into reverse repurchase agreements;
(6) underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of securities of the type referred to in
subparagraph (12) below, the Fund may be deemed to be an underwriter under
certain U.S. securities laws;
(7) invest more than 5% of its total assets taken at market value in the
securities of any one issuer, not including securities of the U.S. government
and its instrumentalities and the securities of one or more domestic or foreign
wholly-owned subsidiaries;
(8) purchase or sell real estate or interests therein or real estate
mortgages, provided that the foregoing shall not prevent the Fund from
purchasing or selling (a) readily marketable securities which are secured by
interests in real estate and (b) readily marketable securities of companies
which deal in real estate, including real estate investment trusts;
(9) purchase or sell commodities or commodity contracts, except that the
Fund may invest in the securities of one or more domestic or foreign
wholly-owned subsidiaries which deal in precious metals and minerals and
contracts relating thereto subject to the limitation that no such investment may
be made if at the time thereof the fair value of all such investments exceeds,
or by virtue of such investment would exceed, an amount equal to 25% of the then
market value of the Fund's total assets, and except also that the Fund may
engage in currency or other financial futures and related options transactions;
(10) make loans to other persons, except through the investment of up to
25% of the total assets of the Fund in one or more domestic or foreign
wholly-owned subsidiaries; for the purposes of this restriction, the purchase of
a portion of an issue of bonds, notes, debentures or other obligations
distributed publicly, whether or not the purchase is made upon the original
issuance of such securities, will not be deemed to be the making of a loan;
(11) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets;
(12) invest more than 15% of its net assets in securities for which market
quotations are not readily available, or in repurchase agreements maturing in
more than seven days; except that this restriction shall not apply to the Fund's
investments in one or more domestic or foreign wholly-owned subsidiaries, and
except also that the Fund may write covered call options traded on the
over-the-counter market and purchase call options to close out existing
positions;
(13) invest more than 5% of the value of the Fund's total assets in the
securities of any issuers which have a record of less than three years
continuous operation, including the similar operations of predecessors or
parents, or equity securities of issuers which are not readily marketable,
except that this restriction shall not apply to the Fund's investments in one or
more domestic or foreign wholly-owned subsidiaries;
(14) purchase the securities of any other investment company, except that
it may make such a purchase (a) in the open market involving no commission or
profit to a sponsor or dealer, other than the customary broker's commission, and
(b) as part of a merger, consolidation or acquisition of assets; provided that
immediately after any such purchase (a) not more than 10% of the Fund's total
assets would be invested in such securities and (b) not more than 3% of the
voting stock of such company would be owned by the Fund;
(15) purchase or retain the securities of any issuer if the Treasurer of
the Fund has knowledge that those officers and/or Directors of the Fund or its
investment adviser who own individually more than 1/2 of 1% of the securities of
such issuer together own more than 5% of the securities of such issuer;
(16) invest in companies for the purpose of exercising control or
management, except for one or more domestic or foreign wholly-owned
subsidiaries; or
(17) acquire, directly or indirectly, more than 10% of the voting
securities of any issuer other than one or more domestic or foreign wholly-owned
subsidiaries.
For purposes of Investment Restriction (1) the definition of senior
securities is deemed not to include the borrowings described in Investment
Restriction (5) and reverse repurchase agreements.
The Fund's purchase of securities of other investment companies, as
described in Investment Restriction (14), results in the layering of expenses,
such that shareholders indirectly bear a proportionate share of the expenses of
those investment companies, including operating costs, investment advisory and
administrative fees.
As a matter of practice, the Fund treats reverse repurchase agreements as
borrowings subject to the limitations of the 1940 Act. For further information
about reverse repurchase agreements, see the section on "Additional Investment
Information" in the Fund's prospectus.
Additional restrictions adopted by the Fund, which may be changed by the
Fund's Board of Directors and which are more restrictive than the fundamental
restrictions adopted by the Fund's shareholders, provide that (1) the Fund shall
not purchase the securities of any other investment company, including unit
investment trusts; (2) assets of the Fund may not be pledged or otherwise
encumbered nor transferred or assigned for the purpose of securing a debt,
except in the course of portfolio trading; and (3) the Fund may not borrow
money, except that it may borrow from banks on a temporary basis to facilitate
the redemption of shares or for extraordinary purposes and with the consent of
the Fund's custodian bank with respect to the conditions of the loan. (Amounts
so borrowed shall not exceed 5% of the Fund's total assets computed immediately
prior to such borrowing and in no event more than 10% of the Fund's net assets
at such time.)
Although not fundamental restrictions or policies requiring a shareholders'
vote to change, the Fund has agreed that, so long as a state authority requires
and shares of the Fund are registered for sale in that state, the Fund will not
(1) invest in real estate limited partnership interests; (2) invest in oil, gas
or other mineral leases; and (3) purchase warrants, valued at the lower of cost
or market, in excess of 5% of the value of the Fund's net assets; included
within that amount, but not to exceed 2% of the value of the Fund's net assets,
may be warrants which are not listed on the New York or American Stock
exchanges; warrants acquired by the Fund at any time in units or attached to
securities are not subject to this restriction.
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 of a
security or a decrease in Fund assets is not a violation of the limit.
VALUATION OF SECURITIES
Current value for the Fund's portfolio securities is determined as follows:
Investments, including ADRs, are usually valued at the closing sales price
or, in the absence of sales and for over-the-counter securities, the mean of bid
and asked quotations. Management values the following securities at prices it
deems in good faith to be fair: (a)securities for which complete quotations are
not readily available; and (b)listed securities if, in the opinion of
management, the last sales price does not reflect a current value or if no sale
occurred. ADRs, certificates representing shares of foreign securities deposited
in domestic and foreign banks, are traded and valued in U.S. dollars. Those
securities traded in foreign currency amounts are translated into United States
dollars as follows: market value of investments, assets and liabilities at the
daily rate of exchange; purchases and sales of investments, income and expenses
at the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
Short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount, which, when combined with accrued interest,
approximates market.) Short-term investments maturing in more than sixty days
when purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount which, when combined with accrued interest,
approximates market.)
The Fund's Board of Directors values the following securities at prices it
deems in good faith to be fair: (1) securities, including restricted securities,
for which complete quotations are not readily available; (2) listed securities
if, in the Board's opinion, the last sales price does not reflect a current
market value or if no sale occurred; (3) the Fund's investment in any
subsidiary; and (4) other assets.
DISTRIBUTIONS AND TAXES
It is the present policy of the Fund to distribute semi-annually by the
15th day of April and October substantially all of its net investment income and
to distribute at least annually any net realized capital gains. Any capital
gains realized by any wholly-owned subsidiary and paid as a dividend by such
subsidiary to the Fund will be treated as ordinary income (and not as capital
gains) by the Fund and taken into consideration in computing the Fund's net
income. It is also the present policy of the Fund to declare any distributions
payable in shares of common stock at net asset value or, at the option of the
shareholder, in cash. A shareholder will receive dividends and capital gains
distributions (if any) in shares of common stock unless the Fund receives
instructions to the contrary from the shareholder before the record date.
For any tax year in which the Fund qualifies as a regulated investment
company, distributions of net investment income and net realized short-term
capital gains (whether received in shares or in cash) are treated by
shareholders as ordinary income for federal income tax purposes. A portion of
the Fund's dividends may qualify for the corporate dividends received deduction.
Distributions of any net realized gains (whether received in shares or in cash)
will be taxable to shareholders for federal income tax purposes as long-term
capital gains when received regardless of the length of time the shares have
been held by the shareholder. When shares on which a capital gain distribution
has been paid are held for less than six months and sold at a loss, the loss
will be treated as a long-term capital loss to the extent of the capital gain
distribution. The Fund's income distributions are expected to exceed the Fund's
net investment income (determined for financial statement purposes) by an amount
approximately equal to the amount by which commissions on sales of new shares
exceed contingent deferred sales charges received by the Fund.
For any tax year in which the Fund qualifies as a regulated investment
company and has at the end of such a year more than 50% of the value of its
total assets invested in the securities of foreign corporations, the Fund will
be entitled to, and intends to elect, the application of Section 853 of the
Internal Revenue Code, as amended (the "Code"). Under Section 853, a shareholder
must include in gross income, and will be treated as having paid, the amount
that the Fund advises is the shareholder's proportionate share of foreign income
taxes paid by the Fund. Such a shareholder will be entitled to credit the
foreign taxes deemed paid by that shareholder against that shareholder's federal
income tax or, in the alternative, may deduct the foreign taxes deemed paid by
the shareholder from the shareholder's gross income, subject to the limitations
on such credit and deduction set forth in the Code. The effect of the foregoing
is to place a shareholder in the same position as the shareholder would have
been had the shareholder owned directly the securities of the foreign
corporations. If such 50% test is not met, foreign income taxes paid cannot be
so used by shareholders. Moreover, the Omnibus Budget Reconciliation Act of 1987
denies a foreign tax credit for any taxes paid to South Africa with respect to
income attributable to the period between January 1, 1988 and July 10, 1991.
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.
SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the sale of
its shares (see "Distribution Plan"), a deferred sales charge may be imposed at
the time of redemption of certain Fund shares within four calendar years after
their purchase. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to the shareholder. Since July 8, 1992,
the deferred sales charge attributable to shares purchased prior to January 1,
1992 has been retained by the Fund, and the deferred sales charge attributable
to shares purchased after January 1, 1992 is, to the extent permitted by a rule
adopted by the National Association of Securities Dealers, Inc. ("NASD"), paid
to KDI. For the fiscal year ended February 28, 1994, the Fund recovered $124,209
in deferred sales charges.
The contingent deferred sales charge is a declining percentage of the
lesser of (1) the net asset value of the shares redeemed or (2) the total cost
of such shares. No contingent deferred sales charge is imposed when the
shareholder redeems amounts derived from (1) increases in the value of the
shareholder's account above the total cost of such shares due to increases in
the net asset value per share of the Fund; (2) certain shares with respect to
which the Fund did not pay a commission on issuance, including shares acquired
through reinvestment of dividend income and capital gains distributions; or (3)
shares held in all or part of more than four consecutive calendar years.
Subject to the limitations stated above, the Fund imposes a contingent
deferred sales charge according to the following schedule: 4% of amounts
redeemed during the calendar year of purchase; 3% of amounts redeemed during the
calendar year after the year of purchase; 2% of amounts redeemed during the
second calendar year after the year of purchase; and 1% of amounts redeemed
during the third calendar year after the year of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter.
The following example will illustrate the operation of the contingent
deferred sales charge. Assume that an investor makes a purchase payment of
$10,000 during the calendar year 1993 and on a given date in 1994 the value of
the investor's account has grown through investment performance and reinvestment
of distributions to $12,000. On such date in 1994, the investor could redeem up
to $2,000 ($12,000 minus $10,000) without incurring a contingent deferred sales
charge. If, on such date, the investor should redeem $3,000, a deferred sales
charge would be imposed on $1,000 of the redemption (the amount by which the
investor's account was reduced by the redemption below the amount of the initial
purchase payment). The charge would be imposed at the rate of 3% because the
redemption is made during the calendar year after the calendar year of purchase,
for a total deferred sales charge of $30.
In determining whether a contingent deferred sales charge is payable and,
if so, the percentage charge applicable, it is assumed that shares held the
longest are the first to be redeemed. There is no contingent deferred sales
charge on exchanges of shares between the Keystone Group of Funds that have
adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act. Moreover,
when shares of one such fund have been exchanged for shares of another such
fund, for purposes of any future contingent deferred sales charge, the calendar
year of the purchase of the shares of the fund exchanged into is assumed to be
the year shares tendered for exchange were originally purchased.
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
payment of commissions or the imposition of a deferred sales charge to (1)
officers, Directors, Trustees and full-time employees of Keystone, Harbor
Capital, Keystone Management, Inc. ("Keystone Management"), Keystone Group, Inc.
("Keystone Group"), their subsidiaries and the Principal Underwriter who have
been such for not less than ninety days; and (2) the pension and profit-sharing
plans established by such companies, their subsidiaries and affiliates, for the
benefit of their officers, Directors, Trustees and full-time employees, provided
all such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
resold except through redemption by the Fund.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund purchased by a bank or trust company in a single account
in the name of such bank or trust company as trustee if the initial investment
in shares of the Fund, any Keystone Custodian Series Fund, Keystone
International Fund Inc., Keystone Tax Exempt Trust, Keystone Tax Free Fund,
Keystone Liquid Trust and/or any Keystone America Fund is at least $500,000 and
any commission paid by the Fund and such other funds at the time of such
purchase is not more than 1% of the amount invested.
DISTRIBUTION PLAN
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1. The Fund bears some of
the costs of selling its shares under a Distribution Plan adopted on July 10,
1984 (the "Distribution Plan") pursuant to Rule 12b-1.
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. A new rule adopted by the NASD effective July 7, 1993
limits such annual expenditures to 1%, of which 0.75% may be used to pay such
distribution costs and 0.25% may be used to pay shareholder service fees. The
aggregate amount that the Fund may pay for such distribution costs is limited to
6.25% of gross share sales since the inception of the Fund's Distribution Plan
plus interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charge paid by shareholders to KDI). The Fund operates
its Distribution Plan in accordance with both the Distribution Plan and the NASD
rule.
In connection with the Distribution Plan, Fund shares are offered for sale
at net asset value without any initial sales charge, and the Fund pays or
accrues to the Principal Underwriter commissions in accordance with the
following schedule:
KDI PAYS
SELLING AMOUNT
FUND PAYS BROKER- RETAINED
AMOUNT OF SALE KDI DEALERS BY KDI
Less than $100,000 5.0% 4.0% 1.0%
$100,000 - $249,999 2.5% 2.0% 0.5%
$250,000 - $499,999 1.0% 1.0% -0-
Over $500,000 0.5% 0.5% -0-
Amounts paid or accrued under the Distribution Plan are paid or accrued to the
Fund's Principal Underwriter, currently KDI, as commissions for Fund shares sold
under the Distribution Plan, all or any part of which commissions may be
reallowed by KDI to others (dealers). In addition, the Fund pays to the
Principal Underwriter amounts sufficient for the Principal Underwriter to pay to
such others a service fee at a rate of 0.25% per annum of the net asset value of
the shares sold by such others that remain outstanding on the books of the Fund
for specified periods. Such commissions and service fees are included in the
Fund's operating expenses.
If the Fund is unable to pay KDI a commission on a new sale because the
annual maximum (0.75% of average daily net assets) has been reached, KDI
intends, but is not obligated, to continue to accept new orders for the purchase
of Fund shares and to pay commissions and service fees to dealers in excess of
the amount it currently receives from the Fund. While the Fund is under no
contractual obligation to pay KDI such amounts that exceed the Distribution Plan
limitation, KDI intends to seek full payment of such advances from the Fund
(together with interest thereon at the prime rate plus one percent) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits. KDI currently intends to seek payment of interest only
on such charges paid or accrued by KDI subsequent to January 1, 1992. If the
Independent Trustees authorize such payments, the effect will be to extend the
period of time during which the Fund incurs the maximum amount of costs allowed
by the Distribution Plan. The Independent Trustees have agreed to reimburse KDI
such portion of this amount at such future time when the payment of such amounts
would not cause the Fund to exceed the Distribution Plan limitation. If the
Distribution Plan is terminated, KDI will ask the Independent Trustees to take
whatever action they deem appropriate under the circumstances with respect to
payment of such amounts.
The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limit specified above, and the amounts and
purposes of expenditures under the Distribution Plan must be reported to the
Rule 12b-1 Directors ("Rule 12b-1 Directors") quarterly. The Rule 12b-1
Directors may require or approve changes in the implementation or operation of
the Distribution Plan, and may also require that total expenditures by the Fund
under the Distribution Plan be kept within limits lower than the maximum amount
permitted by the Distribution Plan as stated above. If such costs are not
limited by the Independent Directors, such costs could, for some period of time,
be higher than such costs permitted by most other plans presently adopted by
other investment companies.
The Distribution Plan may be terminated at any time by vote of the Rule
12b-1 Directors, or by vote of a majority of the outstanding voting securities
of the Fund. Any change in the Distribution Plan that would materially increase
the distribution expenses of the Fund provided for in the Distribution Plan
requires shareholder approval. Otherwise, the Distribution Plan may be amended
by the Directors, including the Rule 12b-1 Directors.
While the Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Directors to
the discretion of the Independent Directors.
During the fiscal year ended February 28, 1994, the Fund paid $1,747,768
under the Distribution Plan.
Whether any expenditure under the Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. The Fund does not treat
Distribution Plan expenses as includable in the Fund's total operating expenses
for purposes of determining compliance with state expense limits.
Commissions paid on new sales of shares are treated as capital charges and
deferred sales charges received by the Fund are treated as capital credits,
respectively, in determining net investment income for tax purposes.
The Independent Directors of the Fund have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plan have benefited
the Fund.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property of the Fund. The Fund has obligated itself,
however, under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder in any 90-day period up to the lesser of
$250,000 or 1% of the Fund's net assets. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in computing the
net asset value per share. Shareholders receiving such securities would incur
brokerage costs when these securities are sold.
FUND MANAGEMENT AND EXPENSES
THE INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Group, 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Keystone Group is a corporation privately owned by current and former
members of management of Keystone and its affiliates. The shares of Keystone
Group common stock beneficially owned by management are held in a number of
voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner,
III, Roger T. Wickers, Edward E. Godfrey, and Ralph J. Spuehler, Jr. Keystone
Group provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Group of Mutual Funds.
THE INVESTMENT ADVISORY AGREEMENT
The Investment Advisory Agreement (the "Advisory Agreement") between the
Fund and Keystone provides that Keystone shall furnish to the Fund office space
and all necessary office facilities, equipment and personnel for managing the
investment and reinvestment of the assets of the Fund and shall arrange, if
desired by the Fund, for members of Keystone's organization to serve without
salaries from the Fund as officers or agents of the Fund. All expenses (other
than those specifically referred to as being borne by Keystone) incurred in the
operation of the Fund are borne by the Fund. Such expenses include, among
others, interest, taxes, brokerage fees and commissions, fees of Directors who
are not affiliated persons of Keystone, charges of custodians, transfer and
dividend disbursing agents and registrars and bookkeeping, auditing and legal
expenses.
The Advisory Agreement provides that, as compensation for its services to
the Fund, Keystone is entitled to a fee at the annual rate of 3/4 of 1% of the
first $100,000,000, 5/8 of 1% of the next $100,000,000 and 1/2 of 1% of the
excess over $200,000,000 of the average of the daily net asset values of the
Fund computed as of the close of business on each business day, such fee to be
reduced by the amount of any compensation paid to Keystone by or on behalf of
the Fund's wholly-owned subsidiaries in consideration for services rendered in
connection with the investment and reinvestment of the assets of such
subsidiaries. The Advisory Agreement also provides that the Fund will reimburse
Keystone on a cost basis in the event Keystone provides any services (excluding
printing) involved in registering and maintaining registrations of the Fund and
its shares with the Securities and Exchange Commission or any services involved
in preparing reports to shareholders. Keystone has undertaken to bear the
expenses of the Fund (including the management fee, but excluding brokerage
commissions, shareholder service fees, taxes, interest and any extraordinary
expenses) in any fiscal year in excess of the most restrictive state expense
limitation then applicable to the Fund.
For the fiscal year ended February 29, 1992, the Fund paid or accrued
management fees of $1,025,294 to Keystone, which represented 0.72% of the Fund's
average net assets. Keystone paid or accrued a sub-advisory fee of $371,421 to
Harbor Capital for the year ended February 29, 1992.
For the fiscal year ended February 28, 1993, the Fund paid or accrued
management fees of $849,474 to Keystone, which represented 0.72% of the Fund's
average net assets. Keystone paid a sub-advisory fee of $350,885 to Harbor
Capital for the year ended February 28, 1993.
During the fiscal year ended February 28, 1994, the Fund paid or accrued
management fees of $1,189,670 to Keystone, which represented 0.69% of the Fund's
average net assets. Keystone paid or accrued a sub-advisory fee of $404,777 to
Harbor Capital for the year ended February 28, 1994.
The Advisory Agreement continues in effect from year to year only so long
as such continuance is specifically approved at least annually by the Fund's
Board of Directors or a majority of the outstanding voting securities of the
Fund and such renewal has been approved by the vote of a majority of Directors
of the Fund who are not "interested persons," as that term is defined in the
1940 Act, of Keystone or of the Fund, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement automatically
terminates upon its assignment (within the meaning of the 1940 Act) and is
terminable at any time, without penalty, by the Fund's Board of Directors or by
a vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to Keystone, and by Keystone on 90 days' written notice to
the Fund.
The Advisory Agreement will terminate automatically upon its "assignment"
as that term is defined in the 1940 Act.
THE SUB-ADVISER
Harbor Capital, 125 High Street, Boston, Massachusetts 02110 is an
investment management firm which was incorporated in Massachusetts on August 9,
1979. Harbor Capital also provides investment counsel for many individuals and
institutions, including endowment funds, foundations and pension and profit
sharing trusts.
The Directors of Harbor Capital are Jay A. Direnberger, Alan S. Fields,
Lawrence J. Marks, Malcolm Pirnie, III (Vice President), Stanley Schlozman,
Frederick G. P. Thorne (President and Principal Executive Officer), and Peter J.
Widmer, (each of whom owns 10% or more of its outstanding voting securities).
THE SUBADVISORY AGREEMENT
The SubAdvisory Agreement between Keystone and Harbor Capital dated August
19, 1993 (the"SubAdvisory Agreement") provides that Harbor Capital, subject to
the supervision of the Fund's Board of Directors and Keystone, will furnish
continuously an investment program for the Fund and will furnish to Keystone,
from time to time, as needed or requested, investment research, advice,
information and recommendations concerning securities to be acquired, held or
sold by the Fund and commodities and other assets to be acquired, held or sold
by Precious Metals (Bermuda) Ltd., a wholly-owned subsidiary of the Fund (the
"Subsidiary"). Harbor Capital will also direct the trading of all securities for
the account of the Fund and of all commodities or other assets for the account
of the Subsidiary.
The SubAdvisory Agreement provides that Harbor Capital be paid in each
fiscal quarter for its services in the preceding quarter 50% of the amount of
the fee paid Keystone under the Advisory Agreement remaining for the preceding
quarter after deduction of the interest expense incurred or imputed at a
specified rate by the Fund's Principal Underwriter in connection with certain
payments made by the Principal Underwriter for sales of Fund shares under the
Fund's 12b-1 Plan, but, in no event, less than the total of (a) 70% of
Keystone's fee on the first $50.1 million of the Fund's average daily net
assets; plus (b) 40% of Keystone's fee on the next $20 million of such assets;
plus (c) 10% of Keystone's fee on the next $50 million of such assets; plus
17.5% of Keystone's fee on such assets that exceed $120.1 million.
Notwithstanding the foregoing, the maximum fee payable to Harbor Capital in any
fiscal year (or period) shall not exceed 90% of the fees with respect to such
fiscal year (or period) payable to Keystone.
The SubAdvisory Agreement will be automatically renewed annually unless
either party thereto has given the other at least 180 days' notice of its
intention to terminate the SubAdvisory Agreement at the end of the contract
period then in effect; provided, however, that the SubAdvisory Agreement will
continue in effect for more than two years from the effective date thereof only
so long as such continuance is specifically approved at least annually by the
Fund's Directors or shareholders in the manner prescribed by the 1940 Act. The
SubAdvisory Agreement may be terminated at any time, without penalty, by the
Fund's Board of Directors or by a vote of a majority of the Fund's outstanding
voting securities, on 60 days' written notice to Harbor Capital. The SubAdvisory
Agreement automatically terminates upon its "assignment" (as defined in the 1940
Act) by either party.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their principal occupations and
some of their affiliations during the past five years are as follows:
*GEORGE S. BISSELL: Chairman of the Board, Director and Chief Executive Officer
of the Fund; Chairman of the Board, Director and Chief Executive
Officer of Keystone Group, Keystone, Keystone Management, Keystone
Software Inc. ("Keystone Software"), Keystone Fixed Income Advisers,
Inc. ("KFIA") and Keystone Investor Resource Center,Inc. ("KIRC");
Chairman of the Board, Chief Executive Officer and Trustee or Director
of Keystone America Capital Preservation and Income Fund, Keystone
America Capital Preservation and Income Fund II, Keystone America
Intermediate Term Bond Fund, Keystone America Strategic Income Fund,
Keystone America World Bond Fund, Keystone Australia Income Fund,
Keystone Tax Free Income Fund, Keystone America State Tax Free Fund,
Keystone America State Tax Free Fund - Series II, Keystone America
Equity Income Fund, Keystone America Global Opportunities Fund,
Keystone America Hartwell Emerging Growth Fund, Inc., Keystone America
Hartwell Growth Fund, Inc., Keystone America Omega Fund, Inc., Keystone
Fund of the Americas Luxembourg and Keystone Fund of the Americas -
U.S. (collectively, "Keystone America Funds"); Keystone Custodian
Funds, Series B-1, B-2, B-4, K-1, K-2, S-1, S-3, and S-4; Keystone
International Fund, Inc., Keystone Tax Free Fund, Keystone Tax Exempt
Trust, Keystone Liquid Trust (collectively, "Keystone Custodian
Funds"); Keystone Institutional Adjustable Rate Fund and Master
Reserves Trust (all such funds, collectively, "Keystone Group Funds");
Chairman of the Board, Hartwell Keystone Advisers, Inc. ("Hartwell
Keystone");Director of Keystone Investment Management Corporation
("KIMCO"); Chairman of the Board and Trustee of Anatolia College; and
Trustee of University Hospital (and Chairman of its Investment
Committee).
FREDERICK AMLING: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
*ALBERT H. ELFNER, III: President and Director of the Fund; President and
Trustee or Director of all other Keystone Group Funds; Director and
Vice Chairman of Keystone; Chief Operating Officer, President and
Director of Keystone Group; Chairman of the Board and Director of KIMCO
and KFIA; President and Director of Keystone Management, Hartwell
Keystone and Keystone Software; Director of KDI, KIRC, Fiduciary
Investment Company, Inc. ("FICO") and Robert Van Partners, Inc.;
Director of Boston Children's Services Association and Trustee of
Anatolia College, Middlesex School, Middlebury College and Citizens
Bank; Member, Board of Governors, New England Medical Center; and
former President of Keystone.
EDWIN D. CAMPBELL: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; President, Morehouse College; 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.
K. DUN GIFFORD: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Chairman of the Board, Director and Executive
Vice President, The London Harness Company; Managing Partner, Roscommon
Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chief Executive Officer,
Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates
(environmental consulting); President, Oldways Preservation and
Exchange Trust (education); and former Director, Keystone Group and
Keystone.
F. RAY KEYSER, JR.: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Of Counsel, Keyser, Crowley & Meub, P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former
Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; 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: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Consultant, Russell Miller, Inc. (in- vestment
bankers) and Consultant, Drake Beam Morin, Inc. (executive
outplacement); Director of Connecticut Natural Gas Corporation, Trust
Company of Connecticut, Hartford Hospital, Old State House Association
and Enhanced Financial Services, Inc.; Member, Georgetown College Board
of Advisors; Chairman, Board of Trustees, Hartford Graduate Center;
Trustee, Kingswood-Oxford School and Greater Hartford YMCA; former
Director, Executive Vice President and Vice Chairman of The Travelers
Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Director of the Fund; Trustee or Director of all other
Keystone Group Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University
School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Senior Vice President, Chief Financial
Officer, Treasurer and Director of Keystone Group; Senior Vice
President, Chief Financial Officer and Treasurer of KDI; Director,
Senior Vice President, Chief Financial Officer and Treasurer of
Keystone; Treasurer of KIMCO, Keystone Management, Keystone Software,
Inc. and FICO; and Treasurer and Director of Hartwell Keystone.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; and President of Keystone.
ROGER T. WICKERS: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Director, Senior Vice President,
General Counsel and Secretary, Keystone Group and KDI; Director and
Secretary, Keystone; and Vice President, Assistant Secretary and
Director, Keystone Management.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Group Funds; Vice President of Keystone Group; and former Vice
President and Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Vice President and Secretary of the Fund; Vice
President and Secretary of all other Keystone Group Funds; Senior Vice
President and General Counsel of Keystone, Keystone Management,
Hartwell Keystone, KIRC, KFIA, Keystone Software and KIMCO; Vice
President, Assistant Secretary and Associate General Counsel of
Keystone Group; Senior Vice President, General Counsel, Director and
Assistant Clerk, FICO; Assistant Secretary of KDI.
DONALD C. DATES: Vice President of the Fund; Senior Vice President of
Keystone; Vice President of Hartwell Emerging Growth Fund, Inc.,
Hartwell Growth Fund, Inc., Keystone America Fund of Growth Stocks,
Keystone America Global Opportunities Fund and Keystone America Omega
Fund, Inc.; and Vice President of four Keystone Custodian Series Funds.
MALCOLM PIRNIE III: Vice President of the Fund; Managing Director and President
of Harbor Capital; Director of Nova Petroleum Corporation.
FREDERICK G.P. THORNE: Vice President of the Fund; Managing Director and
Chairman of Harbor Capital.
* This Director may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Bissell and Mr. Elfner are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Group and several of its
affiliates including Hartwell Keystone, KDI and KIRC. Mr. Bissell and Mr. Elfner
own shares of Keystone Group. Mr. Bissell is Chairman of the Board, Chief
Executive Officer and Director of Keystone Group. Mr. Elfner is President,
Director and Chief Operating Officer of Keystone Group.
The Board of Directors of the Fund has established an Advisory Board
composed principally of former Directors. The members of the Advisory Board are
James R. Dempsey, Knight Edwards, Donald T. Ellis, John M. Haffenreffer, Philip
B. Harley, Everett P. Pope, John W. Sharp, Spencer R. Stuart, Russel R. Taylor,
and Charles M. Williams. The Advisory Board will advise the Board of Directors
and Keystone with respect to the management and operation of the Fund. The
recommendations of the Advisory Board will be considered by the Board of
Directors and Keystone, but will not be binding on them.
The principal occupations and affiliations of the members of the Advisory
Board over the past five years are set forth below:
JAMES R. DEMPSEY: a private investor; Director or Trustee, Convest Energy
Corporation, Superior Electric Co., Phoenix Total Return Fund, Phoenix
Multi-Portfolio Fund, Phoenix Series Fund, The Phoenix Big Edge Series
Fund; former Chairman of the Board, Transatlantic Investment Capital
Corporation, Transatlantic Capital Corporation and former Trustee or
Director of 7 Keystone Group Funds.
KNIGHT EDWARDS: Of Counsel, Edwards & Angell; Member of the Board of Managers
of 7 variable annuity separate accounts of The Travelers Insurance
Company ("Travelers"); Trustee, 5 mutual funds sponsored by Travelers;
and former Trustee or Director of
8 Keystone Group Funds.
DONALD T. ELLIS: President, D.T. Ellis Associates; Associate, Michael Saunders
& Co., real estate broker; former Senior Vice President, Goldman
Financial Services, Inc.; former President, Chief Executive Officer and
Treasurer, Scott Seaboard Corporation; and former Trustee or Director
of 8 Keystone Group Funds.
JOHN M. HAFFENREFFER: Vice President, Director and Treasurer of Haffenreffer
& Co.; Member of the Corporation and Treasurer of Haffenreffer
Benevolent Corp.; Director and Member of the Executive Committee of
Liberty Bank and Trust Company; Director of the Massachusetts Council
of Churches; Vice President, Director and Treasurer, Forest Hills
Company; former Director of Keystone; and former Trustee or Director of
all Keystone Group Funds.
PHILIP B. HARLEY: Director of General Host Corporation, Stamford, Connecticut;
a private investor; former Director, President and Chief Executive
Officer, Baker Perkins, Inc.; former Director, Baker Perkins Holdings
Ltd. (U.K.); and former Trustee or Director of all Keystone Group
Funds.
EVERETT P. POPE: former Chairman and Trustee, Bowdoin College; former Chairman
of the Board and President of Workingmens Cooperative Bank; former
Chairman, Massachusetts Higher Education Assistance Corporation
(guarantor of student loans); and former Trustee or Director of all
Keystone Group Funds.
JOHN W. SHARP: Governor and past President of Montreal General Hospital,
Canada; Honorary Vice Chairman and former National President of Boy
Scouts of Canada; Honorary Colonel, The Black Watch Royal Highland
Regiment of Canada; former Director of Keystone and Unimed, Inc.;
former Chairman and President, Vilas Industries, Ltd. (Canada); former
Chairman, Moyer School supplies, Ltd. (Canada); former Senior Economic
Adviser, Province of Quebec, in New York City; former registered
representative with F.H. Deacon Hodgson Ltd.; and former Trustee or
Director of all Keystone Group Funds.
SPENCER R. STUART: Director of U.S. Tobacco Company, Asset Guaranty Inc.,
International Finance Group and Enhanced Financial Services Inc.;
Director and Chairman, Human Resources Committee, Allegheny
International, Inc.; former Director of Western Airlines, Inc.,
International Finance Group and Keystone; former Chairman, Council of
Managing Advisers, Dean Witter Reynolds Bank; Founder/former Chairman
of Spencer Stuart & Associates; and former Trustee or Director of all
Keystone Group Funds.
RUSSEL R. TAYLOR: Trustee of the Gintel Funds, Greenwich, Connecticut;
Associate Professor and Director, H.W. Taylor Institute of
Entrepreneurial Studies, College of New Rochelle; former Director of
Annis Furs, Inc. and Minnetonka, Inc.; and former Trustee or Director
of all Keystone Group Funds.
CHARLES M. WILLIAMS: Director, Horace Mann Educator Corp.; President, Charles
M. Williams Associates; Advisory Director, Orix U.S.A., Inc.; Director
of Fort Dearborn Income Securities, Inc., 4 Merrill Lynch Funds,
National Life Insurance Company of Vermont and the Institute for
Financial Management, Inc.; President of Charles M. Williams
Associates, Inc.; George Gund Professor of Commercial Banking,
Emeritus, at Harvard University Graduate School of Business
Administration; former Director of Keystone, Hammermill Paper Co.,
Sonat, Inc., United States Leasing International, Inc.; and former
Trustee or Director of all Keystone Custodian Funds and Keystone
America Funds.
Directors who are affiliated persons of Keystone or Harbor Capital receive
no compensation from the Fund or the Subsidiary for their services. Prior to
September of 1993, each of the other Directors received for his services as a
Director an annual retainer of $2,000 plus $100 for each meeting attended. For
the fiscal year ended February 28, 1994, fees of independent Directors totaled
$22,836. Officers are compensated for their services by Keystone or Harbor
Capital and receive no compensation from the Fund or the Subsidiary. Several of
the officers of the Fund are also officers, Directors and/or stockholders of
Keystone or Harbor Capital and have an interest in the management fees paid by
the Fund to Keystone and by Keystone to Harbor Capital. On March 31, 1994, the
Fund's Directors, officers and Advisory Board Members as a group owned less than
1% of the Fund's outstanding shares.
The address of all the Fund's Directors, officers and Advisory Board
members is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PRINCIPAL UNDERWRITER
Pursuant to a Principal Underwriting Agreement dated August 19, 1993 (the
"Underwriting Agreement"), KDI acts as the Fund's Principal Underwriter. KDI,
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is a Delaware
corporation wholly-owned by Keystone. KDI, as agent, has agreed to use its best
efforts to find purchasers for the shares. KDI may retain and employ
representatives to promote distribution of the shares and may obtain orders from
brokers, dealers and others, acting as principals, for sales of shares to them.
The Underwriting Agreement provides that KDI will bear the expense of preparing,
printing and distributing advertising and sales literature and prospectuses used
by it. In its capacity as Principal Underwriter, KDI may receive payments from
the Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved by a majority of the Fund's
Independent Directors at least annually at a meeting called for that purpose,
and if its continuance is approved annually by vote of a majority of Directors,
or by vote of a majority of the outstanding shares.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Directors or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its "assignment" as that term is defined in the 1940 Act.
From time to time, if in KDI's judgment it could benefit the sales of Fund
shares, KDI may use its discretion in providing to selected dealers promotional
materials and selling aids, including, but not limited to, personal computers,
related software and Fund data files.
For the fiscal years ended February 29,1992 and February 28, 1993, KDI
earned commissions of $101,013 and $217,306, respectively, after allowing
commissions and service fees of $666,388 and $719,190, respectively, to dealers
and others. For the fiscal year ended February 28, 1994, aggregate commissions
and service fees were paid or accrued in the amount of $4,896,954, of which
$3,149,186 constituted an advance. Specifically, KDI paid commissions and
service fees to others of $2,956,413 and commissions payable to KDI amounted to
$1,940,541.
BROKERAGE
It is the policy of the Fund, in effecting transactions 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 ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are weighed by Keystone and Harbor Capital 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 or Harbor Capital is
considered to be in addition to and not in lieu of services required to be
performed by Keystone and Harbor Capital under their respective advisory
agreements. The cost, value and specific application of such information are
indeterminable and cannot be practically allocated among the Fund and other
clients of Keystone and Harbor Capital who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for such
other clients.
The Fund expects that purchases and sales of 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 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
purchase of certain securities directly from an issuer for the Fund's portfolio
in order to take advantage of the lower purchase price to members of such a
group.
The Board of Directors of the Fund may in the future determine, as have the
Directors or Trustees of various other funds in the Keystone Group, that the
Fund may follow a policy of considering sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions, subject to
the requirements of best execution described above.
The policy of the Fund with respect to brokerage is and will be reviewed by
the Board of Directors of the Fund from time to time. Because of the possibility
of further regulatory developments affecting the securities exchanges and
brokerage practices generally, the foregoing practices may be changed, modified
or eliminated.
For the fiscal years ended February 29, 1992, February 28, 1993 and
February 28, 1994, brokerage commissions paid by the Fund on portfolio
transactions totaled $574,733 and $377,533 respectively. For the fiscal year
ended February 29, 1992, the Fund paid brokerage commissions of approximately
$250,000. None of such commissions was paid to a broker who was an affiliated
person of the Fund or an affiliated person of such a person or, to the knowledge
of the Fund, to a broker an affiliated person of which was an affiliated person
of the Fund, Keystone or Harbor Capital.
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
Total return quotations for the Fund as they may appear from time to time
in advertisements are calculated by finding the average annual compounded rates
of return over the one, five and ten year periods on a hypothetical $1,000
investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The deduction of the contingent deferred sales charge is reflected in the
applicable years. The ending redeemable value assumes a complete redemption at
the end of the one, five or ten year periods.
The compounded average rate of returns for the one, five and ten year
periods ended February 28, 1994 were 71.48%, 9.08% and 4.65%, respectively. The
cumulative total returns of the Fund for the one, five and ten year periods
ending February 28, 1994 were 71.48% (including contingent deferred sales
charge), 54.46% and 57.56%, respectively.
Current yield quotations consist of a quotation based on a 30-day period
ended on the date of the most recent balance sheet of the Fund, computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the base period. The Fund
presently does not intend to advertise current yield.
ADDITIONAL INFORMATION
KPMG Peat Marwick, One Boston Place, Boston, Massachusetts 02108, Certified
Public Accountants, are the independent auditors for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian ("Custodian") of all securities and cash
of the Fund. The Custodian performs no investment management functions for the
Fund, but, in addition to its custodial services, is responsible for accounting
and related recordkeeping on behalf of the Fund.
Except as otherwise stated in its prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in its prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
No dealer, salesman or other person is authorized to give any information
or to make any representation not contained in the Fund's prospectus, this
statement of additional information or in supplemental sales literature issued
by the Fund or the Principal Underwriter, and no person is entitled to rely on
any information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the
Securities and Exchange 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.
As of March 31, 1994, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL owned of record 16% of
the Fund's then outstanding shares. As of March 31, 1994, management was not
aware of any other person owning beneficially or of record 5% or more of the
Fund's then outstanding shares.
<PAGE>
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APPENDIX
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MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated A-1
by Standard & Poor's Corporation ("S&P"), PRIME-1 by Moody's Investors Service,
Inc. ("Moody's") or F-1 by Fitch Investors Service, Inc. ("Fitch"). These
ratings and other money market instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the factors
considered by Fitch in assigning this rating are: (1) the issuer's liquidity;
(2) its standing in the industry; (3) the size of its debt; (4) its ability to
service its debt; (5) its profitability; (6) its return on equity; (7) its
alternative sources of financing; and (8) its ability to access the capital
markets. Analysis of the relative strength or weakness of these factors and
others determines whether an issuer's commercial paper is rated F-1.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance. Treasury bills have maturities of one year or less. Treasury
notes have maturities of one to ten years, and Treasury bonds generally have
maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include direct obligations of the U.S. Treasury and securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks, Federal
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities, such as
Treasury bills and Government National Mortgage Association ("GNMA")
pass-through certificates, are supported by the full faith and credit of the
U.S.; others, such as securities of Federal Home Loan Banks, by the right of the
issuer to borrow from the Treasury; still others, such as bonds issued by the
Federal National Mortgage Association, a private corporation, are supported only
by the credit of the instrumentality. Because the U.S. government is not
obligated by law to provide support to an instrumentality it sponsors, the Fund
will invest in the securities issued by such an instrumentality only when
Keystone determines that the credit risk with respect to the instrumentality
does not make its securities unsuitable investments. U.S. government securities
will not include international agencies or instrumentalities in which the U.S.
government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the InterAmerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks, including their branches abroad 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 currently does not intend to purchase
such foreign securities (except to the extent that certificates of deposit of
foreign branches of U.S. banks may be deemed foreign securities) or purchase
certificates of deposit, bankers' acceptances or other similar obligations
issued by foreign banks.
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.
FOREIGN SECURITIES
Investment in foreign securities may involve more risk than investment
solely in securities of domestic issuers for the following reasons: (1) there
may be less public information available about foreign companies than is
available about U.S. companies; (2) foreign companies are not generally subject
to the uniform accounting, auditing and financial reporting standards and
practices applicable to U.S. companies; (3) foreign stock markets have less
volume than the U.S. market, and the securities of some foreign companies are
less liquid and more volatile than the securities of comparable U.S. companies;
(4) there may be less government regulation of stock exchanges, brokers, listed
companies and banks in foreign countries than in the U.S.; (5) the Fund may
incur fees on currency exchanges when it changes investments from one country to
another; (6) the Fund's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization of bank deposits, establishment of
exchange controls, political or social instability or diplomatic developments;
and (7) fluctuations in foreign exchange rates will affect the value of the
Fund's portfolio securities, the value of dividends and interest earned, gains
and losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments.
OPTIONS TRANSACTIONS
The Fund is authorized to write (i.e., sell) covered call options and to
purchase call options, including purchasing call options to close out covered
call options previously written. A call option obligates a writer to sell and
gives a purchaser the right to buy the underlying security at the stated
exercise price at any time until the stated expiration date.
The Fund will only write call options that are covered, which means that
the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund may write a call option on any portfolio
security for which call options are available and listed on the London Stock
Exchange or a national securities exchange. The Fund will receive a premium for
writing a call option but will give up, until the expiration date, the
opportunity to profit from an increase in the underlying security's price above
the exercise price. The Fund will retain the risk of loss from a decrease in the
price of the underlying security. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked options which the Fund will not do) but capable
of enhancing the Fund's total returns.
The premium received by the Fund for writing a covered call option will be
recorded as a liability in the Fund's statement of assets and liabilities. This
liability will be adjusted daily to the option's current market value, which
will be the latest sale price at the time as of which the net asset value per
share of the Fund is computed (the close of the New York Stock Exchange), or, in
the absence of such sale, at the latest bid quotation. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction or delivery of the underlying security upon exercise of
the option.
The London Options Clearing House is the issuer of, and the obligor on,
every option traded on the London Stock Exchange and will be the issuer of, and
the obligor on, those covered call options written by the Fund which are traded
on the London Stock Exchange. The Fund will be required to make escrow
arrangements to secure its obligation to deliver to the London Options Clearing
House the underlying security of each such covered call option which the Fund
writes.
The Options Clearing Corporation is the issuer of, and the obligor on,
every option traded on a national securities exchange and will be the issuer of,
and the obligor on, those covered call options written by the Fund which are
traded on a national securities exchange. The Fund will be required to make
escrow arrangements to secure its obligation to deliver to The Options Clearing
Corporation the underlying security of each such covered call option which the
Fund writes.
Options traded in the over-the-counter market involve the additional risk
that securities dealers participating in such transactions would fail to meet
their obligations to the Fund. In addition, the abililty to terminate
over-the-counter option positions may be more limited than in the case of
exchange traded options positions. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities.
The Fund will purchase call options to close out a covered call option it
has written. When it appears that a covered call option written by the Fund is
likely to be exercised, the Fund may consider it appropriate to avoid having to
sell the underlying security. Or, the Fund may wish to extinguish a covered call
option, which it has written in order to be free to sell the underlying
security, to realize a profit on the previously written call option or to write
another covered call option on the underlying security. In all such instances,
the Fund can close out the previously written call option by purchasing a call
option on the same underlying security with the same exercise price and
expiration date. (The Fund may, under certain circumstances, also be able to
transfer a previously written call option.) The Fund will realize a short-term
capital gain if the amount paid to purchase the call option plus transaction
costs is less than the premium received for writing the covered call option. The
Fund will realize a short-term capital loss if the amount paid to purchase the
call option plus transaction costs is greater than the premium received for
writing the covered call option.
A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.
If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
In the past the Fund has qualified for, and elected to receive, the special
tax treatment afforded regulated investment companies under Subchapter M of the
Code. Although the Fund intends to continue to qualify for such tax treatment,
in order to do so it must, among other things, derive less than 30% of its gross
income from gains from the sale or other disposition of securities held for less
than three months. Because of this, the Fund may be restricted in the writing of
call options where the underlying securities have been held less than three
months, in the writing of covered call options which expire in less than three
months and in effecting closing purchases with respect to options which were
written less than three months earlier. As a result, the Fund may elect to
forego otherwise favorable investment opportunities and may elect to avoid or
delay effecting closing purchases or selling portfolio securities, with the risk
that a potential loss may be increased or a potential gain may be reduced or
turned into a loss.
Under the Code, gain or loss attributable to a closing transaction and
premiums received by the Fund for writing a covered call option which is not
exercised may constitute short-term capital gain or loss. Under provisions of
the Tax Reform Act of 1986, effective for taxable years beginning after October
22, 1986, a gain on an option transaction which qualifies as a "designated
hedge" transaction under Treasury regulations may be offset by realized or
unrealized losses on such designated transaction. The netting of gain against
such losses could result in a reduction in gross income from options
transactions for purposes of the 30 percent test.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
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 that are related to
currency and other financial futures contracts for the hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts and
related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather than
in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the U.S. are The Board of Trade of the
City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by the
Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by the Fund, as purchaser,
to accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determination is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, GNMA certificates, 90-day domestic bank
certificates of deposit, 90-day commercial paper, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be authorized. The standard contract size
is $100,000 for futures contracts in U.S. Treasury bonds, U.S. Treasury notes
and GNMA certificates, and $1,000,000 for the other designated contracts. While
U.S. Treasury bonds, U.S. Treasury bills and U.S. Treasury notes are backed by
the full faith and credit of the U.S. government and GNMA certificates are
guaranteed by a U.S. government agency, the futures contracts in U.S. government
securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS/STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in the
index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently stock index futures contracts can be purchased or sold on the 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 transac-tions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable, and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its Custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price, the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs,
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures contracts are similar
to options on stocks except that an option on a currency or other financial
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) rather than to purchase or
sell currency or other instruments making up a financial futures index at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency or other financial
futures contracts is analagous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on 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.
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 may be unable
to fulfill its obligations 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 con-nection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the under-lying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS.
In addition to the risks described above for currency and other financial
futures contracts, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests
in foreign securities they usually will be denominated in foreign currencies and
the Fund temporarily may hold funds in foreign currencies. Thus, the Fund's
share value will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange 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 U.S. is regulated under the Commodity Exchange Act by the CFTC
and 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 and Swiss Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen and 1,000,000 for the
Peso. In contrast to Forward Currency Exchange Contracts which can be traded at
any time, only four value dates per year are available, the third Wednesday of
March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a variety of
currencies in both the U.S. and Europe. On the Philadelphia Stock Exchange, for
example, contracts for half the size of the corresponding futures contracts on
the Chicago Board - Options Exchange are traded with up to nine months maturity
in Deutsche Marks, British Pound Sterling, Japanese Yen, Swiss Francs and
Canadian Dollars. Options can be exercised at any time during the contract life,
and require a deposit subject to normal margin requirements. Since a futures
contract must be exercised, the Fund must continually make up the margin
balance. As a result, a wrong price move could result in the Fund losing more
than the original investment, as it cannot walk away from the futures contract
as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in connection
with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is analagous
to the purchase of protective puts on individual stocks, where an absolute level
of protection is sought below which no additional economic loss would be
incurred by the Fund. Put options may be purchased to hedge a portfolio of
foreign stocks or foreign debt instruments or a position in the foreign currency
upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or the price of the foreign stock or foreign debt instruments, 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. The Fund does not intend to trade more than 5% of its net assets
under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign 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 difference between the
U.S. and foreign nations. If the Fund sells small 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 payment 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
payment restrictions in recent years, or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberal-izations 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 buyer 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 if
the writer 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
broker-dealer carrying the writer's position or if the writer 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 options 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.
INDEX BASED FUTURES CONTACT. An index based futures contract is a bilateral
agreement pursuant to which a party agrees to buy or deliver at settlement an
amount of cash equal to $500 times the difference between the closing value of
an index on the expiration date and the price at which the futures contract is
originally struck. Index based futures are traded on Commodities Exchanges.
Currently index based futures contracts can be purchased or sold with respect to
the Standard & Poor's Corporation (S&P) 500 Stock Index and S&P 100 Stock Index
on the Chicago Mercantile Exchange, the New York Stock Exchange Composite Index
on the New York Futures Exchange and the Value Line Stock Index and Major Market
Index on the Kansas City Board of Trade.
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>
SCHEDULE OF INVESTMENTS--February 28, 1994
Number Market
of Shares Value
COMMON STOCKS (95.7%)
GOLD MINING (87.4%)
Agnico Eagle Mines Ltd. 285,000 $ 3,366,563
American Barrick Resources Corp. 175,000 4,418,750
* Asarco Australia (a) 1,500,000 1,966,933
Cambior Inc. 550,000 8,643,961
Canarc Resource Corp. (a) 300,000 954,071
Delta Gold NL (a) 1,100,000 2,978,905
Driefontein Consolidated Mines Ltd. ADR 250,000 2,937,500
* El Callao Mining Corp. (a) 275,000 905,074
Euro-Nevada Mining Ltd. 425,000 13,516,012
Franco-Nevada Mining Corp. Ltd. 325,000 19,349,530
Free State Consolidated Gold Mines Ltd. ADR 575,000 8,014,063
* Freeport-McMoRan Copper Inc. 125,000 3,156,250
Gold Mines of Kalgoorlie Options (a) 9,900,000 6,349,772
Golden Shamrock (a) 4,000,000 3,449,259
Golden Star Resources Ltd. Canada (a) 300,000 4,520,745
Hartebeestfontein Gold Mining Ltd. ADR 660,000 3,417,150
Homestake Gold (a) 2,500,000 3,082,241
Homestake Mining Co. 250,000 5,312,500
Hycroft Resources & Development Corp. (a) 400,000 1,331,262
Kloof Gold Mining Ltd. ADR 150,000 1,528,125
* MK Gold Co. (a) 200,000 1,225,000
Newcrest Mining 2,500,000 10,814,567
Newmont Mining Corp. 125,000 6,781,250
North Flinders Mines 750,000 5,772,520
Orion Resources (a) 800,000 1,231,471
Placer Dome, Inc. 200,000 4,825,000
Poseidon Gold 1,550,000 3,645,239
Prime Resources Group Inc. (a) 300,000 2,218,771
Randfontein Estates Gold Mining ADR 380,000 3,245,580
* Resolute Resources (a) 1,000,000 1,297,035
Samantha Gold NL 820,000 3,798,461
Southvaal Holdings Ltd. ADR 125,000 3,342,138
TVX Gold Inc. (a) 700,000 4,440,625
Vaal Reefs Exploration & Mining Ltd. ADR 665,000 6,026,562
* Venezuelan Goldfields Ltd. (a) 325,000 3,755,732
* Western Areas Gold Mining Ltd. ADR 525,000 4,372,678
Western Deep Levels Ltd. ADR 100,000 4,043,750
Zapopan NL (a) 2,500,000 5,166,762
175,201,807
GOLD MINING FINANCE (1.7%)
* Anglo-American Corp. of South Africa Ltd.
ADR 80,000 3,340,000
OTHER MINING AND INDUSTRIAL (6.6%)
Plutonic Resources NL 1,600,000 9,236,032
Redstone Resources Inc. 650,000 3,665,594
* Target Exploration (a) 525,000 445,623
13,347,249
TOTAL COMMON STOCKS
(Cost--$125,113,331) 191,889,056
Par
Value
FIXED INCOME (0.6%)
OTHER MINING AND INDUSTRIAL (0.6%)
* Target Exploration, 11.250%, 01/01/97
(Cost--$1,165,066) $ 655,000 1,250,928
SHORT-TERM INVESTMENTS (3.1%)
CERTIFICATE OF DEPOSIT (0.0%)
State Street Bank and Trust Co., 2.375%,
05/02/94 (Cost--$16,300) 16,300 16,300
COMMERCIAL PAPER (3.1%)
Ford Motor Credit Co., 3.400%, 03/01/94
(Cost--$6,182,000) 6,182,000 6,182,000
<PAGE>
Market
Value
TOTAL SHORT-TERM INVESTMENTS
(Cost--$6,198,300) $ 6,198,300
TOTAL INVESTMENTS
(Cost--$132,476,697)(b) 199,338,284
INVESTMENT IN WHOLLY-OWNED
FOREIGN SUBSIDIARY (0.4%)
Precious Metals (Bermuda) Ltd. 700,140
OTHER ASSETS AND LIABILITIES--NET (0.2%) 450,887
NET ASSETS (100.0%) $200,489,311
MAJOR INVESTMENT ELIMINATIONS--
September 1, 1993 to February 28, 1994
Campbell Resources Inc.
Canyon Resources Corp., wts.
Dayton Mining Corp.
Firstmiss Gold Inc.
Pegasus Gold Inc.
Poseidon Gold Ltd.
Royal Oak Mines Inc.
Impala Platinum Holdings Ltd. ADR
Rustenburg Platinum Holdings Ltd. ADR
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income-producing security.
(b) The cost of investments for federal income tax purposes amounted to
$136,804,191. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at February 28, 1994, are as follows:
Gross unrealized appreciation $68,485,412
Gross unrealized depreciation (5,251,179)
Net unrealized appreciation $63,234,233
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended
Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28, Feb. 28,
1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value: Beginning
of year $14.38 $15.37 $14.22 $19.15 $16.82 $15.50 $17.31 $12.80 $12.21 $21.37
Income from investment
operations
Investment income--net
(deficit) (0.17) (0.12) (0.02) -0- 0.06 0.05 (0.01) 0.25 0.34 0.41
Realized gains (losses) on
investments 10.88 (0.76) 1.30 (4.61) 2.27 1.59 (0.17) 4.85 1.10 (8.23)
Net commissions paid on
fund share sales (b) -0- -0- -0- -0- -0- -0- -0- (0.14) (0.11) (0.04)
Total from investment
operations 10.71 (0.88) 1.28 (4.61) 2.33 1.64 (0.18) 4.96 1.33 (7.86)
Less distributions
Dividends from investment
income--net -0- -0- -0- (0.06) -0- (0.12) (0.41) (0.37) (0.29) (0.63)
Distributions in excess of
investment income--net (c) -0- (0.11) (0.13) (0.26) -0- -0- -0- -0- -0- -0-
Distributions from realized
capital gains--net -0- -0- -0- -0- -0- (0.20) (1.22) (0.08) (0.45) (0.67)
Total distributions -0- (0.11) (0.13) (0.32) -0- (0.32) (1.63) (0.45) (0.74) (1.30)
Net asset value: End of
year $25.09 $14.38 $15.37 $14.22 $19.15 $16.82 $15.50 $17.31 $12.80 $12.21
Total return (d) 74.48% (5.74%) 9.07% (24.37%) 13.85% 10.64% (2.86%) 40.12% 10.72% (38.82%)
Ratios/supplemental data
Ratios to average net
assets:
Operating and Management
expenses 2.34% 2.83% 2.70% 2.76% 2.20% 1.68% 1.84% 1.41% 1.44% 1.47%
Investment income--net
(deficit) (0.75%) (0.86%) (0.14%) (0.02%) 0.32% 0.28% (0.05%) 1.98% 3.17% 2.51%
Portfolio turnover rate 73% 58% 53% 68% 95% 82% 62% 89% 42% 27%
Net assets, end of year
(thousands) 200,489 114,364 131,356 150,200 195,837 222,079 222,646 98,433 63,929 41,468
<FN>
(a) Calculation based on average shares outstanding.
(b) Prior to June 30, 1987, net commissions paid on new sales of shares under the Fund's Rule 12b-1 Distribution Plan had
been treated for both financial statement and tax purposes as capital charges. On June 11, 1987, the Securities and
Exchange Commission adopted a rule which required for financial statements for the periods ended on or after June 30,
1987, that net commissions paid under Rule 12b-1 Distribution Plans be treated as operating expense rather than
capital charges. Accordingly, beginning with the year ended February 29, 1988 the Fund's financial statements reflect
12b-1 Distribution Plan expenses (i.e., shareholder service fees plus commissions paid net of deferred sales charges
received by the Fund) as a component of net investment income.
(c) Effective March 1, 1993 the Fund adopted Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies. As a
result, distribution amounts exceeding book basis net investment income (or tax basis net income on a temporary basis)
are presented as "Distributions in excess of net investment income." Similarly, capital gain distributions in excess
of book basis capital gains (or tax basis capital gains on a temporary basis) are presented as "Distributions in
excess of realized capital gains." For the fiscal years ended February 28, 1993, February 29, 1992, and February 28,
1991, distributions in excess of book basis net income were charged to paid-in capital.
(d) Excluding applicable sales charges.
<FN>
</TABLE>
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
February 28, 1994
<S> <C>
Assets:
Investments at market value (identified cost--$132,476,697) (Note 1) $199,338,284
Investment in wholly-owned foreign subsidiary, at fair value (Note 2) 700,140
Total investments 200,038,424
Cash 321
Foreign currency (Cost--$152,663) 153,385
Receivable for:
Investments sold 147,040
Fund shares sold 4,020,812
Interest and dividends 343,421
Prepaid expenses 20,184
Other assets 4,435
Due from foreign subsidiary 3,494
Total assets 204,731,516
Liabilities:
Payable for:
Investments purchased 38,554
Fund shares redeemed 4,004,806
Commissions and shareholder service fees payable to Principal Underwriter (Note 3) 63,628
Payable to Investment Adviser (Note 5) 13,954
Accrued reimbursable expenses (Note 5) 4,511
Other accrued expenses 116,752
Total liabilities 4,242,205
Net assets $200,489,311
Net assets represented by (Notes 1 and 3):
Paid-in capital $164,884,734
Undistributed investment income--net 402,189
Accumulated realized gains (losses) on investment transactions--net (31,659,921)
Net unrealized appreciation on investments and foreign currency 66,862,309
Total net assets applicable to outstanding shares of beneficial interest
($25.09 a share on 7,990,003 shares outstanding) $200,489,311
</TABLE>
See Notes to Financial Statements.
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended February 28, 1994
<S> <C> <C>
Investment Income:
Dividends (net of foreign withholding taxes of $388,644) $ 2,686,527
Interest 56,895
Total income 2,743,422
Expenses (Notes 3 and 5):
Management fee $ 1,189,670
Transfer agent fees 820,771
Accounting, auditing and legal 49,128
Custodian and financial agent 124,105
Printing 34,088
Postage and mailing 69,469
Directors' fees and expenses 22,836
Distribution Plan expenses 1,623,559
Registration fees 93,522
State tax expense 26,828
Miscellaneous expenses 16,872
Total expenses 4,070,848
Loss from operations--net (Note 1) (1,327,426)
Equity in earnings of subsidiary (Note 2) 5,057
Realized and unrealized gain (loss) on investments and foreign currency
related transactions--net:
Realized gain on:
Investments 46,565,060
Foreign currency related transactions 101,947
Realized gain on investments and foreign currency related
transactions--net (Note 4) 46,667,007
Net change in unrealized appreciation on:
Investments 41,185,635
Foreign currency related transactions (92,908)
Increase (decrease) in unrealized appreciation--net 41,092,727
Net gain on investments and foreign currency related transactions 87,759,734
Net increase in net assets resulting from operations $86,437,365
</TABLE>
See Notes to Financial Statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended February 28,
1994 1993
<S> <C> <C>
Operations:
Loss from operations--net (Note 1) $ (1,327,426) $ (1,008,165)
Equity in earnings of subsidiary (Note 2) 5,057 6,007
Realized gain (loss) on investments and foreign currency related
transactions--net (Note 4) 46,667,007 (14,538,913)
Increase in unrealized appreciation--net 41,092,727 8,212,201
Net increase (decrease) in net assets resulting from operations 86,437,365 (7,328,870)
Distributions to shareholders in excess of net investment income
(Notes 1 and 6) 0 (905,284)
Capital share transactions (Note 3):
Proceeds from shares sold 299,168,601 52,539,898
Payments for shares redeemed (299,480,226) (61,902,600)
Net asset value of shares issued in reinvestment of distributions in excess of
net investment income 0 604,360
Net decrease in net assets resulting from capital share transactions (311,625) (8,758,342)
Total increase (decrease) in net assets 86,125,740 (16,992,496)
Net assets:
Beginning of year 114,363,571 131,356,067
End of year [including undistributed net investment income (distributions in
excess of net investment income) as follows: February, 1994--$402,189 and
February, 1993--($1,203,474)] (Note 1) $ 200,489,311 $114,363,571
</TABLE>
See Notes to Financial Statements.
<PAGE>
Keystone Precious Metals Holdings, Inc.
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Precious Metals Holdings, Inc. (the "Fund") is a Delaware corporation
for which Keystone Custodian Funds, Inc. ("Keystone") is the investment
adviser. It is registered as a diversified open-end investment company under
the Investment Company Act of 1940 (the "Act").
Harbor Capital Management Company, Inc. (the "Sub-Adviser") acts as
sub-adviser to the Fund. Subject to the supervision of the Fund's Board of
Directors and Keystone, the Sub-Adviser provides an investment program for the
Fund, as well as providing research, advice and security recommendations to
Keystone upon request.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting
of members of current management of Keystone and its affiliates. Keystone
Investor Resource Center, Inc. ("KIRC") a wholly-owned subsidiary of Keystone,
is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments, including American Depository Receipts ("ADRs"), are usually
valued at the closing sales price or, in the absence of sales and for
over-the-counter securities, the mean of bid and asked quotations. Management
values the following securities at prices it deems in good faith to be fair:
(a) securities for which complete quotations are not readily available and (b)
listed securities if, in the opinion of management, the last sales price does
not reflect a current value or if no sale occurred. ADRs, certificates
representing shares of foreign securities deposited in domestic and foreign
banks, are traded and valued in United States dollars. Those securities traded
in foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily rate
of exchange; purchases and sales of investments, income and expenses at the
rate of exchange prevailing on the respective dates of such transactions. Net
unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
Short-term investments maturing in sixty days or less are valued at amortized
cost (original purchase cost as adjusted for amortization of premium or
accretion of discount which, when combined with accrued interest, approximates
market.) Short-term investments maturing in more than sixty days for which
market quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased that
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount which, when combined with accrued interest, approximates
market.)
B. A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or, in the
case of a stock index, cash at a set price on a future date. Upon entering
into a futures contract, the Fund is required to deposit with a broker an
amount ("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income.
<PAGE>
C. Securities transactions are accounted for on the trade date. Realized gains
and losses are computed on the identified cost basis. Interest income is
recorded on the accrual basis and dividend income is recorded on the
ex-dividend date. Distributions to shareholders are recorded on the record
date.
D. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund is relieved of any federal
income tax liability by distributing all of its net taxable investment income
and net taxable capital gains, if any, to its shareholders. The Fund intends
to avoid excise tax liability by making the required distributions under the
Internal Revenue Code.
E. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller, under the repurchase agreement, will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at 101%
of the repurchase price. The Fund monitors the value of collateral on a daily
basis, and if the value of the collateral falls below required levels, the
Fund intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks, and the Fund will take
constructive receipt of all securities underlying repurchase agreements until
such agreements expire.
F. In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Fund may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time, the Fund
may enter into contracts to hedge certain foreign currency assets. Contracts
are recorded at market value. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on investments and
foreign currency related transactions. Gains and losses on foreign currency
related transactions are treated as ordinary income for federal income tax
purposes.
<PAGE>
G. The Fund distributes net investment income to shareholders, if any,
semiannually, and net capital gains, if any, annually. Distributions from net
investment income are based on tax basis net income. Distributions from
taxable net investment income and net capital gains can exceed book basis net
investment income and net capital gains. Effective March 1, 1993, the Fund
adopted Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies. As a result, the Fund changed the
classification of distributions to shareholders to more clearly reflect the
differences between financial statement amounts available for distribution
and amounts distributed to comply with income tax regulations. Accordingly,
the following reclassifications have been made to the capital accounts in the
year ended February 28, 1994; a decrease in paid-in capital of $2,440,700, an
increase in undistributed net investment income of $2,928,032 and a decrease
in accumulated net realized gains (losses) on investment transactions of
$487,332. Differences between book basis net investment income available for
distribution and tax basis net investment income available for distribution
are primarily attributable to differences in the treatment of 12b-1
Distribution Plan charges and unrealized appreciation on Passive Foreign
Investment Companies. There were no distributions for the year ended February
28, 1994.
(2.) Investment in Foreign Subsidiary
Precious Metals (Bermuda) Ltd., the Fund's wholly- owned foreign subsidiary,
was acquired in May 1975 and has as its primary objective the acquisition of
precious metals. The Fund accounts for its investments in the subsidiary under
the equity method of accounting. At February 28, 1994, the fair value of the
Fund's investment in the foreign subsidiary was determined as follows:
Cash and cash
equivalents $719,054
Gold bullion -0-
Accrued expenses (18,914)
$700,140
During the year ended February 28, 1994, the foreign subsidiary had no
purchases or sales of gold bullion. Investment activities of the foreign
subsidiary resulted in gross investment income, general and administrative
expenses, and net investment income of $17,551, $12,494 and $5,057,
respectively. Management fees paid or accrued by the foreign subsidiary to
Keystone totaled $4,802 for the year ended February 28, 1994.
(3.) Capital Share Transactions
One hundred million shares of the Fund with a par value of $1.00 are
authorized for issuance. Transactions in shares of the Fund were as follows:
Year Ended February 28,
1994 1993
Shares sold 13,110,077 3,666,418
Shares redeemed (13,075,662) (4,296,651)
Shares issued in
reinvestment of
distributions from:
Investment
income--net -0- 41,288
Net increase(decrease) 34,415 (588,945)
The Fund bears some of the cost of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under the Distribution Plan, the Fund pays Keystone Distributors, Inc.
("KDI"), the principal underwriter and a wholly-owned subsidiary of Keystone,
amounts which in total may not exceed the Distribution Plan maximum.
<PAGE>
In connection with the Distribution Plan and subject to the limitations
discussed above, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KDI in connection with
the Distribution Plan, and subject to the limitations discussed above, KDI
generally pays brokers or others a commission equal to 4% of the price paid to
the Fund for each sale of Fund shares as well as a shareholder service fee at
a rate of 0.25% per annum of the net asset value of shares sold by such
brokers or others and remaining outstanding on the books of the Fund for
specified periods.
To the extent Fund shares are redeemed within four calendar years of original
issuance, the Fund may be eligible to receive a deferred sales charge from
the investor as partial reimbursement for sales commissions previously paid
on those shares. This charge is based on declining rates, which begin at
4.0%, applied to the lesser of the net asset value of shares redeemed or the
total cost of such shares.
The Distribution Plan provides that the Fund may incur certain expenses which
may not exceed a maximum amount equal to 0.3125% of the Fund's average daily
net assets for any quarter occurring after the inception of the Distribution
Plan. A new rule of the National Association of Securities Dealers, Inc.
("NASD Rule") limits the annual expenditures which the Fund may incur under
the Distribution Plan to 1%, of which 0.75% may be used to pay such
distribution expenses and 0.25% may be used to pay shareholder service fees.
The NASD Rule also limits the aggregate amount which the Fund may pay for such
distribution costs to 6.25% of gross share sales since the inception of the
Fund's 12b-1 Distribution Plan, plus interest at the prime rate plus 1% on
unpaid amounts thereof (less any contingent deferred sales charges paid by the
shareholders to KDI).
The Fund has operated its Distribution Plan in accordance with both the Plan
and the NASD Rule since July 8, 1992, except that until July 7, 1993, maximum
annual payments with respect to Net Asset Value as represented by shares sold
prior to January 1, 1992 remained at the current rate of 0.3125% quarterly
(approximately 1.25% annually).
KDI intends, but is not obligated, to continue to pay or accrue distribution
charges which exceed current annual payments permitted to be received by KDI
from the Fund. KDI intends to seek full payment of such charges from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits. KDI currently intends to seek payment of interest
only on such charges paid or accrued by KDI subsequent to January 1, 1992.
Commencing on July 8, 1992, contingent deferred sales charges applicable to
shares of the Fund issued after January 1, 1992 have, to the extent permitted
by the NASD Rule, been paid to KDI rather than to the Fund.
In connection with the changes in the deferred sales charges, the Fund has
applied to the Internal Revenue Service for authority to treat Distribution
Plan costs as expenses instead of capital charges for tax purposes and
provisionally to treat such costs as expenses until final approval is received
from the Internal Revenue Service.
During the year ended February 28, 1994, the Fund recovered $124,209 in
deferred sales charges. During the year ended February 28, 1994, the Fund paid
KDI $1,747,768. The amount paid by the Fund under its Distribution Plan, net
of deferred sales charges, was $1,623,559 (0.94% of the Fund's average daily
net asset value during the year). During the year ended February 28, 1994, KDI
paid commissions on new sales and shareholder service fees to dealers and
others of $6,105,599, of which $3,149,186 was an advance. During the year, KDI
received $449,293 in deferred sales charges, reducing the total advances
outstanding to $11,401,953 (5.69% of the Fund's net asset value as of February
28, 1994). The right to certain portions of this amount, if and when
receivable, was assigned by KDI in 1988 in connection with a financial
transaction. As of February 28, 1994, $8,473,473 of the amount remained
outstanding.
<PAGE>
(4.) Securities Transactions
As of February 28, 1994, the Fund had a capital loss carryover for federal
income tax purposes of approximately $30,543,000 which expires as follows:
2000--$22,005,000 and 2001--$8,538,000. For the year ended February 28, 1994,
purchases and sales of investment securities were as follows:
Cost of
Purchases Proceeds from Sales
Portfolio securities $123,217,015 $130,807,101
Short-term investments 471,063,200 467,205,200
$594,280,215 $598,012,301
(5.) Investment Management and Transactions with Affiliates
Officers and directors of the Fund who are employees of Keystone or the
Sub-Adviser receive no compensation directly from the Fund. Several officers
of the Fund are also officers, directors and/or stockholders of Keystone or
the Sub-Adviser and have an interest in the management fee paid by the Fund to
Keystone and by Keystone to the Sub-Adviser. The management fee paid by the
Fund is determined by applying percentage rates, which start at 0.75%, and
decline, as net assets increase, to 0.50% per annum, to the average of net
asset values of the Fund. The amount of the fee payable to the Fund's
Investment Adviser is reduced by the amount of any investment advisory fee
paid to the Fund's Investment Adviser by the Fund's subsidiary.
During the year ended February 28, 1994, the Fund paid or accrued management
fees of $1,189,670, to Keystone, which represented 0.69% of the Fund's average
net assets on an annualized basis. Keystone paid or accrued a sub-advisory fee
of $404,777 to Harbor Capital for the year ended February 28, 1994.
During the year ended February 28, 1994, the Fund paid or accrued $27,774 to
KIRC and Keystone Group, Inc., as reimbursement for the cost of certain
accounting services provided to the Fund. During the year ended February 28,
1994, $820,771 was paid or accrued to KIRC for shareholder services.
(6.) Distributions to Shareholders
A distribution of net investment income of $0.05 per share was declared
payable April 7, 1994 to shareholders of record on March 25, 1994. This
distribution is not reflected in the accompanying financial statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders
Keystone Precious Metals Holdings, Inc.
We have audited the accompanying statement of assets and liabilities of
Keystone Precious Metals Holdings, Inc. including the schedule of investments,
as of February 28, 1994, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years in the ten-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of February 28, 1994 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Precious Metals Holdings, Inc. as of February 28, 1994, the results
of its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the ten-year period then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Boston, Massachusetts
April 8, 1994
