<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
File Nos. 2-81691
811-2303
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ___
Pre-Effective Amendment No. ___
Post-Effective Amendment No. 21 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ___
Amendment No. 18 X
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 338-3200
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
Boston, MA 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(i)
___ on (date) pursuant to paragraph (a)(i)
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on (date) pursuant to paragraph (a)(ii) of Rule 485.
The Registrant has filed a Declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. A Rule 24f-2 Notice for the Registrant's last
fiscal year was filed April 8, 1996.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ----------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered Unit* Price** Fee
- ------------------------------------------------------------------------------
Shares of
$1.00 Par 789,934 $25.51 $289,998 $100
Value
- ------------------------------------------------------------------------------
* Computed under Rule 457(d) on the basis of the offering price per share at the
close of business on June 14, 1996.
**The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 16,883,225 shares of the
Fund were redeemed during its fiscal year ended February 29, 1996. Of such
shares, 16,104,659 were used for a reduction pursuant to Rule 24f-2 during the
current year. The remaining 778,566 shares are being used for a reduction in
this filing.
The Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. A Rule 24f-2 Notice for Registrant's most recent
fiscal year ended February 29, 1996 was filed on April 8, 1996.
<PAGE>
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 21
to REGISTRATION STATEMENT
This Post-Effective Amendment No. 21 to Registrant's Registration Statement No.
2-81691/811-2303 consists of the following pages, items of information and
documents:
The Facing Sheet
The Contents Page
The Cross Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEM 24(a) and 24(b)
Financial Statements
Independent Auditors' Report
Listing of Exhibits
PART C - OTHER INFORMATION - ITEMS 25-32 - AND SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections
Principal Underwriter
Location of Accounts and Records
Undertakings
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Cross-Reference Sheet pursuant to Rules 404 and 495 under the Securities Act of
1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Fee Table
3 Financial Highlights
4 Cover Page
The Fund
Investment Objectives and Policies
Investment Restrictions
Risk Factors
5 Fund Management and Expenses
Additional Information
5A Not applicable
6 The Fund
Dividends and Taxes
Fund Shares
Shareholder Services
Pricing Shares
7 How to Buy Shares
Distribution Plan
Shareholder Services
8 How to Redeem Shares
9 Not applicable
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- ---------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Not applicable
<PAGE>
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Cross-Reference Sheet continued.
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- ---------- -------------------------------------------
13 The Fund's Investment Objectives and Policies
Investment Restrictions
Brokerage
Appendix
14 Directors and Officers
15 Additional Information
16 Investment Adviser
Subadviser/Consultant
Principal Underwriter
Distribution Plan
Sales Charges
Additional Information
17 Brokerage
18 Not applicable (see Part A, Fund Shares)
19 Valuation of Securities
Distribution Plan
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return and Yield
Quotations
23 Financial Statements
<PAGE>
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
PART A
PROSPECTUS
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS JUNE 18, 1996
- ------------------------------------------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<C> <C>
Keystone Precious Metals Holdings, Inc. (the "Fund") This prospectus sets forth concisely the
is a mutual fund that seeks long-term capital information about the Fund that you should know
appreciation while protecting the purchasing power of before investing. Please read it and retain it for
shareholders' capital. Obtaining current income is a future reference.
secondary objective.
Additional information about the Fund is contained
The Fund invests primarily in common stocks of in a statement of additional information dated June
established companies directly or indirectly engaged in 18, 1996, which has been filed with the Securities
mining, processing or dealing in gold or other precious and Exchange Commission and is incorporated by
metals and minerals. reference into this prospectus. For a free copy, or
for other information about the Fund, write to the
Your purchase payment is fully invested. There is no address or call the telephone number listed above.
sales charge when you buy the Fund's shares. The Fund
may impose a deferred sales charge, which declines from SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
4% to 1%, if you redeem your shares within four calendar OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND
years of purchase. SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
The Fund has adopted a Distribution Plan pursuant to BOARD, OR ANY OTHER AGENCY.
Rule 12b-1 under the Investment Company Act of 1940
under which it bears some of the costs of selling its
shares to the public.
- --------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------------
Page Page
<S> <C> <C> <C>
Fee Table ........................................ 2 How to Buy Shares ............................ 10
Financial Highlights ............................. 3 Distribution Plan ............................ 11
The Fund ......................................... 4 How to Redeem Shares ......................... 13
Investment Objective and Policies ................ 4 Shareholder Services ......................... 15
Investment Restrictions .......................... 5 Performance Data ............................. 16
Risk Factors ..................................... 5 Fund Shares .................................. 16
Pricing Shares ................................... 7 Additional Information ....................... 17
Dividends and Taxes .............................. 7 Additional Investment
Fund Management and Expenses ..................... 8 Information ................................ (i)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
<PAGE>
FEE TABLE
KEYSTONE 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 the net asset value of shares redeemed)
Exchange Fee(2) ...................................... $10.00
(per exchange)
ANNUAL FUND OPERATING EXPENSES(3)
(as a percentage of average net assets)
Management Fee ....................................... 0.69%
12b-1 Fees(4) ........................................ 1.00%
Other Expenses ....................................... 0.59%
----
Total Fund Operating Expenses ........................ 2.28%
====
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: ............... $63 $91 $122 $262
You would pay the following
expenses on the same
investment , assuming no
redemption: ................ $23 $71 $122 $262
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ----------
(1) The deferred sales charge declines from 4% to 1% of amounts redeemed within
four calendar years after purchase. No deferred sales charge is imposed
thereafter.
(2) There is no fee for exchange orders received by the Fund directly from a
shareholder over the Keystone Automated Response Line ("KARL"). (For a
description of KARL, see "Shareholder Services.")
(3) Expense ratios are for the Fund's fiscal year ended February 29, 1996.
(4) 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").
(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.
(For a share outstanding throughout each 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 appears in the Fund's Annual Report and should
be read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the Fund's
Annual Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB.28,
1996(a) 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988(a) 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ...... $19.30 $25.09 $14.38 $15.37 $14.22 $19.15 $16.82 $15.50 $17.31 $12.80
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss) ................. (0.25) (0.13) (0.17) (0.12) (0.02) -0- 0.06 0.05 (0.01) 0.25
Net gains (losses) on
securities ............. 7.30 (5.54) 10.88 (0.76) 1.30 (4.61) 2.27 1.59 (0.17) 4.85
Net commissions paid on
fund share sales (b) ... -0- -0- -0- -0- -0- -0- -0- -0- -0- (0.14)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. 7.05 (5.67) 10.71 (0.88) 1.28 (4.61) 2.33 1.64 (0.18) 4.96
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income ...... -0- (0.12) -0- -0- -0- (0.06) -0- (0.12) (0.41) (0.37)
Distributions in excess
of net investment income(c) -0- -0- -0- (0.11) (0.13) (0.26) -0- -0- -0- -0-
Distributions from
realized capital
gains .................. -0- -0- -0- -0- -0- -0- -0- (0.20) (1.22) (0.08)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ..... 0.00 (0.12) 0.00 (0.11) (0.13) (0.32) 0.00 (0.32) (1.63) (0.45)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
YEAR ................... $26.35 $19.30 $25.09 $14.38 $15.37 $14.22 $19.15 $16.82 $15.50 $17.31
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (d) ........ 36.53% (22.70%) 74.48% (5.74%) 9.07% (24.37%) 13.85% 10.64% (2.86%) 40.12%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Operating and management
expenses ............... 2.28%(e) 2.33% 2.34% 2.83% 2.70% 2.76% 2.20% 1.68% 1.84% 1.41%
Net investment income
(loss) ................. (1.08%) (0.54%) (0.75%) (0.86%) (0.14%) (0.02%) 0.32% 0.28% (0.05%) 1.98%
Portfolio turnover rate . 39% 75% 73% 58% 53% 68% 95% 82% 62% 89%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net assets, end of year
(thousands) ............ $217,270 $171,193 $200,489 $114,364 $131,356 $150,200 $195,837 $222,079 $222,646 $98,433
======== ======== ======== ======== ======== ======== ======== ======== ======== =======
<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.
(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 net 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.
(e) "Ratio of operating and management expenses to average net assets" for the year ended February 29, 1996 includes indirectly paid
expenses. Excluding indirectly paid expenses for the year ended February 29, 1996, the expense ratio would have been 2.26%.
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
The Fund (formerly named 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 Investments Family of Funds. The Fund
is one of more than thirty funds managed or advised by Keystone Investment
Management Company (formerly named Keystone Custodian Funds, Inc.)
("Keystone"), the Fund's investment adviser.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
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.
PRINCIPAL INVESTMENTS
The Fund pursues its objectives by investing, under normal circumstances, at
least 80% of its assets in common stocks of companies that are engaged in, or
which receive at least 50% of their revenue from other companies engaged in,
exploration, mining, processing or dealing in gold or other precious metals and
minerals, such as silver, platinum, palladium and diamonds. A company will be
considered to be engaged in a business or activity if at least 50% of the
company's assets, revenues or profits are derived from that business or
activity.
Currently, the Fund also has a nonfundamental policy, which it may change
without shareholder approval, of investing a portion of its assets in domestic
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
negotiable certificates issued by a U.S. bank representing the right to receive
securities of a foreign issuer deposited in that bank or a foreign correspondent
bank.
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 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.
OTHER ELIGIBLE INVESTMENTS
When market conditions warrant, the Fund may adopt a defensive position to
preserve shareholders' capital by investing up to 100% of its assets in cash,
cash equivalents and United States ("U.S.") government securities and repurchase
agreements.
The Fund may also enter into reverse repurchase agreements and firm commitment
agreements for securities and currencies; write covered call options and
purchase call options to close out existing positions and employ new investment
techniques involving such options; 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 invest in warrants.
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.
The Fund may invest in restricted securities, including securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933
Act"). Generally, Rule 144A establishes a safe harbor from the registration
requirements of the 1933 Act for resales by large institutional investors of
securities not publicly traded in the U.S. The Fund may purchase Rule 144A
securities when such securities present an attractive investment opportunity and
otherwise meet the Fund's selection criteria. The Board of Directors has adopted
guidelines and procedures pursuant to which Keystone determines the liquidity of
the Fund's Rule 144A securities. The Board monitors Keystone's implementation of
such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of 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 "Risk Factors" and "Additional Investment Information" sections of this
prospectus 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.
The investment objective of the Fund cannot be changed without a vote of the
holders of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 ("1940 Act")).
- ------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------
The Fund has adopted the fundamental investment policies and restrictions
summarized below, which may not be changed without the approval of a majority of
the Fund's outstanding shares (as defined in the 1940 Act). These restrictions
and certain other fundamental and nonfundamental restrictions are set forth in
the statement of additional information.
The Fund may not do the following: (1) invest more than 5% of its total assets
in the securities of any one issuer (other than U.S. government securities and
its instrumentalities and securities of one or more domestic or foreign wholly
owned subsidiaries) except that up to 25% of its total assets may be invested
without regard to this limit; and (2) borrow money, except that the Fund may
borrow money from banks for emergency or extraordinary purposes in aggregate
amounts up to 5% of its net assets, or enter into reverse repurchase agreements.
The Fund "concentrates" (within the meaning 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.
In addition, the Fund may, notwithstanding any other investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Fund. The Fund does not currently
intend to implement this policy and would do so only if the 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.
- ------------------------------------------------------------------------------
RISK FACTORS
- ------------------------------------------------------------------------------
Like any investment, your investment in the Fund involves risk. Before you buy
shares of the Fund, you should carefully evaluate your ability to assume the
risks your investment in the Fund poses. YOU CAN LOSE MONEY BY INVESTING IN THE
FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE VALUE OF THE FUND'S
PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE OF YOUR INVESTMENT.
The Fund seeks long-term capital appreciation by investing primarily in common
stocks of companies that are engaged in, or which receive at least 50% of their
revenues from other companies engaged in, mining, processing or dealing in gold
or other precious metals and minerals. The Fund is best suited to patient
investors who can afford to maintain their investment over a relatively long
period of time, and who are seeking a fund which is aggressive and has the
potential for high returns. The Fund involves a high degree of risk and is not
an appropriate investment for conservative investors who are seeking
preservation of capital and/or income as a primary objective.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks, including risks of investing in
foreign securities and derivatives, attendant to individual securities or
investment practices are discussed in "Additional Investment Information."
FUND RISKS. The profits of the companies in which the Fund invests, and
ultimately the value of the Fund's securities, are directly affected by the
price of gold and other precious metals and minerals. The price of gold and
other precious metals and minerals, in turn, is subject to substantial
short-term volatility caused by various conditions, including: monetary and
political developments within a particular country and among various countries,
such as currency devaluations or revaluations and exchange controls; economic
and social conditions such as industrial and commercial demand, and investment
and speculation; and trade restrictions between countries. Since a significant
portion of the world's gold ore reserves are located in South Africa, the
political, social and economic conditions there can affect local and other gold
and gold-related companies.
A need for cash due to large liquidations from the Fund when the prices of
portfolio securities are declining could result in losses to the Fund.
Investing in the Fund involves the risk common to investing in any security,
that is that the value of the securities held by the Fund will fluctuate in
response to changes in economic conditions or public expectations about those
securities. The net asset value of the Fund's shares will change accordingly.
FOREIGN RISK. Investing in securities of foreign issuers generally involves
greater risk than investing in securities of domestic issuers for the following
reasons: (1) there may be less public information available about foreign
companies than is available about U.S. companies; (2) foreign companies are not
generally subject to the uniform accounting, auditing and financial reporting
standards and practices applicable to U.S. companies; (3) foreign stock markets
have less volume than the U.S. market, and the securities of some foreign
companies are less liquid and more volatile than the securities of comparable
U.S. companies; (4) foreign securities transactions may involve higher brokerage
commissions; (5) there may be less government regulation of stock exchanges,
brokers, listed companies and banks in foreign countries than in the U.S.; (6)
the Fund may incur fees on currency exchanges when it changes investments from
one country to another; (7) the Fund's foreign investments could be affected by
expropriation, confiscatory taxation, nationalization, establishment of exchange
controls, political or social instability or diplomatic developments; (8)
fluctuations in foreign exchange rates will affect the value of the Fund's
investments, the value of dividends and interest earned, gains and losses
realized on the sale of securities, net investment income and unrealized
appreciation or depreciation of investments; and (9) interest and dividends on
foreign securities may be subject to withholding taxes in a foreign country that
could result in a reduction of net investment income available for distribution.
Investing in securities of issuers in emerging markets countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging markets countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
companies in emerging markets countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities.
OTHER CONSIDERATIONS. The Fund does not, by itself, constitute a balanced
investment plan. The Fund may be appropriate as part of an overall investment
program. Investors may wish to consult their financial advisers when considering
what portion of their total assets to invest in securities of precious metals
companies.
- ------------------------------------------------------------------------------
PRICING SHARES
- ------------------------------------------------------------------------------
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's securities do not
affect the current net asset value of its shares. The Exchange is currently
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share is arrived at by determining the value of all of the Fund's
assets, subtracting all liabilities and dividing the result by the number of
shares outstanding.
The Fund values the short-term investments it purchases as follows: short-term
investments purchased 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
value; 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 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
value.
All other investments are valued at market value or, where market quotations
are not readily available, at fair value and, in the case of the Fund's
investment in any subsidiary, using the equity method of accounting which
approximates fair value as determined in good faith by the Fund's Board of
Directors. See "Valuation of Securities" in the Fund's 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 "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company when it
fails to distribute, with respect to each calendar year, at least 98% of its
ordinary income for such calendar year and 98% of its net capital gains for the
one-year period ending on October 31 of such calendar year. Any taxable dividend
declared in October, November, or December to shareholders of record in such
month, and paid by the following January 31 will be includable in the taxable
income of the shareholder as if paid on December 31 of the year in which the
dividend was declared. If the Fund qualifies and if it distributes 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 generally will make
distributions from its net investment income on or about the 15th day of April
and October each year, and from its net capital gains, if any, at least
annually.
Distributions are payable in shares of the Fund or, at the shareholder's
option (which must be exercised before the record date for the distribution), in
cash. Fund distributions in the form of additional shares are made at net asset
value without the imposition of a sales charge. Income dividends and net
short-term gains distributions are taxable as ordinary income, and net long-term
gains dividends are taxable as capital gains regardless of how long the Fund's
shares are held. If Fund shares held for less than six months are sold at a
loss, however, such loss will be treated for tax purposes as a long-term capital
loss to the extent of any long-term capital gains dividends received. 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.
If more than 50% of the value of the Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both actual dividends and the
amount the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax or to treat his share of
the foreign tax withheld as an itemized deduction from his gross income. In
substance, this policy enables the shareholder to benefit from the same foreign
tax credit or deduction that he would have received if he had been the
individual owner of foreign securities and had paid foreign income tax on the
income therefrom. As in the case of individuals receiving income directly from
foreign sources, the above described tax credit and deductions are subject to
certain limitations.
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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, the Fund's
investment adviser, provides investment advice, management and administrative
services to the Fund.
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 Investments, Inc. ("Keystone Investments"), located at
200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in
a number of voting trusts, the trustees of which are George S. Bissell, Albert
H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van
Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
Pursuant to its Investment Advisory Agreement (the "Advisory Agreement") with
the Fund, Keystone provides investment advisory and management services to the
Fund. Keystone manages the investment and reinvestment of the Fund's assets,
supervises the operation of the Fund, provides all necessary office space,
facilities, equipment and personnel and arranges at the request of the Fund for
its employees to serve as officers or agents of the Fund.
The Advisory Agreement provides that, for its services to the Fund, 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.
During the fiscal year ended February 29, 1996, the Fund paid or accrued
management fees of $1,354,605 to Keystone, which represented 0.69% of the Fund's
average daily net assets. Keystone paid or accrued a fee of $301,007 to Harbor
Capital Management Company, Inc., which acted as sub-adviser to the Fund for the
period from March 1, 1995 through July 31, 1995, and as a consultant to the Fund
for the period from August 1, 1995 through February 29, 1996.
The Advisory Agreement provides that it will continue only if approved at
least annually by (1) the Board of Directors of the Fund or by a vote of a
majority of the Fund's outstanding Shares and (2) by the vote of a majority of
the Independent Directors cast 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 Board of Directors or by a vote of a
majority of the outstanding Shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
CONSULTANT Since August 1, 1995, Harbor Capital Management Company, Inc.
("Harbor Capital"), located at 125 High Street, Boston, Massachusetts 02110, has
served as a consultant to Keystone with respect to the Fund and its subsidiary
pursuant to a Consultant Agreement. In accordance with the terms of the
Consultant Agreement, Harbor Capital provides Keystone with monthly reports
discussing the world's gold bullion markets and gold stock markets, and advice
regarding economic factors and trends in the precious metals sectors.
For its services, Harbor Capital receives from Keystone a fee at the annual
rate of 0.10% of the Fund's average daily net assets. The Fund has no
responsibility to pay Harbor Capital's fee.
The Consultant Agreement provides that it will continue for a period of two
years from August 1, 1995 and thereafter from year to year if the parties
thereto agree. The Consultant Agreement may be terminated by either party,
without penalty, on 60 days' written notice to the other party. Neither party
may assign the Consultant Agreement without the consent of the other party.
Prior to August 1, 1995, pursuant to a Sub-Advisory Agreement with Keystone,
Harbor Capital, as sub-adviser, provided investment advisory services to the
Fund, its subsidiary, and Keystone, for compensation paid by Keystone as
follows: 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.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that the Fund is
expected to pay include, but are not limited to, expenses of its transfer agent,
its custodian and its independent auditors; expenses under its Distribution
Plan; fees of its Independent Directors; expenses of shareholders' and
Directors' meetings; fees payable to government agencies, including registration
and qualification fees of the Fund and its shares under federal and state
securities laws; expenses of preparing, printing and mailing Fund prospectuses,
notices, reports and proxy material; and certain extraordinary expenses. In
addition to such expenses, the Fund pays its brokerage commissions, interest
charges and taxes. For the fiscal year ended February 29, 1996, the Fund paid
2.28% of its average net assets in expenses.
During the fiscal year ended February 29, 1996, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, and Keystone Investments, $19,093 for the cost of
certain accounting services and $831,209 for shareholders services. KIRC is a
wholly-owned subsidiary of Keystone.
PORTFOLIO MANAGER
John Madden has been the Fund's Portfolio Manager since 1995. He is a Keystone
Vice President and Senior Portfolio Manager and has over 28 years of investment
experience.
SECURITIES TRANSACTIONS
Under policies established by the Board of Directors, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may consider the number of shares of the Fund sold by the
broker-dealers. In addition, broker-dealers executing portfolio transactions,
from time to time, may be affiliated with the Fund, Keystone, Harbor Capital,
the Fund's principal underwriter or their affiliates. The Fund may pay higher
commissions to broker-dealers which provide research services. Keystone and/or
Harbor Capital may use these services in advising the Fund as well as in
advising their other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal year ended February 28,
1995 and February 29, 1996 were 75% and 39%, respectively. High portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which would be borne directly by the Fund, as well as
additional realized gains and/or losses to shareholders. For further information
about brokerage and distributions, see the statement of additional information.
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HOW TO BUY SHARES
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You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) ("the Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund by
mailing to the Fund, c/o Keystone Investor Resource Center, Inc., P.O. Box 2121,
Boston, Massachusetts 02106-2121, a completed account application and a check
payable to the Fund. You may also telephone 1-800-343-2898 to obtain the number
of an account to which you can wire or electronically transfer funds and then
send in a completed account application. Subsequent investments in Fund shares
in any amount may be made by check, by wiring Federal funds 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 same 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
or on shares purchased through reinvestment of dividends. If imposed, the
deferred sales charge is deducted from the redemption proceeds otherwise payable
to the shareholder. To the extent permitted by the NASD rule, the deferred sales
charge is paid to the Principal Underwriter.
The contingent deferred sales charge is a declining percentage of the lesser
of (1) the net asset value of the shares redeemed or (2) the total cost of such
shares. No deferred sales charge is imposed when 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 permitted
exchanges of shares between the Funds in the Keystone Fund Family that have
adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act. 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; (5) automatic withdrawals under a systematic income
plan of up to 1% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
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 Directors, Trustees, officers and employees of the
Fund, Keystone and certain of their affiliates; (2) registered representatives
of firms with dealer agreements with the Principal Underwriter; and (3) a bank
or trust company acting as trustee for a single account. For more details, see
the statement of additional information.
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DISTRIBUTION PLAN
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The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. The Fund's Distribution
Plan provides that the Fund may expend up to 0.3125% quarterly (approximately
1.25% annually) of the average daily net asset value of its shares to pay
distribution costs for sales of its shares and to pay shareholder service fees.
A NASD rule limits the amount that a Fund may pay annually in distribution costs
for the sale of its shares and shareholder service fees. The rule limits annual
expenditures to 1% of the aggregate average daily net asset value of its shares,
of which 0.75% may be used to pay such distribution costs 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 Distribution Plan, plus interest at the prime
rate plus 1% per annum on such amounts (less any deferred sales charges paid by
shareholders to the Principal Underwriter), remaining unpaid from time to time.
Payments under the Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers) (1) as
commissions for Fund shares sold and (2) as shareholder service fees in respect
of shares maintained by the recipients and outstanding on the Fund's books for
specified periods. Amounts paid or accrued to the Principal Underwriter under
(1) and (2) in the aggregate may not exceed the annual limitations referred to
above. The Principal Underwriter generally reallows to brokers or others
commissions in accordance with the following schedule:
PRINCIPAL UNDERWRITER
PAYS SELLING
AMOUNT OF SALE BROKER-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 Principal Underwriter generally reallows to brokers or others a
shareholder service fee at a rate of 0.25% per annum of the net asset value of
shares maintained by such recipients and outstanding on the books of the Fund
for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on a new
sale because the annual maximum (0.75% of average daily net assets) has been
reached, the Principal Underwriter intends, but is not obligated, to continue to
accept new orders for the purchase of Fund shares and to pay or accrue
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to
reimburse the Principal Underwriter for advances made by the Principal
Underwriter in excess of the Distribution Plan limitation, the Principal
Underwriter intends to seek full payment of such amounts from the Fund (together
with interest at the rate of prime plus 1%) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within permitted
limits. The Principal Underwriter currently intends to seek payment of interest
only on such charges paid or accrued by the Principal Underwriter subsequent to
January 1, 1992. If the Fund's 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, the Principal Underwriter will ask the Independent Directors
to take whatever action they deem appropriate under the circumstances with
respect to payment of such amounts.
During the fiscal year ended February 29, 1996, the Fund recovered $755,218 in
deferred sales charges. During the year, the Fund paid the Principal Underwriter
under the Distribution Plan $1,979,775. (1.00% of the Fund's average daily net
asset value during the year). The amount paid by the Fund under its Distribution
Plan, net of deferred sales charges received by the Fund, was $1,224,557. During
the year, the Principal Underwriter also received $755,218 in deferred sales
charges. Unpaid distribution costs at February 29, 1996 were $12,834,715 (5.91%
of the Fund's net assets).
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 outstanding voting shares of the Fund.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of 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.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
Upon written notice to dealers, the Principal Underwriter, 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 Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to dealers that satisfy certain criteria established
from time to time by the Principal Underwriter. These conditions relate to
increasing sales of shares of the Keystone funds over specified periods and
certain other factors. Such payments may, depending on the dealer's satisfaction
of the required conditions, be periodic and may be up to 0.25% of the value of
shares sold by such dealer.
The Principal Underwriter also may pay banks and other financial services
firms that facilitate transactions in shares of the Fund for their clients a
transaction fee up to the level of the payments allowed to dealers for the sale
of such shares as described above.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Fund's Board of 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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You may redeem Fund shares 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). Your
signature(s) on the written order and certificates must be guaranteed as
described below.
The redemption value equals the net asset value adjusted for fractions of a
cent and may be more or less than the shareholder's cost depending upon changes
in the value of the Fund's portfolio securities between purchase and redemption.
The Fund may impose a deferred sales charge at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the Fund deducts
the deferred sales charge from the redemption proceeds otherwise payable to the
shareholder.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take up to 15 days or
more. Any delay may be avoided by purchasing shares either with a certified
check drawn on a U.S. bank or by bank wire of funds. Although the mailing of a
redemption check may be delayed, the redemption value will be determined and the
redemption processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after redemption and prior to the release of the
proceeds, no appreciation or depreciation will occur in the value of the
redeemed shares, and no interest will be paid on the redemption proceeds. If the
mailing of a redemption check has been delayed, the check will be mailed
promptly after good payment has been collected.
The Fund computes the redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from the
shareholder. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made within seven days thereafter except as
discussed herein.
You may also redeem your shares through your broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from dealers and will calculate the net asset value on the
same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. The Principal Underwriter
charges no fee for this service. Your broker-dealer, however, may charge a
service fee.
For your protection, 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
Telephone Redemptions Section of the application to enjoy telephone redemption
privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If 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 falls below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No
contingent deferred sales charges are applied to such redemptions.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) the Fund cannot dispose of its
investments or fairly determine their value; or (4) the Securities and Exchange
Commission, for the protection of shareholders, so orders.
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SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers shareholders specific fund account information and price and yield
quotations, as well as the ability to effect account transactions, including
investments, exchanges and redemptions. Shareholders may access KARL by dialing
toll free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days
a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange shares
of the Fund for shares of any of the other funds in the Keystone Fund Family, on
the basis of their respective net asset values by calling toll free
1-800-343-2898 or by writing KIRC at Box 2121, Boston, Massachusetts 02106-2121.
(See "How to Redeem Shares" for additional information with respect to telephone
transactions.)
Fund shares purchased by check may be exchanged for shares of any Fund in the
Keystone Fund Family after 15 days, provided good payment for the purchase of
Fund shares has been collected. You may exchange your shares for another
Keystone fund for a $10 fee by calling or writing to Keystone. The exchange fee
is waived for individual investors who make an exchange using KARL. If the
shares being tendered for exchange have been held for less than four years and
are still subject to a deferred sales charge, such charge will carry over to the
shares being acquired in the exchange transaction. The Fund reserves the right,
after 60 days notice to shareholders, to terminate this exchange offer or to
change its terms, including the right to change the service charge for any
exchange.
Orders to exchange shares of the Fund for shares of Keystone Liquid Trust
("KLT") will be executed by redeeming the shares of the Fund and purchasing
shares of KLT at the net asset value of KLT shares determined after the proceeds
from such redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund prior
to 4:00 p.m. 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 you,
including Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified
Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"); 403(b)
Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Pension Plans. For details, including fees and application forms, call
KIRC toll free at 1-800-247-4075 or write to KIRC at P.O. Box 2121, Boston,
Massachusetts 02106-2121.
AUTOMATIC INVESTMENT PLAN
Shareholders may take advantage of investing on an automatic basis by
establishing an automatic investment plan. Funds are drawn on a shareholder's
checking account monthly and used to purchase Fund shares.
SYSTEMATIC INCOME PLAN
Under an Systematic Income Plan, shareholders may arrange for regular monthly
or quarterly fixed withdrawal payments. Each payment must be at least $100 and
may be as much as 1% per month or 3% per quarter of the total net asset value of
the Fund shares in the shareholder's account when the Systematic Income Plan is
opened. Fixed withdrawal payments are not subject to a 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. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
refers to the Fund's average annual compounded rates of return over specified
periods determined by comparing the initial amount invested to the ending
redeemable value of that amount. The resulting equation assumes reinvestment of
all dividends and distributions and deduction of all recurring charges, if any,
applicable to all shareholder accounts. The deduction of the contingent deferred
sales charge is reflected in the applicable years. The exchange fee is not
included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period. The Fund presently does not intend to advertise current yield.
The Fund may also include comparative performance information in advertising
or marketing the Fund's shares, such as data from Lipper Analytical Services,
Inc., Morningstar, Inc., Standard & Poor's Corporation and Ibbotson Associates
or other industry publications.
- ------------------------------------------------------------------------------
FUND SHARES
- ------------------------------------------------------------------------------
The Fund currently issues 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.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
KIRC, 101 Main Street, Cambridge, Massachusetts 02142-1519, is a wholly-owned
subsidiary of Keystone and serves as the Fund's transfer and dividend dispersing
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
- ------------------------------------------------------------------------------
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and the Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
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 and monitoring Keystone'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.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. The staff of the Securities and Exchange
Commission has taken the position that a fully secured or collateralized reverse
repurchase agreements is not subject to the percentage limitation on borrowing
imposed under Section 18 of the 1940 Act.
FOREIGN SECURITIES
The Fund may invest in securities principally traded in securities markets
outside the U.S. While investment in foreign securities is intended to reduce
risk by providing further diversification, such investments involve sovereign
risk in addition to the credit and market risks normally associated with
domestic securities. Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations. There
may be less publicly available information about a foreign company,
particularily emerging market country companies, than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. Securities of some foreign companies are less liquid or more volatile
than securities of U.S. companies, and foreign brokerage commissions and
custodian fees are generally higher than in the United States. Investments in
foreign securities may also be subject to other risks different from those
affecting U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments and currency blockage (which would prevent cash
from being brought back to the U.S.).
"WHEN ISSUED" AND "FORWARD COMMITMENT" TRANSACTIONS
The Fund may purchase securities and currencies on a when issued and delayed
delivery basis and may purchase or sell securities and currencies on a forward
commitment basis. When issued or delayed delivery transactions arise when
securities or currencies are purchased by the Fund with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A forward commitment transaction is an agreement by the Fund to
purchase or sell securities or currencies at a specified future date. When the
Fund engages in these 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 and forward
commitment transactions may be expected to occur a month or more before delivery
is due. No payment or delivery is made by the Fund, however, until it receives
payment or delivery from the other party to the transaction. A separate account
of liquid assets equal to the value of 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.
DERIVATIVES
The Fund may use derivatives while seeking to achieve its investment
objective. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond indices and stock indices.
Derivatives can be used to earn income or protect against risk, or both. For
example, one party with unwanted risk may agree to pass that risk to another
party who is willing to accept the risk, the second party being motivated, for
example, by the desire either to earn income in the form of a fee or premium
from the first party, or to reduce its own unwanted risk by attempting to pass
all or part of that risk to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes, although the Fund generally uses derivatives
primarily as direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options as well as forwards for hedging purposes. Derivatives are a
valuable tool which, when used properly, can provide significant benefit to Fund
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Fund. However, the Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options, futures, forwards and
swaps, is provided later in this section and is provided in the Fund's statement
of additional information. The Fund does not presently engage in the use of
swaps.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, the Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. The Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Fund may only write "covered" options. This means that so long as the Fund
is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities that are available
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. The Fund does not expect, however, that this will occur.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and, by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously
written put or call options of the same series.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Fund generally will write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular option at any
particular time, and, for some options, no secondary market may exist. In such
event, it might not be possible to effect a closing transaction in a particular
option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair the Fund's ability to
use such options to achieve its investment objective.
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 above, the Fund may invest in securities of foreign issuers. When
the Fund invests in foreign securities they usually will be denominated in
foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.
As one way of managing exchange rate risk, 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 and receive when the contract is completed) is
fixed when the Fund enters into the contract. The Fund usually will enter into
these contracts to stabilize the U.S. dollar value of a security it has agreed
to buy or sell. The Fund intends to use these contracts to hedge the U.S. dollar
value of a security it already owns, particularly if the Fund expects a decrease
in the value of the currency in which the foreign security is denominated.
Although the Fund will attempt to benefit from using forward contracts, the
success of its hedging strategy will depend on Keystone's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. The value of the Fund's investments denominated in foreign currencies
will depend on the relative strength of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by changes in the exchange
rate or exchange control regulations between foreign currencies and the dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund. The Fund may also purchase and sell options related to
foreign currencies in connection with hedging strategies.
<PAGE>
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KEYSTONE
FUND FAMILY
*
Quality Bond Fund (B-1)
Diversified Bond Fund (B-2)
High Income Bond Fund (B-4)
Balanced Fund (K-1)
Strategic Growth Fund (K-2)
Growth and Income Fund (S-1)
Mid-Cap Growth Fund (S-3)
Small Company Growth Fund (S-4)
International Fund
Precious Metals Holdings
Tax Free Fund
Liquid Trust
- ---------------------------------
[LOGO] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[RECYCLE LOGO]
KPMH-P 6/96
12M
- ---------------------------------
KEYSTONE
PRECIOUS METALS
HOLDINGS, INC.
- ---------------------------------
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
JUNE 18, 1996
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 18, 1996. A copy of the
prospectus may be obtained from Keystone Investment Distributors Company (the
"Principal Underwriter"), the Fund's principal underwriter, located at 200
Berkeley Street, Boston, Massachusetts 02116-5034 or your broker-dealer.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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Page
The Fund's Objectives and Policies 2
Investment Restrictions 4
Valuation of Securities 9
Distributions and Taxes 10
Sales Charges 11
Distribution Plan 14
Redemptions in Kind 17
Investment Adviser 18
Consultant 20
Directors and Officers 22
Principal Underwriter 26
Brokerage 28
Standardized Total Return and
Yield Quotations 30
Additional Information 31
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-11
<PAGE>
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THE FUND'S OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Fund's primary investment objective is to provide share-holders
with long-term capital appreciation and with protection of the purchasing power
of their capital. Obtaining current income is a secondary objective. Keystone
Investment Management Company (formerly named Keystone Custodian Funds, Inc.)
("Keystone") acts as the Fund's investment adviser. Since August 1, 1995, Harbor
Capital Management Company, Inc. ("Harbor Capital") has served as a consultant
to Keystone with respect to the Fund. Prior to that date, Harbor Capital served
as the Fund's sub-adviser.
The Fund pursues its objectives by investing, under normal
circumstances, at least 80% of its assets in common stocks of companies that are
engaged in, or receive at least 50% of their revenue from other companies
engaged in, exploration, 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 to be engaged in a business or activity
if at least 50% of its assets, reserves or profits are 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 ("ADRs").
ADRs are negotiable certificates 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.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
None of the restrictions enumerated in this paragraph may be changed
without the vote of the holders of a majority of the Fund's outstanding voting
shares, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund shall not do any of 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. Also, as a matter of practice,
the Fund does not pledge its assets except in the course of portfolio trading.
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 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 (1) 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 Exchanges; (2) not invest in real estate limited
partnership interests; and (3) not invest in oil, gas or other mineral leases.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in value of a
security or a decrease in Fund assets is not a violation of the limit.
In order to permit the sale of Fund shares in certain states, the Fund
may make commitments more restrictive than the investment restrictions described
above. Should the Fund determine that any such commitment is no longer in the
best interests on the Fund, it will revoke the commitment by terminating sales
of its shares in the state involved.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are generally
determined as follows:
(1) 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.
(2) 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.
(3) The Fund's Board of Directors values the following securities at
prices it deems in good faith to be fair: (a) securities, including restricted
securities, for which complete quotations are not readily available; (b) listed
securities if, in the Board's opinion, the last sales price does not reflect a
current market value or if no sale occurred; (c) the Fund's investment in any
subsidiary; and (d) other assets.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund distributes to its shareholders dividends from net investment
income and net realized long-term and short-term capital gains annually in
shares or, at the option of the shareholder, in cash. (Distributions of ordinary
income may be eligible in whole or in part for the Corporate 70% dividends
received deduction.) Shareholders who have not opted, prior to the record date
for any distribution, to receive cash will have the number of distributed shares
determined on the basis of the Fund's net asset value per share computed at the
end of the day on the record date after adjustment for the distribution. Net
asset value is used in computing the number of shares in both gains and income
distribution reinvestments. Account statements and/or checks as appropriate will
be mailed to shareholders within seven days after the Fund pays the
distribution. Unless the Fund receives instructions to the contrary from a
shareholder before the record date, it will assume that the shareholder wishes
to receive that distribution and future gains and income distributions in
shares. Instructions continue in effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder and regardless of the period of time Fund shares have been held by
the shareholder. However, if such shares are held less than six months and
redeemed at a loss, the shareholder will recognize a long term capital loss on
such shares to the extent of the long term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
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.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined, to the best of the
Fund's ability, to be taxable as ordinary income. Shareholders of the Fund will
be advised annually of the federal income tax status of distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to the Fund's shareholders, a
shareholder will be required to include in his gross income both actual
dividends and the amount the Fund advises him is his pro rata portion of income
taxes withheld by foreign governments from interest and dividends paid on the
Fund's investments. The shareholder will be entitled, however, to take the
amount of his share of such foreign taxes withheld as a credit against his
United States income tax, or to treat his share of the foreign tax withheld as
an itemized deduction from his gross income, if that should be to his advantage.
In substance, this policy enables the shareholder to benefit from the same
foreign tax credit or deduction that he would have received if he had been the
individual owner of foreign securities and had paid foreign income tax on the
income therefrom. As in the case of individuals receiving income directly from
foreign sources, the above described tax credit and deductions are subject to
certain limitations.
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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. The deferred
sales charge is, to the extent permitted by the National Association of
Securities Dealers, Inc. ("NASD"), paid to the Principal Underwriter. For the
fiscal year ended February 29, 1996, the Fund recovered $755,218 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.
Subject to the limitations stated above, the contingent deferred sales
charge is imposed according to the following schedule: 4% of amounts redeemed
during the calendar year of purchase; 3% of amounts redeemed during the calendar
year after the year of purchase; 2% of amounts redeemed during the second
calendar year after the year of purchase; and 1% of amounts redeemed during the
third calendar year after the year of purchase. No contingent deferred sales
charge is imposed on amounts redeemed thereafter.
The following example illustrates the operation of the contingent
deferred sales charge. Assume that an investor makes a purchase payment of
$10,000 during the calendar year 1996 and on a given date in 1997 the value of
the investor's account has grown through investment performance and reinvestment
of distributions to $12,000. On such date in 1997, the investor could redeem up
to $2,000 ($12,000 minus $10,000) without incurring a 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 proceeds (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)
and would total $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 funds in the Keystone Fund Family 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, the calendar year of the exchange, for purposes of any future
deferred sales charge, is deemed to be the year shares tendered for exchange
were originally purchased.
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
imposition of a deferred sales charge to (1) officers, Directors, Trustees,
full-time employees and sales representatives of the Fund, Keystone Management,
Keystone, Keystone Investments, Inc. ("Keystone Investments"), Harbor Capital,
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, full-time employees and sales representatives,
provided, however, that all such sales are made upon the written assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No 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 other Fund in the Keystone Fund Family (as hereinafter
defined), Keystone International Fund Inc., Keystone Tax Free Fund, Keystone
Liquid Trust and/or any Keystone America Fund (as hereinafter defined), 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.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is a
least 591/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under a
systematic income plan of up to 1% per month of the shareholder's initial
account balance; (6) withdrawals consisting of loan proceeds to a retirement
plan participant; (7) financial hardship withdrawals made by a retirement plan
participant; or (8) withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan participant.
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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 pursuant to Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The NASD rule limits such annual expenditures to 1.0%,
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 the Principal Underwriter).
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:
PRINCIPAL
UNDERWRITER AMOUNT
FUND PAYS SELLING RETAINED
PRINCIPAL BROKER- BY PRINCIPAL
AMOUNT OF SALE UNDERWRITER DEALERS UNDERWRITER
- -------------- ----------- ------- -----------
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-
Payments under the Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
(1) as commissions for Fund shares sold and (2) as shareholder service fees in
respect of shares maintained by the recipients and outstanding on the Fund's
books for specific periods. Amounts paid or accrued to the Principal Underwriter
under (1) and (2) in the aggregate may not exceed the limitation referred to
above. The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.0% of the price paid for each Fund share sold as well as a
shareholder service fee at a rate of 0.25% per annum of the net asset value of
shares maintained by such recipients and outstanding on the books of the Fund
for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on
a new sale because the annual maximum (0.75% of average daily net assets) has
been reached, the Principal Underwriter intends, but is not obligated, to
continue to accept new orders for the purchase of Fund shares and to pay
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to
reimburse the Principal Underwriter for advances made by the Principal
Underwriter in excess of the Distribution Plan limitation, the Principal
Underwriter intends to seek full payment of such amounts from the Fund (together
with interest rate at the prime rate plus 1.0%) at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits. The Principal Underwriter currently intends to seek payment of interest
only on such charges paid or accrued by the Principal Underwriter subsequent to
July 7, 1992. If the Fund's Directors who are not "interested persons," as
defined in the 1940 Act ("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, the Principal Underwriter will ask the Independent Directors
to take whatever action they deem appropriate under the circumstances with
respect to payment of such amounts.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under the Distribution Plan must be reported to the
Fund's Independent Directors quarterly. The Fund's Independent Directors may
require or approve changes in the implementation or operation of the
Distribution Plan and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent 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 outstanding voting
securities of the Fund. Any change in the Distribution Plan that would
materially increase the distribution expenses of the Fund provided for in the
Distribution Plan requires shareholder approval. Otherwise, the Distribution
Plan may be amended by votes of the majority of both (1) the Funds 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.
During the fiscal year ended February 29, 1996, the Fund paid the
Principal Underwriter $1,979,775 under the Distribution Plan. During the same
year, the Principal Underwriter received $755,218 after payments of commissions
on new sales and shareholder service fees to dealers and others in the amount of
$1,224,557.
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. 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.
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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision 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 to the Fund's business and affairs. Keystone has provided investment
advisory and management services to investment companies and private accounts
since it was organized in 1932. Keystone is a wholly-owned subsidiary of
Keystone Investments, Inc., located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone and its affiliates. The
shares of Keystone Investments common stock beneficially owned by management are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Edward E. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D.
Van Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
The Investment Advisory Agreement between the Fund and Keystone (the
"Advisory Agreement") 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. The Advisory
Agreement also provides that Keystone 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 Independent Directors, 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.
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 daily net assets. Keystone paid or accrued a sub-advisory fee
of $404,777 to Harbor Capital for the year ended February 28, 1994.
During the fiscal year ended February 28, 1995, the Fund paid or
accrued management fees of $1,396,523 to Keystone, which represented 0.68% of
the Fund's average daily net assets. Keystone paid or accrued a sub-advisory fee
of $451,566 to Harbor Capital for the year ended February 28, 1995.
During the fiscal year ended February 29, 1996, the Fund paid or
accrued management fees of $1,354,605 to Keystone, which represented 0.69% of
the Fund's average daily net assets. Keystone paid fees totalling $301,007 to
Harbor Capital for the year ended February 29, 1996.
The Advisory Agreement continues in effect only if approved at least
annually by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund, and such renewal has been approved by the vote
of a majority of the Independent Directors, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory 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 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.
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CONSULTANT
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Harbor Capital, located at 125 High Street, Boston, Massachusetts
02110, has provided investment counsel to individuals and institutions,
including endowment funds, foundations, and pension and profit sharing trusts,
since it was organized in 1979.
The Directors of Harbor Capital are Alan S. Fields, Lawrence J. Marks,
Malcolm Pirnie, III (President), Stanley Schlozman, Frederick G. P. Thorne
(Chairman), William S. Peck, and James Kelly (each of whom owns 10% or more of
its outstanding voting securities).
Since August 1, 1995, Harbor Capital has served as a consultant to
Keystone with respect to the Fund and its subsidiaries pursuant to a Consultant
Agreement. In accordance with the terms of the Consultant Agreement, Harbor
Capital provides Keystone with monthly reports discussing the world's gold
bullion markets and gold stock markets, and advice regarding economic factors
and trends in the precious metals sectors. For its services under the Consultant
Agreement, Harbor Capital will receive from Keystone a fee at the annual rate of
0.10% of the Fund's average daily net assets.
Prior to August 1, 1995 and pursuant to a SubAdvisory Agreement between
Keystone and Harbor Capital dated August 19, 1993 (the "SubAdvisory Agreement"),
Harbor Capital served as investment subadviser to the Fund. The SubAdvisory
Agreement provided that Harbor Capital, subject to the supervision of the Fund's
Board of Directors and Keystone, would furnish continuously an investment
program for the Fund and would 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 would
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 further provided that Harbor Capital would 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) was not to exceed 90% of the fees with respect to such
fiscal year (or period) payable to Keystone.
For its services under the Consultant Agreement, Harbor Capital
receives from Keystone a fee at the annual rate of 0.10% of the Fund's average
daily net assets. The Fund has no responsibility to pay Harbor Capital's fee.
The Consultant Agreement shall continue in effect for a period of two
years from August 1, 1995 and thereafter from year to year if the parties
thereto agree. The Consultant Agreement may be terminated by either party,
without penalty, on 60 days' written notice to the other party. Neither party
may assign the Consultant Agreement without the consent of the other party.
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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:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Director of the
Fund; Chairman of the Board, President and Chief Executive Officer of
Keystone Investments, Keystone, Keystone Management and Keystone
Software, Inc. ("Keystone Software"); President, Chief Executive
Officer and Trustee or Director of all other funds in the Keystone
Investments Family of Funds; Chairman of the Board and Director of
Keystone Institutional Company, Inc. ("Keystone Institutional")
(formerly named Keystone Investment Management Corporation) and
Keystone Fixed Income Advisors ("KFIA"); Director and President of
Keystone Asset Corporation, Keystone Capital Corporation and Keystone
Trust Company; Director of the Principal Underwriter, KIRC and
Fiduciary Investment Company, Inc. ("FICO"); Director of Boston
Children's Services Association; Trustee of Anatolia College, Middlesex
School, and Middlebury College; Member, Board of Governors, New England
Medical Center; former Director and President of Hartwell Keystone
Advisers, Inc. ("Hartwell Keystone"); former Director and Vice
President, Robert Van Partners, Inc. and former Trustee of Neworld
Bank.
FREDERICK AMLING: Director of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Professor, Finance
Department, George Washington University; President, Amling & Company
(investment advice); 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
funds in the Keystone Investments Family of Funds; Investment Counselor
to Appleton Partners, Inc.; former Managing Director, Seaward
Management Corporation (investment advice) and former Director,
Executive Vice President and Treasurer, State Street Research &
Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Director of the Fund; Chairman of
the Board and Trustee or Director of all other funds in the Keystone
Investments Family of Funds; Director of Keystone Investments; Chairman
of the Board and Trustee of Anatolia College; Trustee of University
Hospital (and Chairman of its Investment Committee); former Director
and Chairman of the Board of Hartwell Keystone; former Chairman of the
Board and Chief Executive Officer of Keystone Investments; and former
Chief Executive Officer of the Fund.
EDWIN D. CAMPBELL: Director of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of 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 funds
in the Keystone Investments Family of Funds; former Group Vice
President, Textron Corp.; and former Director, Peoples Bank (Charlotte,
N.C).
K. DUN GIFFORD: Director of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of 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 Investments and Keystone.
LEROY KEITH, JR.: Director of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Director of Phoenix
Total Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund,
Phoenix Multi-Portfolio Fund and The Phoenix Big Edge Series Fund; and
former President, Morehouse College.
F. RAY KEYSER, JR.: Director of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of 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
funds in the Keystone Investments Family of 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 funds
in the Keystone Investments Family of Funds; Chairman, Environmental
Warranty, Inc., 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 Enhance Financial Services, Inc.; 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; former Managing Director of
Russell Miller, Inc.; and former Member, Georgetown College Board of
Advisors.
ANDREW J. SIMONS: Director of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; former 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 funds in the Keystone Investments Family of Funds; Director,
Senior Vice President, Chief Financial Officer and Treasurer of
Keystone Investments, the Principal Underwriter, Keystone Asset
Corporation, Keystone Capital Corporation, Keystone Trust Company;
Treasurer of Keystone Institutional and FICO; Treasurer and Director of
Keystone Management, Keystone Software; Vice President and Treasurer of
KFIA; Director of KIRC; former Treasurer and Director of Hartwell
Keystone; former Treasurer of Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; and
President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in
the Keystone Investments Family of Funds; Vice President of Keystone
Investments, Keystone, the Principal Underwriter, FICO and Keystone
Software; and former Controller of Keystone Investments and certain of
its affiliated operating companies.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other funds in the Keystone
Investments Family of Funds; Senior Vice President, General Counsel and
Secretary of Keystone; Senior Vice President, General Counsel,
Secretary and Director of the Principal Underwriter, Keystone
Management and Keystone Software; Senior Vice President and General
Counsel of Keystone Institutional; Senior Vice President, General
Counsel and Director of FICO and KIRC; Vice President and Secretary of
KFIA; Senior Vice President, General Counsel and Secretary of Keystone
Investments, Keystone Asset Corporation, Keystone Capital Corporation
and Keystone Trust Company; former Senior Vice President and Secretary
of Hartwell Keystone and Robert Van Partners, Inc.
* This Director may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended February 29, 1996, none of the Directors
and officers of Keystone or Harbor Capital received any direct remuneration from
the Fund or the Subsidiary. During the same period, the Independent Directors
received approximately $9,336 in retainers and fees from the Fund. Annual
retainers and meeting fees paid by all funds in the Keystone Investments Family
of Funds (which includes over 30 mutual funds) for the calendar year ended
December 31, 1995, totalled approximately $450,716. On May 31, 1996, the Fund's
Directors and officers, beneficially owned less than 1% of the Fund's
outstanding shares.
Except where otherwise indicated, the address of all the Fund's
Directors and officers and the address of the Fund is 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to a Principal Underwriting Agreement with the Fund (the
"Underwriting Agreement"), Keystone Investment Distributors Company acts as the
Fund's principal underwriter. The Principal Underwriter, located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034, is a Delaware corporation wholly-owned
by Keystone. The Principal Underwriter, as agent, has agreed to use its best
efforts to find purchasers for the shares. The Principal Underwriter may retain
and employ representatives to promote distribution of the shares and may obtain
orders from brokers, dealers and others, acting as principals, for sales of
shares to them. The Underwriting Agreement provides that the Principal
Underwriter will bear the expense of preparing, printing and distributing
advertising and sales literature and prospectuses used by it. In its capacity as
principal underwriter, the Principal Underwriter may receive payments from the
Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved 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 the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter 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 28, 1994 and 1995 and February 29,
1996, the Principal Underwriter earned commissions of $124,209, $24,927 and
$755,218, respectively, after reallowing commissions and service fees of
$1,623,559, $2,060,573 and $1,224,557, respectively, to retail brokers and
others under the Distribution Plan.
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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 judgmental and weighed by management in determining the
overall reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund, Keystone Management or Keystone is
considered to be in addition to and not in lieu of services required to be
performed by Keystone Management under the Management Agreement or Keystone
under the Advisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practicably allocated among the
Fund and other clients of Keystone Management or Keystone who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for such other clients. Under the Management Agreement and the Advisory
Agreement, Keystone Management and Keystone are permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
Management and Keystone do follow such a practice, they will do so on a basis
which is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark up or reflect a dealer's mark down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities for the Fund's
portfolio, thereby taking advantage of the lower purchase price available to
members of such a group.
Neither Keystone Management, Keystone, nor the Fund intends to place
securities transactions with any particular broker-dealer or group thereof. The
Fund's Board of Directors, however, has determined that the Fund may consider
sales of shares as a factor in the selection of broker-dealers to execute
portfolio transactions, subject to the requirements of best execution, including
best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Directors from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
Management or Keystone from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop that the
same investment decision is made for more than one fund. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
In no instance are portfolio securities purchased from or sold to
Keystone Management, Keystone, the Principal Underwriter or any of their
affiliated persons, as defined in the 1940 Act and rules and regulations issued
thereunder.
During the fiscal years ended February 28, 1994 and 1995 and February
29, 1996, the Fund paid approximately $574,733, $523,000 and $438,893,
respectively, in brokerage commissions.
- --------------------------------------------------------------------------------
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 ending redeemable value assumes a complete redemption at the end of the one,
five or ten year periods.
The cumulative total returns of the Fund for the one, five and ten year
periods ended February 29, 1996 were 33.53%, 89.32% and 145.51%, respectively.
The compounded average annual rates of return for the one, five and ten year
periods ended February 29, 1996 were 33.53% (including contingent deferred sales
charge), 13.62% and 9.40%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund presently does not
intend to advertise current yield.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, located at 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian ("Custodian") of all securities
and cash of the Fund. The Custodian may hold securities of some foreign issuers
with subcustodians located outside the United States. The Custodian performs no
investment management functions for the Fund, but, in addition to its custodial
services, is responsible for accounting and related recordkeeping on behalf of
the Fund.
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the Independent Auditors of the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone Investments Management Company and acts
as transfer agent and dividend disbursing agent for the Fund.
As of May 31, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL owned of record
12.633% of the Fund's then outstanding shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the
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.
<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.
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>
PAGE 9
- ---------------------------------------------
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
SCHEDULE OF INVESTMENTS--February 29, 1996
See Notes to Financial Statements.
Number Market
of Shares Value
------------------------------- --------- ------------
COMMON STOCKS (96.5%)
GOLD MINING (69.0%)
Amax Gold Inc. (a) 125,000 $ 937,500
Beatrix Mines Ltd. 140,000 1,302,083
Cameco Corp. 50,000 2,724,324
Delta Gold NL (a) 1,200,000 3,027,291
Euro-Nevada Mining Ltd. 262,200 9,938,334
Firstmiss Gold Inc. (a) 109,700 2,948,188
Franco-Nevada Mining Corp. Ltd. 117,500 7,130,166
Free State Consolidated Gold
Mines Ltd. ADR 340,000 3,293,750
Goldcorp Inc. 400,000 7,580,728
Golden Shamrock (a) 4,818,000 2,946,564
Homestake Mining Co. 175,000 3,390,625
Impala Platinum Holdings ADR 160,000 2,894,032
Kinross Gold Corp. (a) 900,000 8,325,000
Loraine Gold Mines Ltd. ADR (a) 670,000 2,337,161
Newcrest Mining 1,560,400 7,479,327
Newmont Gold Co. 170,000 9,562,500
Newmont Mining Corp. 175,000 9,953,125
North Flinders Mines 900,000 5,710,573
Orion Resources 1,000,000 1,238,437
Orvana Minerals Corp. (a) 275,000 1,703,841
Perilya Mines NL (a) 3,500,000 2,220,778
Plutonic Resources NL 2,150,000 12,080,498
Prime Resources Group Inc. (a) 524,800 5,068,591
Ranger Minerals NL (a) 1,050,000 3,242,871
Ross Mining NL 2,048,100 2,442,501
Rustenburg Platinum Holdings
Ltd. 153,056 2,857,433
Santa Fe Pacific Gold Corp. 150,000 2,343,750
Sons of Gwalia Ltd. 699,600 4,545,983
TVX Gold Inc. (a) 235,300 2,321,856
Vaal Reefs Exploration & Mining
Ltd. ADR 749,000 7,419,781
Vengold Inc. (a) 733,000 824,625
Vengold, Warrants 429,000 175,115
Western Areas Gold Mining Ltd.
ADR 416,939 7,056,695
Western Deep Levels Ltd. ADR 40,000 2,000,000
Wiluna Mines Ltd. (a) 1,000,000 917,361
------------------------------- ------- ----------
149,941,387
------------------------------- ------- ----------
METALS & MINING (27.5%)
Acacia Resources (a) 3,399,200 $ 7,639,820
Argentina Gold Corp. (a) 400,000 1,035,061
Ashanti Goldfields Ltd. (d) 335,000 7,705,000
Barrick Gold 275,000 8,318,750
Elandsrand Gold Mining Ltd. ADR 300,000 1,763,520
Harmony Gold Mining Ltd. ADR 200,000 2,609,780
Middle Witwatersrand ADR 250,000 2,906,925
Mount Edon Gold Mines Ltd. 510,000 1,208,623
Pioneer Group Inc. 320,000 9,360,000
Randgold + Exploration 1,429,666 6,091,540
Repadre Capital Corp. (a) 200,000 583,133
Target Exploration (a) 1,790,000 5,084,571
Stillwater Mining Company (a) 245,900 5,348,325
------------------------------- ------- ----------
59,655,048
------------------------------- ------- ----------
TOTAL COMMON STOCKS
(Cost--$157,324,027) 209,596,435
------------------------------- ------- ----------
Par
Value
------------------------------- ------- ----------
FIXED INCOME (0.8%)
OTHER MINING & INDUSTRIAL (0.8%)
Target Exploration, 11.250%, 01/01/97
(Cost--$582,533) SA RAND 655,000 1,860,555
-------------------------------------------- ----------
Maturity
Value
------------------------------- ------- ----------
SHORT-TERM INVESTMENTS (1.5%)
REPURCHASE AGREEMENTS (1.5%)
Investments in repurchase
agreements, in a joint
trading account purchased
2/29/96, 5.415%, maturing
3/1/96
(Cost--$3,182,000)(c) $3,182,479 3,182,000
------------------------------- ------- ----------
TOTAL INVESTMENTS
(Cost--$161,088,560) 214,638,990
------------------------------- ------- ----------
<PAGE>
PAGE 10
- ---------------------------------------------
Keystone Precious Metals Holdings, Inc.
Market
Value
- ----------------------------- ---------- ------------
INVESTMENTS IN WHOLLY-OWNED UNCONSOLIDATED FOREIGN
SUBSIDIARY (0.3%)
Precious Metals (Bermuda)
Ltd. $ 737,527
- ----------------------------- -------- ----------
OTHER ASSETS AND
LIABILITIES--NET (0.9%) 1,893,856
- ----------------------------- -------- ----------
NET ASSETS (100.0%) $217,270,373
- ----------------------------- -------- ----------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) The cost of investments for federal income tax purposes amounted to
$171,542,510. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at February 29, 1996, are as follows:
Gross unrealized appreciation $ 58,881,947
Gross unrealized depreciation (15,047,940)
-----------
Net unrealized appreciation $ 43,834,007
===========
(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at February 29, 1996.
(d) Security that may be resold to "qualified institutional buyers" under
rule 144A of the Federal Securities Act of 1933. This security has been
determined to be liquid under guidelines established by the Board of
Trustees.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996 (a) 1995 (a) 1994 (a) 1993 (a) 1992 (a)
- ---------------------------------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 19.30 $ 25.09 $ 14.38 $ 15.37 $ 14.22
- ---------------------------------- ------- ------- ------- ------- ---------
Income from investment operations:
Net investment income (loss) (0.25) (0.13) (0.17) (0.12) (0.02)
Net gains (losses) on securities 7.30 (5.54) 10.88 (0.76) 1.30
Net commissions paid on fund share
sales (b) -0- -0- -0- -0- -0-
- ---------------------------------- ------- ------- ------- ------- ---------
Total from investment operations 7.05 (5.67) 10.71 (0.88) 1.28
- ---------------------------------- ------- ------- ------- ------- ---------
Less distributions:
Dividends from net investment
income -0- (0.12) -0- -0- -0-
Distributions in excess of net
investment income (c) -0- -0- -0- (0.11) (0.13)
Distributions from realized
capital gains -0- -0- -0- -0- -0-
- ---------------------------------- ------- ------- ------- ------- ---------
Total distributions 0.00 (0.12) 0.00 (0.11) (0.13)
- ---------------------------------- ------- ------- ------- ------- ---------
Net asset value end of year $ 26.35 $ 19.30 $ 25.09 $ 14.38 $ 15.37
- ---------------------------------- ------- ------- ------- ------- ---------
Total return (d) 36.53% (22.70%) 74.48% (5.74%) 9.07%
Ratios/supplemental data
Ratios to average net assets:
Operating and Management expenses 2.28%(e) 2.33% 2.34% 2.83% 2.70%
Net investment income (loss) (1.08%) (0.54%) (0.75%) (0.86%) (0.14%)
Portfolio turnover rate 39% 75% 73% 58% 53%
- ---------------------------------- ------- ------- ------- ------- ---------
Net assets, end of year
(thousands) $217,270 $171,193 $200,489 $114,364 $131,356
- ---------------------------------- ------- ------- ------- ------- ---------
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Year Ended
Feb. 28, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1991 (a) 1990 (a) 1989 (a) 1988 (a) 1987
- ---------------------------------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 19.15 $ 16.82 $ 15.50 $ 17.31 $ 12.80
- ---------------------------------- ------- ------- ------- ------- ---------
Income from investment operations:
Net investment income (loss) -0- 0.06 0.05 (0.01) 0.25
Net gains (losses) on securities (4.61) 2.27 1.59 (0.17) 4.85
Net commissions paid on fund share
sales (b) -0- -0- -0- -0- (0.14)
- ---------------------------------- ------- ------- ------- ------- ---------
Total from investment operations (4.61) 2.33 1.64 (0.18) 4.96
- ---------------------------------- ------- ------- ------- ------- ---------
Less distributions:
Dividends from net investment
income (0.06) -0- (0.12) (0.41) (0.37)
Distributions in excess of net
investment income (c) (0.26) -0- -0- -0- -0-
Distributions from realized
capital gains -0- -0- (0.20) (1.22) (0.08)
- ---------------------------------- ------- ------- ------- ------- ---------
Total distributions (0.32) 0.00 (0.32) (1.63) (0.45)
- ---------------------------------- ------- ------- ------- ------- ---------
Net asset value end of year $ 14.22 $ 19.15 $ 16.82 $ 15.50 $ 17.31
- ---------------------------------- ------- ------- ------- ------- ---------
Total return (d) (24.37%) 13.85% 10.64% (2.86%) 40.12%
Ratios/supplemental data
Ratios to average net assets:
Operating and Management expenses 2.76% 2.20% 1.68% 1.84% 1.41%
Net investment income (loss) (0.02%) 0.32% 0.28% (0.05%) 1.98%
Portfolio turnover rate 68% 95% 82% 62% 89%
- ---------------------------------- ------- ------- ------- ------- ---------
Net assets, end of year
(thousands) $150,200 $195,837 $222,079 $222,646 $98,433
- ---------------------------------- ------- ------- ------- ------- ---------
</TABLE>
(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.
(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 net 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.
(e) "Ratio of operating and management expenses to average net assets" for
the year ended February 29, 1996 includes indirectly paid expenses.
Excluding indirectly paid expenses for the year ended February 29, 1996,
the expense ratio would have been 2.26%.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- ---------------------------------------------
Keystone Precious Metals Holdings, Inc.
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996
================================================================================
Assets:
Investments at market value (identified
cost--$161,088,560) (Note 1) $214,638,990
Investment in wholly-owned unconsolidated foreign
subsidiary, at fair value (Note 2) 737,527
- ------------------------------------------------------ -----------
Total investments 215,376,517
Cash 303
Receivable for:
Fund shares sold 1,812,683
Interest and dividends 379,471
Prepaid expenses 21,798
Other assets 4,435
Due from foreign subsidiary 897
- ------------------------------------------------------ -----------
Total assets 217,596,104
- ------------------------------------------------------ -----------
Liabilities:
Payable for:
Fund shares redeemed 251,823
Payable to Investment Adviser (Note 5) 2,861
Accrued reimbursable expenses (Note 5) 1,920
Other accrued expenses 69,127
- ------------------------------------------------------ -----------
Total liabilities 325,731
- ------------------------------------------------------ -----------
Net assets $217,270,373
- ------------------------------------------------------ -----------
Net assets represented by (Notes 1 and 3):
Paid-in capital $163,900,840
Accumulated distributions in excess of net
investment income (55,852)
Accumulated net realized gains (losses) on investment
transactions (126,447)
Net unrealized appreciation on investments and
foreign currency 53,551,832
- ------------------------------------------------------ -----------
Total net assets applicable to outstanding shares of
beneficial interest ($26.35 a share on 8,245,446
shares outstanding) $217,270,373
- ------------------------------------------------------ -----------
See Notes to Financial Statements.
<PAGE>
STATEMENT OF OPERATIONS
Year Ended February 29, 1996
================================================================================
Investment income (Note 1):
Dividends (net of withholding taxes of
$156,666) $ 2,169,487
Interest 176,754
- ----------------------------------------------- ------- ----------
Total investment income 2,346,241
- ----------------------------------------------- ------- ----------
Expenses (Notes 3 and 5):
Management fee $ 1,354,605
Transfer agent fees 831,209
Accounting, auditing and legal 67,602
Custodian fees 97,617
Printing 30,365
Directors' fees and expenses 9,336
Distribution Plan expenses 1,979,775
Registration fees 84,757
State tax expense 30,001
Miscellaneous expenses 12,846
- ----------------------------------------------- ------- ----------
Total expenses 4,498,113
Less: Expenses paid indirectly (Note 5) (28,227)
- ----------------------------------------------- ------- ----------
Net expenses 4,469,886
- ----------------------------------------------- ------- ----------
Net investment loss (2,123,645)
- ----------------------------------------------- ------- ----------
Equity in earnings of wholly-owned
unconsolidated foreign subsidiary (Note 2) 21,316
- ----------------------------------------------- ------- ----------
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions
(Note 4):
Realized gain on:
Investments 15,958,230
Foreign currency related transactions (5,779)
- ----------------------------------------------- ------- ----------
Net realized gain on investments and foreign
currency related transactions 15,952,451
Unrealized appreciation on investments:
Beginning of year 3,078,967
End of year 53,551,832
- ----------------------------------------------- ------- ----------
Net change in unrealized appreciation or
depreciation on investments: 50,472,865
- ----------------------------------------------- ------- ----------
Net gain (loss) on investments and foreign
currency related transactions 66,425,316
- ----------------------------------------------- ------- ----------
Net increase in net assets resulting from
operations $64,322,987
- ----------------------------------------------- ------- ----------
See Notes to Financial Statements.
<PAGE>
PAGE 13
- ---------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS Year Ended Year Ended
February 29, February 28,
1996 1995
======================================================================== ============== ================
<S> <C> <C>
Operations:
Net investment loss $ (2,123,645) $ (1,113,674)
Equity in earnings of wholly-owned unconsolidated foreign subsidiary 21,316 16,070
Net realized gain on investments and foreign currency related
transactions 15,952,451 16,264,818
Net change in unrealized appreciation (depreciation) on investments and
foreign currency holdings 50,472,865 (63,783,342)
- ------------------------------------------------------------------------ ------------ --------------
Net increase (decrease) in net assets resulting from operations 64,322,987 (48,616,128)
- ------------------------------------------------------------------------ ------------ --------------
Net distributions to shareholders from investment income (Notes 1 and 6) 0 (1,048,057)
- ------------------------------------------------------------------------ ------------ --------------
Capital share transactions (Note 3):
Proceeds from shares sold 376,204,823 374,710,377
Payments for shares redeemed (394,450,262) (355,122,400)
Reinvestment of dividends and distributions 0 779,722
- ------------------------------------------------------------------------ ------------ --------------
Net increase (decrease) in net assets resulting from capital share
transactions (18,245,439) 20,367,699
- ------------------------------------------------------------------------ ------------ --------------
Total increase (decrease) in net assets 46,077,548 (29,296,486)
Net assets:
Beginning of year 171,192,825 200,489,311
- ------------------------------------------------------------------------ ------------ --------------
End of year [including accumulated distributions in excess of net
investment income on February 29, 1996 of ($55,852) and undistributed
net investment income on February 28, 1995 of $1,129,201] (Note 1) $217,270,373 $ 171,192,825
======================================================================== ============ ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 14
- ---------------------------------------------
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 Investment Management Company (formerly named
Keystone Custodian Funds, Inc.) ("Keystone") is the investment adviser. It is
registered as a diversified open-end management investment company under the
Investment Company Act of 1940 (the "Act").
Since August 1, 1995, Harbor Capital Management Company, Inc. ("Harbor
Capital") has served as Consultant to Keystone with respect to the Fund.
Prior to August 1, 1995, Harbor Capital served as a subadviser to the Fund.
Pursuant to the terms of its Consultant Agreement, Harbor Capital provides
Keystone with monthly reports discussing the world's gold bullion markets and
gold stocks markets, and advice regarding economic factors and trends in the
precious metals sector.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is a
private corporation predominately owned by current and former members of
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
which requires management to make estimates and assumptions that affect
amounts reported herin. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
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 are negotiable certificates issued by a United States Bank representing
the right to recieve securities of a foreign issuer deposited in that bank or
a foreign bank, and are traded and valued in United States dollars. Those
securities traded in foreign currency amounts are translated into United
States dollars at the daily rate of exchange. 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. The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. 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
<PAGE>
PAGE 15
- ---------------------------------------------
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.
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 investmentss, income and expense 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. In addition to market risk, the
Fund is subject to the credit risk that the other party will not complete the
obligation of the contract.
C. Securities transactions are accounted for no later than one business day
after 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 ex-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 expects to be 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.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agree-
<PAGE>
PAGE 16
- ---------------------------------------------
Keystone Precious Metals Holdings, Inc.
ments that are collateralized by U.S. Treasury and/or Federal Agency
obligations.
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
forward foreign currency exchange contracts.
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. The significant
difference between financial statement amounts available for distribution and
distributions made in accordance with income tax regulations are primarily
attributable to the deferral of post-October losses and utilization of
capital loss carryforwards.
(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 29, 1996, the fair value
of the Fund's investment in the foreign subsidiary was determined as follows:
Cash and cash equivalents $747,056
Accrued expenses (9,529)
----------------------------- -------
Fair Value $737,527
============================= =======
During the year ended February 29, 1996, the foreign subsidiary had no
purchases or sales of precious metals. Investment activities of the foreign
subsidiary resulted in gross investment income, general and administrative
expenses, and net investment income of $36,405, $15,089 and $21,316,
respectively. Management fees paid or accrued by the foreign subsidiary to
Keystone totaled $4,946 for the year ended February 29, 1996.
(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 Year ended
February 29, 1996 February 28, 1995
- ---------------------- ----------------- ------------------
Sales 16,257,907 15,698,308
Redemptions (16,883,225) (14,849,643)
Reinvestment of
dividends and
distributions 0 32,096
- ---------------------- --------------- -----------------
Net increase
(decrease) (625,318) 880,761
====================== =============== =================
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 Investment Distributors
Company ("KIDCO"), (formerly Keystone Distributors, Inc.) the principal
underwriter and a wholly-owned subsidiary of Keystone, amounts which in total
may not exceed the Distribution Plan maximum.
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 KIDCO in connection
with the Distribution Plan, and subject to the limitations discussed above,
KIDCO generally pays brokers or others a commission equal to 4.0% of the
<PAGE>
PAGE 17
- ---------------------------------------------
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
maintained by such recipients and outstanding on the books of the Fund for
specified periods.
To the extent Fund shares are redeemed within four calendar years of
original issuance, depending upon when those shares were issued, 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 expend up to 0.3125%
quarterly (approximately 1.25% annually) of the Fund's average daily net
assets to pay distribution costs for sales of its shares and to pay
shareholder service fees. A 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 1.00% of the Fund's average daily net
asset value, of which 0.75% may be used to pay such distribution costs and
0.25% may be used to pay shareholder service fees. The NASD 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 1.00% per annum on
unpaid amounts thereof (less any contingent deferred sales charges paid by
the shareholders to KIDCO) remaining unpaid from time to time.
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).
KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and service fees which exceed annual maximum payments
permitted to be received by KIDCO from the Fund. KIDCO intends to seek full
payment of such amounts from the Fund (together with annual interest thereon
at the prime rate plus 1.00%) at such time in the future as, and to the
extent that, payment thereof by the Fund would be within permitted limits.
KIDCO currently intends to seek payment of interest only on such amounts paid
or accrued by KIDCO 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 KIDCO rather than to the Fund.
During the year ended February 29, 1996, the Fund paid KIDCO $1,979,775.
During the period, KIDCO retained $755,218 after payments of commissions on
new sales and service fees to dealers and others of $1,224,557. Under a rule
of the NASD, the maximum uncollected amounts for which KIDCO may seek payment
from the Fund under its Distribution Plan is $12,834,715 (5.91% of the Fund's
net asset value as of February 29, 1996).
(4.) Securities Transactions
Realized gains and losses are computed on the identified cost basis. Gains
and losses on foreign currency related transactions are treated as ordinary
income for federal income tax purposes. As of February 29, 1996, the Fund had
a capital loss carryover for federal
<PAGE>
PAGE 18
- ---------------------------------------------
Keystone Precious Metals Holdings, Inc.
income tax purposes of approximately $126,447 which expires as follows:
2001--$126,447.
Cost of purchases and proceeds from sales of investment securities
excluding short-term securities for the year ended February 29, 1996 were
$75,310,671 and $93,617,463, respectively.
(5.) Investment Management and Transactions with Affiliates
Officers and directors of the Fund who are employees of Keystone or the
Consultant receive no compensation directly from the Fund. Several officers
of the Fund are also officers, directors and/or stockholders of Keystone and
have an interest in the management fee paid by the Fund to Keystone. The
management fee paid by the Fund to Keystone 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 daily net assets of the Fund. Such fee is
reduced by the amount of any investment advisory fee paid to Keystone by the
Fund's subsidiary. Since August 1, 1995, Harbor Capital has served as a
Consultant to Keystone with respect to the Fund. For its services as
Consultant, Harbor Capital receives from Keystone a fee at the annual rate of
0.10% of the Fund's average daily net assets.
During the year ended February 29, 1996, the Fund paid or accrued
management fees of $1,354,605 to Keystone, which represented 0.69% of the
Fund's average daily net assets on an annualized basis. Keystone paid or
accrued a fee of $301,007 to Harbor Capital which acted as sub-advisor to the
Fund for the period from March 1, 1995 through July 31, 1995 and as
Consultant for the period from August 1, 1995 through February 29, 1996.
During the year ended February 29, 1996, the Fund paid or accrued $19,093
to KIRC and Keystone Investments, Inc., as reimbursement for the cost of
certain accounting services provided to the Fund. During the year ended
February 29, 1996, $831,209 was paid or accrued to KIRC for shareholder
services.
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended February 29, 1996 the Fund paid custody fees in the amount
of $69,390 and received credit of $28,227 pursuant to the expense offset
arrangement, resulting in a total expense of $97,617. The assets deposited
with the custodian under the expense offset arrangement could have been
invested in income-producing assets.
<PAGE>
PAGE 19
- ---------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
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 29, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the ten-year period then ended. 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 29, 1996 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 29, 1996, the results
of its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the ten-year period then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 29, 1996
<PAGE>
KEYSTONE PRECIOUS METALS HOLDINGS, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24(a). FINANCIAL STATEMENTS
All Financial Statements listed below are included in Registrant's Statement of
Additional Information.
Schedule of Investments February 29, 1996
Financial Highlights For the fiscal years ended
February 28, 1987 through
February 29, 1996
Statement of Assets and Liabilities February 29, 1996
Statement of Operations Fiscal year ended February 29, 1996
Statement of Changes in Net Assets Two years ended February 29, 1996
Notes to Financial Statements
Independent Auditors' Report
dated March 29, 1996
All other schedules are omitted as the required information is inapplicable.
Item 24(b). Exhibits
(1) A copy of the Registrant's Composite Certificate of Incorporation dated
June 2, 1972 was filed with Registration Statement No. 2-81691/811-2303 as
Exhibit 24(b)(1) and is incorporated by reference herein. Copies of the
Restated Certificate of Incorporation dated July 19, 1973; Certificate of
Amendment of Restated Certificate of Incorporation dated March 22, 1983;
Certificate of Amendment of Restated Certificate of Incorporation dated
November 19, 1984; Amended Foreign Corporation Certificate dated December
14, 1984; and Certificate of Amendment of Restated Certificate of
Incorporation dated February 11, 1986 were filed with Post-Effective
Amendment No. 19 to Registration Statement No. 2- 81691/811-2303
("Post-Effective Amendment No. 19") as Exhibit 24(b)(1) and are
incorporated by reference herein.
(2) A copy of Registrant's By-Laws was filed with Registration Statement No.
2-81691/811-2303 as Exhibit 24(b)(2) and is incorporated by reference
herein. A copy of the Registrant's Amended and Restated Bylaws dated
September, 1987 was filed with Post-Effective Amendment No. 19 as Exhibit
24(b)(2) and is incorporated by reference herein.
(3) Not applicable.
(4) (A) Registrant's (i) Restated Certificate of Incorporation, Articles 4, 5,
and 6, (ii) Certificate of Amendment of Restated Certificate of
Incorporation dated March 22, 1983, Article 2, and (iii) Certificate of
Amendment of Restated Certificate of Incorporation dated February 11, 1986,
Article 1, each as filed with Post-Effective Amendment No. 19 as Exhibit
24(b)(1) and incorporated by reference herein.
(B) Registrant's Amended and Restated Bylaws, Article III, was filed with
Post-Effective Amendment No. 19 as Exhibit 24(b)(2) and is incorporated by
reference herein.
(5) (A) A copy of the Investment Advisory Agreement between the Registrant and
Keystone Investment Management Company (formerly named Keystone Custodian
Funds, Inc.) ("Keystone") dated August 19, 1993 was filed with
Post-Effective Amendment No. 19 as Exhibit 24(b)(5)(A) and is incorporated
by reference herein.
(B) A copy of the Subadvisory Agreement between Keystone and Harbor
Capital Management Company, Inc. dated August 19, 1993 was filed with
Post-Effective Amendment No. 19 as Exhibit 24(b)(5)(B) and is incorporated
by reference herein.
(6) (A) A copy of the Principal Underwriting Agreement between the Registrant
and Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) dated August 19, 1993 was filed with Post- Effective
No. 19 as Exhibit 24(b)(6)(A) and is incorporated by reference herein.
(6) (B) The form of Dealer Agreement used by the Principal Underwriter is filed
herewith as Exhibit 24(b)(6)(B).
(7) Not applicable.
(8) A copy of the Custodian, Fund Accounting and Recordkeeping Agreement
between the Registrant and State Street Bank and Trust Company together
with the First through the Fourth Amendments thereto were filed with Post
Effective Amendment No. 19 as Exhibit 24(b)(8) and is incorporated by
reference herein.
(9) Not applicable.
(10) An opinion and a consent of counsel as to the legality of securities being
registered by the Fund pursuant to Section 24(e)(1) of the 1940 Act is
filed herewith as Exhibit 24(b)(10).
(11) Consent as to use of opinion of Registrant's Independent Auditors Report is
filed herewith as Exhibit 24(b)(11).
(12) Not applicable.
(13) Not applicable.
(14) Copies of model plans used in the establishment of retirement plans in
connection with which Registrant offers its securities were filed with
Post-Effective Amendment No. 66 to Registration Statement No. 2-
10527/811-96 as Exhibit 24(b)(14) and are incorporated by reference herein.
(15) A copy of the Registrant's Distribution Plan adopted pursuant to Rule 12b-1
was filed with Post-Effective Amendment No. 19 as Exhibit 24(b)(15) and is
incorporated by reference herein.
(16) A schedule for computation of total return is filed herewith as Exhibit
24(b)(16).
(17) Financial Data Schedule is filed herewith as Exhibit 24(b)(17).
(18) Not applicable.
(19) Powers of Attorney are filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant
The Fund owns all of the outstanding voting securities, excluding
Directors' qualifying shares, of Precious Metals (Bermuda) Ltd., a
corporation organized under the laws of Bermuda.
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of May 31, 1996
-------------- --------------------------
Common Stock,
$1 par value 18,892
Item 27. Indemnification
Provisions for the indemnification of the Registrant's Directors and
officers are contained in Article XIV of the Registrant's ByLaws, a
copy of which was filed with Post-Effective Amendment No. 19 as
Exhibit 24(b)(2) and is incorporated herein by reference.
Provisions for the indemnification of Keystone Investment Distributors
Company (formerly named Keystone Distributors, Inc.), the Registrant's
principal underwriter, are contained in Section 9 of the Principal
Underwriting Agreement between the Registrant and Keystone Investment
Distributors Company, a copy of which was filed with Post-Effective
Amendment No 19 as Exhibit 24(b)(6)(A).
Item 28. Business and other Connections of Investment Advisers
The following tables list the names of the various officers and
directors of Keystone Investment Management Company, Registrant's
investment adviser, respectively, and their respective positions. For
each named individual, the tables list, for at least the past two
fiscal years, (i) any other organizations (excluding investment
advisory clients) with which the officer and/or director has had or
has substantial involvement; and (ii) positions held with such
organizations.
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
Position with
Keystone Other
Investment Business
Name Management Company Affiliations
- ---- ------------------ ------------
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Executive President and Director:
Officer,and KeystoneInvestments,Inc.
Director Keystone Management,Inc.
Keystone Software, Inc.
Keystone Asset Corporation
Keystone Capital Corporation
Chairman of the Board and
Director:
Keystone Fixed Income
Advisers, Inc.
Keystone Institutional
Company, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Keystone Investor
Resource Center, Inc.
Boston Children's
Services Associates
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Philip M. Byrne Director President and Director:
Keystone Institutional
Company, Inc.
Senior Vice President:
Keystone Investments, Inc.
Herbert L. Senior Vice None
Bishop, Jr. President
Donald C. Dates Senior Vice None
President
<PAGE>
Position with
Keystone Other
Investment Business
Name Management Company Affiliations
- ---- ------------------ ------------
Gilman Gunn Senior Vice None
President
Edward F. Director, Director, Senior Vice
Godfrey Senior Vice President
President, Chief Financial Officer and
Treasurer and Treasurer:
Chief Financial Keystone Investments, Inc.
Officer Keystone Investment
Distributors Company
Treasurer:
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Former Treasurer and
Director:
Hartwell Keystone
Advisers, Inc.
James R. McCall Director and None
President
Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment
Distributors Company
Senior Vice President and
Director:
Keystone Investments, Inc.
Chairman and Director:
Keystone Investor
Resource Center, Inc.
Keystone Management, Inc.
Formerly President:
Keystone Management, Inc.
Formerly Treasurer:
The Kent Funds
Keystone Investments, Inc.
Keystone Investment
Management Company
<PAGE>
Position with
Keystone Other
Investment Business
Name Management Company Affiliations
- ---- ------------------ ------------
Rosemary D. Senior Vice General Counsel, Senior
Van Antwerp President, Vice President and
General Counsel Secretary:
and Secretary Keystone Investments, Inc.
Senior Vice President and
General Counsel:
Keystone Institutional
Company, Inc.
Senior Vice President,
General Counsel and
Director:
Keystone Investor
Resource Center, Inc.
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Senior Vice President,
General Counsel, Director
and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Former Senior Vice
President and Secretary:
Hartwell Keystone
Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income
Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Institutional
Company, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Formerly Controller:
Keystone Investments, Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
John D. Rogol Vice President Vice President and
and Controller Controller:
Keystone Investments, Inc.
Keystone Invesmtent
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
<PAGE>
Position with
Keystone Other
Investment Business
Name Management Company Affiliations
- ---- ------------------ ------------
John D. Rogol (con't) Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Controller:
Keystone Asset Corporation
Keystone Capital Corporation
Robert K. Vice President None
Baumback
Betsy A. Blacher Senior Vice None
President
Francis X. Claro Vice President None
Kristine R. Vice President None
Cloyes
Christopher P. Senior Vice None
Conkey President
Richard Cryan Senior Vice None
President
Maureen E. Senior Vice None
Cullinane President
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Christopher R. Senior Vice None
Ely President
Sami J. Karam Vice President None
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
<PAGE>
Position with
Keystone Other
Investment Business
Name Management Company Affiliations
- ---- ------------------ ------------
John C. Vice President None
Madden, Jr.
Stephen A. Marks Vice President None
Eleanor H. Marsh Vice President None
Walter T. Senior Vice None
McCormick President
Barbara McCue Vice President None
Stanley M. Niksa Vice President None
Robert E. O'Brien Vice President None
Margery C. Parker Vice President None
William H. Vice President None
Parsons
Daniel A. Rabasco Vice President None
David L. Smith Vice President None
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
Joseph J. Asst. Vice None
Decristofaro President
<PAGE>
Item 29. Principal Underwriter
Keystone Investment Distributors Company (formerly named
Keystone Distributors, Inc.), which acts as Registrant's
principal underwriter, also acts as principal underwriter for
the following entities:
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Quality Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Capital Preservation and Income Fund
Keystone Fund of the Americas
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund, Inc.
Keystone Liquid Trust
Keystone Omega Fund
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone Tax Free Fund
Keystone World Bond Fund
(b) For information with respect to each officer and director of
Registrant's principal underwriter, see the following pages.
<PAGE>
Item 29(b) (continued).
Position and Offices with Position and
Name and Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ------------------ ------------------------- ------------
Ralph J. Spuehler* Director, President None
Edward F. Godfrey* Director, Senior Vice Senior Vice
President, Treasurer President
and Chief Financial
Officer
Rosemary D. Van Antwerp* Director, Senior Vice Senior Vice
President, General Counsel President
and Secretary
Albert H. Elfner, III* Director President
Charles W. Carr* Senior Vice President None
Peter M. Delehanty* Senior Vice President None
J. Kevin Kenely* Vice President Treasurer
John D. Rogol* Vice President and None
Controller
Frank O. Gebhardt Divisional Vice None
2626 Hopeton President
San Antonio, TX 78230
C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londonderry, NH 03053
David S. Ashe Regional Manager and None
32415 Beaconsfield Vice President
Birmingham, MI 48025
David E. Achzet Regional Vice President None
60 Lawn Avenue -
Greenway 27
Stamford, CT 06902
William L. Carey, Jr. Regional Manager and None
4 Treble Lane Vice President
Malvern, PA 19355
John W. Crites Regional Manager and None
2769 Oakland Circle W. Vice President
Aurora, CO 80014
<PAGE>
Item 29(b) (continued)
Position and Offices with Position and
Name and Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ------------------ ------------------------- ------------
Richard J. Fish Regional Vice President None
309 West 90th Street
New York, NY 10024
Michael E. Gathings Regional Manager and None
245 Wicklawn Way Vice President
Roswell, GA 30076
Robert G. Holz, Jr. Regional Manager and None
313 Meadowcrest Drive Vice President
Richardson, Texas 75080
Todd L. Kobrin Regional Manager and None
20 Iron Gate Vice President
Metuchen, NJ 08840
Ralph H. Johnson Regional Manager and None
345 Masters Court, #2 Vice President
Walnut Creek, CA 94598
Paul J. McIntyre Regional Manager and None
Vice President
Dale M. Pelletier Regional Manager and None
464 Winnetka Ave. Vice President
Winnetka, IL 60093
Juliana Perkins Regional Manager and None
2348 West Adrian Street Vice President
Newbury Park, CA 91320
Matthew D. Twomey Regional Manager and None
9627 Sparrow Court Vice President
Ellicott City, MD 21042
Mitchell I. Weiser Regional Manager and None
7031 Ventura Court Vice President
Parkland, FL 33067
Welden L. Evans Regional Banking Officer None
490 Huntcliff Green and Vice President
Atlanta, GA 30350
Russell A. Haskell* Vice President None
Robert J. Matson* Vice President None
<PAGE>
Item 29(b) (continued)
Position and Offices with Position and
Name and Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ------------------ ------------------------- ------------
John M. McAllister* Vice President None
Gregg A. Mahalich Vice President None
14952 Richards Drive W.
Minnetonka, MN 55345
Burton Robbins Vice President None
1586 Folkstone Terrace
Westlake Village, CA
91361
Thomas E. Ryan, III* Vice President None
Peter Willis* Vice President None
Raymond P. Ajemian* Manager and Vice President None
Joan M. Balchunas* Assistant Vice President None
Thomas J. Gainey* Assistant Vice President None
Eric S. Jeppson* Assistant Vice President None
Julie A. Robinson* Assistant Vice President None
Peter M. Sullivan Assistant Vice President None
21445 Southeast 35th Way
Issaquah, WA 98027
Jean S. Loewenberg* Assistant Secretary Assistant
Secretary
Colleen L. Mette* Assistant Secretary Assistant
Secretary
Dorothy E. Bourassa* Assistant Secretary Assistant
Secretary
* Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
Item 29(c). - Not applicable
<PAGE>
Item 30. Location of Accounts and Records
200 Berkeley Street
Boston, Massachusetts 02116-5034
Keystone Investor Resource Center, Inc.
101 Main Street
Cambridge, Massachusetts 02142-1519
Harbor Capital Management Company, Inc.
125 High Street
Boston, Massachusetts 02110
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain, Inc.
3431 Sharpslot Road
Swansea, Massachusetts 02777
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Upon request and without charge, Registrant hereby undertakes
to furnish each person to whom a copy of the Registrant's
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for the effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston, in The Commonwealth of Massachusetts, on
the 18th day of June, 1996.
KEYSTONE PRECIOUS METALS
HOLDINGS, INC.
By:/s/ Rosemary D. Van Antwerp
----------------------------------------
Rosemary D. Van Antwerp
Senior Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 18th day of June, 1996.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board
- ------------------------------- and Director
George S. Bissell*
/s/ Albert H. Elfner, III Chief Executive Officer,
- ------------------------------- President and Director
Albert H. Elfner, III*
/s/ J. Kevin Kenely Treasurer (Principal
- ------------------------------- Financial and Accounting
J. Kevin Kenely* Officer)
*By: /s/ Melina M.T. Murphy
-------------------------------------
Melina M.T. Murphy**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
- ---------- -----
/s/ Frederick Amling Director
- --------------------------------
Frederick Amling*
/s/ Charles A. Austin, III Director
- --------------------------------
Charles A. Austin, III*
/s/ Edwin D. Campbell Director
- --------------------------------
Edwin D. Campbell*
/s/ Charles F. Chapin Director
- --------------------------------
Charles F. Chapin*
/s/ K. Dun Gifford Director
- --------------------------------
K. Dun Gifford*
/s/ Leroy Keith, Jr. Director
- --------------------------------
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Director
- --------------------------------
F. Ray Keyser, Jr.*
/s/ David M. Richardson Director
- --------------------------------
David M. Richardson*
/s/ Richard J. Shima Director
- --------------------------------
Richard J. Shima*
/s/ Andrew J. Simons Director
- --------------------------------
Andrew J. Simons*
*By: /s/ Melina M.T. Murphy
---------------------------------
Melina M.T. Murphy**
Attorney-in-Fact
**Melina M.T. Murphy, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to
powers of attorney duly executed by such persons and attached hereto as
Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Page Number
in Sequential
Exhibit Number Exhibit Numbering System
1 Composite Certificate of Incorporation(1)
Restated Certificate of
Incorporation(2)
Certificate of Amendment of
Restated Certificate of
Incorporation(2)
Certificate of Amendment of
Restated Certificate of
Incorporation(2)
Amended Foreign Corporation
Certificate(2)
Certificate of Amendment of
Restated Certificate of
Incorporation(2)
2 By-Laws(1)
Amended and Restated By-Laws(2)
4 (A) Restated Certificate of Incorporation(2)
Certificate of Amendment of Restated
Certificate of Incorporation(2)
Certificate of Amendment of Restated
Certificate of Incorporation(2)
(B) Amended and Restated By-Laws(2)
5 (A) Investment Advisory Agreement(2)
(B) SubAdvisory Agreement(2)
6 (A) Principal Underwriting Agreement(2)
(B) Dealer Agreement
8 Custodian, Fund Accounting
and Recordkeeping Agreement(2)
Amendments to Custody, Fund Accounting
and Recordkeeping Agreement(2)
10 Opinion and Consent of Counsel
11 Independent Auditors' Consent
14 Model Retirement Plans(3)
15 Distribution Plan(2)
16 Performance Data Schedule
17 Financial Data Schedule (filed as Exhibit 27)
19 Powers of Attorney
- ---------------------------------
(1) Incorporated by reference herein to Registration Statement
No. 2-81691/811-2303.
(2) Incorporated by reference herein to Post-Effective Amendment
No. 19 to Registration Statement No. 2-81691/811-2303.
(3) Incorporated by reference herein to Post-Effective Amendment
No. 66 to Registration Statement No. 2-10527/811-96.
<PAGE>
Exhibit 99.6(B)
[LOGO] KEYSTONE
INVESTMENTS
200 Berkeley Street
Boston, Massachusetts 02116-5034
Dealer No._________________________________________________________
(Please indicate Exchange Membership(s), if any.)__________________
-------------------------------------------------------------------
Effective Date_____________________________________________________
CLASS A AND B SHARES
To Whom It May Concern:
Keystone Investment Distributors Company ("the Company"), principal
underwriter, invites you to participate in the distribution of shares of the
Keystone Fund Family, Classes A and B shares of the Keystone America Fund Family
and other Funds ("Funds") designated by us which are currently or hereafter
underwritten by the Company, subject to the following terms:
1. In the distribution and sale of shares, you shall not have authority to act
as agent for the issuer, the Company or any other dealer in any respect in such
transactions. All orders are subject to acceptance by us and become effective
only upon confirmation by us. The Company reserves the unqualified right not to
accept any specific order for the purchase or exchange of shares.
2. You will offer and sell shares of the Funds other than Class A shares of the
Keystone America Funds only at their respective net asset values in accordance
with the terms and conditions of a current prospectus of the Fund whose shares
you offer. With respect to Class A shares of the Keystone America Funds and
other Funds designated by us, you will offer and sell such shares at the public
offering price described in a current prospectus of the Fund whose shares you
offer. You will offer shares only on a forward pricing basis, i.e. orders for
the purchase or repurchase of shares accepted by you prior to the close of the
New York Stock Exchange and placed with us the same day prior to the close of
our business day, 5:00 p.m. Eastern Time, and orders to exchange shares of one
Fund for shares of another Fund eligible for exchange placed with us prior to
3:00 p.m. Eastern Time, shall be confirmed at the closing price for that
business day. You agree to place orders for shares only with us and at such
closing price. You further agree to confirm the transaction with your customer
at the price confirmed in writing by us. In the event of a difference between
verbal and written price confirmations, the written confirmations shall be
considered final. Prices of the Funds' shares are computed by and are subject to
withdrawal by the Funds in accordance with their current respective
prospectuses. You agree to place orders with us only through your central order
department unless we accept your written Power of Attorney authorizing others to
place orders on your behalf.
3. So long as this agreement remains in effect, we will pay you commissions on
sales of shares of the Funds and service fees, all in accordance with the
Schedule of Commissions and Service Fees ("Schedule") attached hereto and made a
part hereof, effective June 1, 1995, which Schedule may be modified from time to
time or rescinded by us, in either case without prior notice. You shall have no
vested right to receive any continuing service fees, other fees, or other
commissions which we may elect to pay to you from time to time on shares
previously sold by you. You agree not to share or rebate any portion of such
commissions or to otherwise grant any concessions, discounts or other allowances
to any person who is not a broker or dealer actually engaged in the investment
banking or securities business. You will receive commissions in accordance with
the attached Schedule on all purchase transactions in shareholder accounts
(excluding reinvestment of income dividends and capital gains distributions) for
which you are designated as Dealer of Record except where we determine that any
such purchase was made with the proceeds of a redemption or repurchase of shares
of the same Fund or another Fund whether or not the transaction constitutes the
exercise of the exchange privilege. Commissions will be paid to you twice a
month.
You hereby authorize us to act as your agent in connection with all
transactions in shareholder accounts in which you are designated as Dealer of
Record. All designations of Dealer of Record and all authorizations of the
Company to act as your Agent shall cease upon the termination of this Agreement,
or upon the shareholder's instruction to transfer his or her account to another
Dealer of Record.
4. Payment for all shares purchased from us shall be made to the Company and
shall be received by the Company within ten business days after the acceptance
of your order or such shorter time as may be required by law. If such payment is
not received by us, we reserve the right, without prior notice, forthwith to
cancel the sale, or, at our option, to sell the shares ordered by you back to
the Fund concerned in which latter case we may hold you responsible for any
loss, including loss of profit, suffered by us or by the Fund resulting from
your failure to make payment as aforesaid.
5. You agree to purchase shares of the Funds only from us or from your
customers. If you purchase shares from us, you agree that all such purchases
shall be made only to cover orders already received by you from your customers,
or for your own bonafide investment without a view to resale. If you purchase
shares from your customers, you agree to pay such customers the applicable net
asset value per share less any contingent deferred sales charge that would be
applicable if such shares were then tendered for redemption in accordance with
the then current applicable prospectus ("repurchase price").
6. You will sell shares only --
(a) to your clients at the prices described in paragraph 2 above; or
(b) to us as agent for the Funds at the repurchase price. In such a
sale to us, you may act either as principal for your own account or as
agent for your customer. If you act as principal for your own account
in purchasing shares for resale to us, you agree to pay your customer
not less than nor more than the repurchase price which you receive
from us. If you act as agent for your customer in selling shares to
us, you agree not to charge your customer more than a fair commission
for handling the transaction.
7. You shall not withhold placing with us orders received from your customers so
as to profit yourself as a result of such withholding.
8. We will not accept from you any conditional orders for shares.
9. If any shares sold to you under the terms of this agreement are repurchased
by a Fund, or are tendered for redemption, within seven business days after the
date of our confirmation of the original purchase by you, it is agreed that you
shall forfeit your right to any commissions on such sales even though the
shareholder may be charged a contingent deferred sales charge by the Fund.
We will notify you of any such repurchase or redemption within the next ten
business days after the date on which the certificate or written request for
redemption is delivered to us or to the Fund, and you shall forthwith refund to
us the full amount of any commission you received on such sale. We agree, in the
event of any such repurchase or redemption, to refund to the Fund any commission
we retained on such sale and, upon receipt from you of the commissions paid to
you, to pay such commissions forthwith to the Fund.
10. Shares sold to you hereunder shall not be issued in certificate form or
otherwise until payment has been received by the Fund concerned. If transfer
instructions are not received from you within 15 days after our acceptance of
your order, the Company reserves the right to instruct the transfer agent for
the Fund concerned to register a certificate for the shares sold to you in your
name and forward such certificate to you. You agree to hold harmless and
indemnify the Company, the Fund and its transfer agent for any loss or expense
resulting from such registration.
11. No person is authorized to make any representations concerning shares of the
Funds except those contained in the current applicable prospectuses and in sales
literature issued by us supplemental to such prospectuses. In purchasing shares
from us you shall rely solely on the representations contained in the
appropriate prospectus and in such sales literature. We will furnish additional
copies of the current prospectuses and such sales literature and other releases
and information issued by us in reasonable quantities upon request. You agree
that you will in all respects duly conform with all laws and regulations
applicable to the sale of shares of the Funds and will indemnify and hold
harmless the Funds, their directors and trustees and the Company from any damage
or expenses on account of any wrongful act by you, your representatives, agents
or sub-agents in connection with any orders or solicitation of orders of shares
of the Funds by you, your representatives, agents or sub-agents.
12. Each party hereto represents that it is a member of the National Association
of Securities Dealers, Inc., and agrees to notify the other should it cease to
be a member of such Association and agrees to the automatic termination of this
agreement at that time. It is further agreed that all rules or regulations of
said Association now in effect or hereafter adopted, which are binding upon
underwriters and dealers in the distribution of the securities of open-end
investment companies, shall be deemed to be a part of this agreement to the same
extent as if set forth in full herein.
13. You will not offer the Funds for sale in any State where they are not
qualified for sale under the Blue Sky Laws and regulations of such State or
where you are not qualified to act as a dealer, except for States in which they
are exempt from qualification.
14. This agreement supersedes and cancels any prior agreement with respect to
the sales of shares of any of the Funds underwritten by the Company and the
Company reserves the right to amend this agreement at any time and from time to
time.
15. This agreement shall be effective upon acceptance by us in Boston,
Massachusetts and all sales hereunder are to be made, and title to shares of the
Funds shall pass, in Boston. This agreement is made in the Commonwealth of
Massachusetts and shall be interpreted in accordance with the laws of
Massachusetts.
16. All communications to the Company should be sent to the above address. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
17. Either party may terminate this agreement at any time by written notice to
the other party.
Signed: Accepted:
- ---------------------------------- Boston, MA (USA) as of June 1, 1995
Dealer or Broker Name
- ---------------------------------- KEYSTONE INVESTMENT DISTRIBUTORS COMPANY
Address 200 Berkeley Street, Boston, MA 02116-5034
- ---------------------------------- -----------------------------------------
Authorized Signature Authorized Signature
<PAGE>
EXHIBIT 99.10
June 18, 1996
Keystone Precious Metals Holdings, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
Ladies and Gentlemen:
I am a Senior Vice President of and General Counsel to Keystone
Investment Management Company (formerly named Keystone Custodian Funds, Inc.),
the investment adviser to Keystone Precious Metals Holdings, Inc. (the "Fund").
You have asked for my opinion with respect to the proposed issuance of 789,934
additional shares of the Fund.
To my knowledge, a Prospectus is being filed with the Securities and
Exchange Commission (the "Commission") as part of this Post-Effective Amendment
No. 21 to the Fund's Registration Statement, which will cover the public
offering and sale of the Fund shares currently registered with the Commission.
In my opinion, such additional shares, if issued and sold in accordance
with the Fund's Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation") and offering Prospectus, will be legally issued,
fully paid, and nonassessable by the Fund, entitling the holders thereof to the
rights set forth in the Certificate of Incorporation and subject to the
limitations set forth therein.
My opinion is based upon my examination of the Fund's Certificate of
Incorporation and Amended and Restated By-Laws; a review of the minutes of the
Fund's Board of Directors authorizing the issuance of such additional shares;
and the Fund's Prospectus. In my examination of such documents, I have assumed
the genuineness of all signatures and the conformity of copies to originals.
I hereby consent to the use of this opinion in connection with Post-
Effective Amendment No. 21 to the Fund's Registration Statement, which covers
the registration of such additional shares.
Very truly yours,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Vice President and
General Counsel
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
The Directors of
Keystone Precious Metals Holdings, Inc.
We consent to the use of our report dated March 29 1996, included
herein and to the references to our firm under the captions "FINANCIAL
HIGHLIGHTS" in the prospectus and "ADDITIONAL INFORMATION" in the statement of
additional information.
PMG Peat Marwick LLP
Boston, Massachusetts
June 18, 1996
<PAGE>
EXHIBIT 99.16
<TABLE>
<CAPTION>
PMH MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Feb-96 TOTAL RETURN COMPOUNDED
<CAPTION>
with cdsc N/A 13.34% 33.53% 83.15% 22.35%
W/O CDSC 1.46% 16.34% 36.53% 84.15% 22.57%
<S> <C> <C> <C> <C> <C>
Beg dates 31-Jan-96 29-Dec-95 28-Feb-95 26-Feb-93 26-Feb-93
Beg Value (no load) 21,817 19,028 16,214 12,021 12,021
End Value (W/O CDSC) 22,136 22,136 22,136 22,136 22,136
End Value (with cdsc) 21,565 21,650 22,016 22,016
beg nav 25.97 22.65 19.30 14.38 14.38
end nav 26.35 26.35 26.35 26.35 26.35
shares originally purhased 840.09 840.09 840.09 835.95 835.95
TIME 3
PMH FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Feb-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
with cdsc 89.32% 13.62% 145.51% 9.40%
W/O CDSC 89.32% 13.62% 145.51% 9.40%
<S> <C> <C> <C> <C>
Beg dates 28-Feb-91 28-Feb-91 28-Feb-86 28-Feb-86
Beg Value (no load) 11,692 11,692 9,017 9,017
End Value (W/O CDSC) 22,136 22,136 22,136 22,136
End Value (with cdsc) 22,136 22136.259219 22,136 22136.259219
beg nav 14.22 14.22 12.80 12.8
end nav 26.35 26.35 26.35 26.35
shares originally purhased 822.25 822.25 704.42 704.42
TIME 5 10
</TABLE>
<PAGE>
EXHIBIT 99.19
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/ George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Rosemary D. Van Antwerp, Jean S.
Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of
them singly, my true and lawful attorneys, with full power to them and each of
them to sign for me and in my name in the capacity indicated below any and all
registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5,
N-1 and N-1A, as amended from time to time, and any and all amendments thereto
to be filed with the Securities and Exchange Commission for the purpose of
registering from time to time all investment companies of which I am now or
hereafter a Director, Trustee or officer and for which Keystone Investment
Management Company serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and in my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ J. Kevin Kenely
J. Kevin Kenely
Treasurer
Dated: December 15, 1995
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser,Jr.
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Andrew J. Simons
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE PRECIOUS METALS FUND CLASS A
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 161,088,560
<INVESTMENTS-AT-VALUE> 215,376,517
<RECEIVABLES> 2,192,154
<ASSETS-OTHER> 27,433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 217,596,104
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 325,731
<TOTAL-LIABILITIES> 325,731
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 163,900,840
<SHARES-COMMON-STOCK> 8,245,446
<SHARES-COMMON-PRIOR> 8,870,764
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (55,852)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (126,447)
<ACCUM-APPREC-OR-DEPREC> 53,551,832
<NET-ASSETS> 217,270,373
<DIVIDEND-INCOME> 2,169,487
<INTEREST-INCOME> 176,754
<OTHER-INCOME> 0
<EXPENSES-NET> (4,469,886)
<NET-INVESTMENT-INCOME> (2,123,645)
<REALIZED-GAINS-CURRENT> 15,952,451
<APPREC-INCREASE-CURRENT> 50,494,181
<NET-CHANGE-FROM-OPS> 64,322,987
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,257,907
<NUMBER-OF-SHARES-REDEEMED> (16,883,225)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 46,077,548
<ACCUMULATED-NII-PRIOR> 1,129,201
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (16,084,364)
<GROSS-ADVISORY-FEES> (1,354,605)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,498,113)
<AVERAGE-NET-ASSETS> 197,526,297
<PER-SHARE-NAV-BEGIN> 19.30
<PER-SHARE-NII> (0.25)
<PER-SHARE-GAIN-APPREC> 7.30
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 26.35
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
