<PAGE>
KEYSTONE WORLD BOND FUND
PROSPECTUS FEBRUARY 27, 1996
Keystone World Bond Fund (formerly named Keystone America World Bond Fund)
(the "Fund") is a mutual fund authorized to issue more than one series of
shares. At this time, the Fund issues shares of only one portfolio, the World
Bond Portfolio (the "Portfolio").
The Portfolio seeks current income by investing primarily in a non-diversified
portfolio consisting of debt securities denominated in United States ("U.S.")
and foreign currencies. The Portfolio seeks capital appreciation as a secondary
objective.
Generally, the Portfolio offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in the "Fee
Table," "Alternative Sales Options," "Contingent Deferred Sales Charge and
Waiver of Sales Charges," "Distribution Plans," and "Fund Shares."
This prospectus concisely states information about the Fund and the Portfolio
that you should know before investing. Please read it and retain it for future
reference.
Additional information about the Fund and the Portfolio is contained in a
statement of additional information dated February 27, 1996, which has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this prospectus. For a free copy, or for other information about
the Fund, write to the address or call the telephone number listed below.
KEYSTONE WORLD BOND FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
THE PORTFOLIO MAY INVEST UP TO 35% OF ITS ASSETS IN EITHER OR BOTH OF (I)
LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS," AND (II) BONDS ISSUED BY
FOREIGN ISSUERS RATED BELOW INVESTMENT GRADE, BOTH OF WHICH ENTAIL GREATER
RISKS, INCLUDING RISKS OF DEFAULT, UNTIMELY INTEREST AND PRINCIPAL PAYMENTS AND
PRICE VOLATILITY, THAN THOSE FOUND IN HIGHER RATED SECURITIES, AND MAY PRESENT
PROBLEMS OF LIQUIDITY AND VALUATION. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING. SEE "INVESTMENT OBJECTIVES AND POLICIES," PAGE 7, AND
"RISK FACTORS," PAGE 9, OF THIS PROSPECTUS.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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>
TABLE OF CONTENTS
Page
Fee Table ....................................................... 3
Financial Highlights ............................................ 4
The Fund ........................................................ 7
Investment Objectives and Policies .............................. 7
Investment Restrictions ......................................... 9
Risk Factors .................................................... 9
Pricing Shares .................................................. 12
Dividends and Taxes ............................................. 13
Fund Management and Expenses .................................... 14
How to Buy Shares ............................................... 16
Alternative Sales Options ....................................... 16
Contingent Deferred Sales Charge and Waiver of Sales Charges .... 20
Distribution Plans .............................................. 22
How to Redeem Shares ............................................ 23
Shareholder Services ............................................ 24
Performance Data ................................................ 27
Fund Shares ..................................................... 27
Additional Information .......................................... 28
Additional Investment Information ............................... (i)
Exhibit A ....................................................... A-1
<PAGE>
FEE TABLE
KEYSTONE WORLD BOND FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class 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"; "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION\1/ OPTION\2/
-------------- -------------- --------------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%\3/ None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%\4/ 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year
value of shares redeemed) the and 0.00% thereafter
sixth year and 0.00%
thereafter
Exchange Fee (per exchange)\5/ .................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES\6/
(as a percentage of average net assets)
Management Fees ................................... 0.65% 0.65% 0.65%
12b-1 Fees ........................................ 0.25% 1.00%\7/ 1.00%\7/
Other Expenses .................................... 1.56% 1.56% 1.56%
---- ---- ----
Total Fund Operating Expenses ..................... 2.46% 3.21% 3.21%
==== ==== ====
<CAPTION>
EXAMPLES\8/ 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:
<S> <C> <C> <C> <C>
Class A ............................................................................ $71 $121 $172 $314
Class B ............................................................................ $82 $129 $188 N/A
Class C ............................................................................ $42 $ 99 $168 $351
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A ............................................................................ $71 $121 $172 $314
Class B ............................................................................ $32 $ 99 $168 N/A
Class C ............................................................................ $32 $ 99 $168 $351
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
<FN>
- ----------
\1/ Class B shares purchased on or after June 1, 1995 convert tax free to Class
A shares after eight years. See "Class B Shares" for more information.
\2/ Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
\3/ The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
\4/ Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
\5/ 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.")
\6/ Expense ratios shown above are for the fiscal year ended October 31, 1995.
Total Fund Operating Expenses for the fiscal year ended October 31, 1995
include indirectly paid expenses.
\7/ Long term shareholders may pay more than the economic equivalent of the
maximum front end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD").
\8/ The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE WORLD BOND FUND -- WORLD BOND PORTFOLIO CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund. The financial highlights for the year ended October 31, 1995, the
period from January 1, 1994 to October 31, 1994 and each of the years in the
five year period ended December 31, 1993 were audited by KPMG Peat Marwick LLP,
the Fund's independent auditors. The financial highlights for the year ended
December 31, 1988 and the period January 9, 1987 (commencement of operations) to
December 31, 1987 were audited by the Fund's previous 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>
PERIOD FROM JANUARY 9, 1987
YEAR ENDED JANUARY 1, 1994 YEAR ENDED DECEMBER 31, (COMMENCEMENT OF
OCTOBER 31, TO OCTOBER 31, --------------------------------------------------------- OPERATIONS) TO
1995 1994 1993 1992 1991 1990 1989 1988 DECEMBER 31, 1987
---------- --------------- ------- ------- -------- ------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF
PERIOD .............. $ 8.42 $ 9.56 $ 8.69 $10.77 $ 9.82 $ 9.76 $10.04 $11.02 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.61 0.32 0.44 0.64 0.66 0.63 0.61 0.54 0.56
Net realized and
unrealized gain
(loss) on investment
and foreign
currency related
transactions ........ (0.01) (0.96) 1.03 (0.79) 0.99 0.31 (0.27) (0.92) 1.27
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ....... 0.60 (0.64) 1.47 (0.15) 1.65 0.94 0.34 (0.38) 1.83
------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income (0.54) 0 (0.43) (0.96) (0.45) (0.52) (0.62) (0.54) (0.56)
In excess of net
investment income (c) 0 0 (0.17) (0.28) 0 (0.04) 0 0 0
Tax basis return of
capital ............. (0.06) (0.50) 0 0 0 0 0 0 0
Net realized gains on
investment and foreign
currency related
transactions ........ 0 0 0 (0.69) (0.25) (0.32) 0 (0.06) (0.25)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.60) (0.50) (0.60) (1.93) (0.70) (0.88) (0.62) (0.60) (0.81)
------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE END OF
PERIOD $ 8.42 $ 8.42 $ 9.56 $ 8.69 $10.77 $ 9.82 $ 9.76 $10.04 $11.02
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (d) ..... 7.62% (6.72%) 17.26% (1.24%) 17.48% 10.11% 3.07% (3.34%) 19.10%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses (a) . 2.46%(e) 2.20%(b) 2.20% 2.20% 2.00% 2.00% 1.81% 1.19% 1.88%(b)
Net investment income 7.21% 4.66%(b) 4.62% 5.44% 6.43% 6.48% 5.81% 5.34% 5.68%(b)
Portfolio turnover rate 108% 100% 107% 185% 204% 154% 73% 335% 171%
NET ASSETS END OF
PERIOD (THOUSANDS) . $9,956 $6,047 $8,403 $7,121 $11,843 $13,833 $14,806 $5,043 $4,774
<FN>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of total expenses to average net assets" would have been 2.25%, 3.12%,
2.50%, 2.15% and 2.47% for the period from January 1, 1994 to October 31,
1994 and the years ended December 31, 1993, 1992, 1991 and 1990,
respectively.
(b) Annualized.
(c) Effective January 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income." 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
capital gains." For the fiscal years ended December 31, 1992 and 1990,
distributions in excess of book basis net investment income were charged to
paid-in capital.
(d) Excluding applicable sales charges.
(e) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.44%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE WORLD BOND FUND
WORLD BOND PORTFOLIO
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important 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>
AUGUST 2, 1993
PERIOD FROM (DATE OF INITIAL
YEAR ENDED JANUARY 1, 1994 TO PUBLIC OFFERING) TO
OCTOBER 31, 1995 OCTOBER 31, 1994 DECEMBER 31, 1993
---------------- ------------------ -----------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF PERIOD .............. $ 8.46 $ 9.58 $ 9.47
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .... 0.52 0.31 0.16
Net realized and
unrealized gain (loss)
on investment and
foreign currency related
transactions ........... 0.01 (0.99) 0.21
------ ------ ------
Total from investment
operations ............. 0.53 (0.68) 0.37
------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income .... (0.48) 0 (0.11)
In excess of net
investment income (c) .. 0 0 (0.15)
Tax basis return of
capital ................ (0.06) (0.44) 0
Net realized gains on
investment and foreign
currency related
transactions ........... 0 0 0
------ ------ ------
Total distributions ...... (0.54) (0.44) (0.26)
------ ------ ------
NET ASSET VALUE END OF
PERIOD ................. $ 8.45 $ 8.46 $ 9.58
====== ====== ======
TOTAL RETURN (D) ......... 6.68% (7.18%) 3.93%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses (a) ..... 3.21%(e) 2.95%(b) 2.95%(b)
Net investment income .. 6.43% 4.05%(b) 3.79%(b)
Portfolio turnover rate .. 108% 100% 107%
NET ASSETS END OF PERIOD
(THOUSANDS) ............ $3,680 $3,429 $2,544
<FN>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of total expenses to average net assets" would have been 3.03% and 3.47% for
the period from January 1, 1994 to October 31, 1994 and for the period from
August 2, 1993 (Date of Initial Public Offering) to December 31, 1993,
respectively.
(b) Annualized.
(c) Effective January 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income." 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
capital gains."
(d) Excluding applicable sales charges.
(e) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 3.19%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE WORLD BOND FUND
WORLD BOND PORTFOLIO
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important 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>
AUGUST 2, 1993
PERIOD FROM (DATE OF INITIAL
YEAR ENDED JANUARY 1, 1994 TO PUBLIC OFFERING) TO
OCTOBER 31, 1995 OCTOBER 31, 1994 DECEMBER 31, 1993
---------------- ------------------ -----------------
<S> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF PERIOD ............ $ 8.42 $ 9.58 $ 9.47
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. 0.56 0.30 0.18
Net realized and unrealized gain
(loss) on investment and
foreign currency related
transactions ................... (0.02) (1.02) 0.19
------ ------ ------
Total from investment operations 0.54 (0.72) 0.37
------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income ............ (0.48) 0 (0.12)
In excess of net investment
income (c) ..................... 0 0 (0.14)
Tax basis return of capital ...... (0.06) (0.44) 0
Net realized gains on investment
and foreign currency related
transactions ................... 0 0 0
------ ------ ------
Total distributions .............. (0.54) (0.44) (0.26)
------ ------ ------
NET ASSET VALUE END OF PERIOD .... $ 8.42 $ 8.42 $ 9.58
====== ====== ======
TOTAL RETURN (D) ................. 6.83% (7.61%) 3.93%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses (a) ............. 3.21%(e) 2.95%(b) 2.95%(b)
Net investment income .......... 6.49% 3.94%(b) 3.79%(b)
Portfolio turnover rate .......... 108% 100% 107%
NET ASSETS END OF PERIOD (THOUSANDS) $1,183 $1,591 $1,878
<FN>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of total expenses to average net assets" would have been 3.03% and 3.40% for
the period from January 1, 1994 to October 31, 1994 and for the period from
August 2, 1993 (Date of Initial Public Offering) to December 31, 1993,
respectively.
(b) Annualized.
(c) Effective January 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income." 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
capital gains."
(d) Excluding applicable sales charges.
(e) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 3.19%.
</TABLE>
<PAGE>
THE FUND
The Fund is an open-end, management investment company, commonly known as a
mutual fund, and is authorized to issue series of shares representing portfolios
of its assets, some or all of which portfolios may be diversified. At this time,
the Fund issues shares of one nondiversified portfolio, the World Bond
Portfolio. The Fund was formed as a Massachusetts business trust on September 5,
1986. The Fund is one of the 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 Objective
The Portfolio seeks current income by investing primarily in a nondiversified
portfolio consisting of debt securities denominated in U.S. and foreign
currencies. The Portfolio seeks capital appreciation as a secondary objective.
If the Portfolio's investment objectives change, shareholders should consider
whether the Portfolio is still an appropriate investment in light of their then
current financial positions and needs.
Of course, there can be no assurance that the Portfolio will achieve its
investment objectives since there is uncertainty in every investment.
NORMAL MARKET CONDITIONS POLICY
The Portfolio invests at least 65% of its total assets in bonds denominated in
at least three currencies, one of which may be United States ("U.S.") currency.
This policy is fundamental and may not be changed without obtaining the approval
of the Portfolio's shareholders. While the Portfolio's fundamental policy
requires it to invest at least 65% of its total assets in bonds denominated in
at least three currencies, it is expected that under normal market conditions in
excess of 80% of the Portfolio's total assets will be invested in debt
securities denominated in U.S. and foreign currencies.
COUNTRY OF ISSUER POLICY
Under normal market conditions, at least 65% of the Portfolio's total assets
will also be invested in the securities of issuers located in three countries,
one of which may be the U.S. The Portfolio may, and the Portfolio's adviser
intends to, invest up to 35% of its assets in the securities of issuers located
in "emerging" or "developing" market countries. For this purpose, countries with
emerging or developing markets are generally those where the per capita income
is in the low to middle ranges, as determined by the International Bank for
Reconstruction and Development ("World Bank").
DEFENSIVE POLICY
When, in the opinion of the Portfolio's investment adviser, market conditions
warrant, the Portfolio may, for defensive purposes, temporarily invest more than
35% of its total assets in money market instruments, cash and government
securities denominated in U.S. and foreign currencies. Under circumstances where
the Portfolio is investing for defensive purposes, it may not be pursuing its
investment objectives.
NONDIVERSIFICATION POLICY
The Portfolio will attempt to vary its investments among issuers located in
different countries as indicated above, but reserves authority to invest up to
25% of its total assets in obligations issued or guaranteed by any one foreign
government and up to 10% of its total assets in obligations issued or guaranteed
by any one multinational agency.
In allocating the Portfolio's investments among issuers located in different
countries, the Portfolio's adviser will take into consideration the interest
rate environments and general economic conditions of such countries. It will
also evaluate the relative values of different currencies on the basis of
technical and political data and such fundamental economic criteria, as relative
inflation rates and trends, projected growth rates, balance of payments status
and economic policies.
The debt securities in which the Portfolio may invest include bonds,
debentures, notes, commercial paper, certificates of deposit, obligations issued
or guaranteed by the U.S. or a foreign government or any of their political
subdivisions, agencies or instrumentalities, and debt securities convertible
into common stock.
At least 65% of the debt securities selected for the Portfolio will be rated
Baa or higher by Moody's Investors Service ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P") or, if unrated, will be deemed to be of
comparable quality by the Portfolio's adviser.
Bonds rated Baa or higher by Moody's or BBB or higher by S&P are considered
investment grade bonds and are generally considered medium to high quality
obligations of the issuer. Such bonds generally have protections for timely
interest payments and repayment of principal. Bonds rated in the lower part of
these ratings, however, may have some speculative characteristics. Any
split-rated bond in which the Portfolio may invest will be rated at least Baa by
Moody's or BBB by S&P.
Bonds that are rated Baa by Moody's are considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Bonds
rated BBB by S&P are regarded as having an adequate capacity to pay interest and
repay principal. While such bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
The balance of the debt securities held by the Portfolio may be rated below
Baa by Moody's or below BBB by S&P. Such bonds are commonly referred to as "junk
bonds." For a discussion of the investment risks associated with investments in
such bonds, see the "Risk Factors" section of this prospectus.
The value of the Portfolio's investments will vary inversely with changes in
prevailing interest rates and changes in the value of the U.S. dollar in
relation to foreign currencies. Because of these factors, investment in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline.
Investing in a nondiversified portfolio, as opposed to a diversified
portfolio, may result in a greater degree of exposure to the economic movements
of the market sector in which the Portfolio invests. Investment in foreign
securities also involves other risks, which are described under "Risk Factors."
EQUITY POLICY
The Portfolio, consistent with achieving its investment objectives, may invest
up to 35% of its total assets in dividend-paying equity securities, such as
common stocks or preferred stocks, including convertible preferred stock, and in
the other instruments described herein.
OTHER ELIGIBLE SECURITIES
The Portfolio may enter into repurchase agreements with respect to U.S. and
foreign government securities for the purpose of investing cash balances. The
Portfolio may purchase or sell foreign currency, purchase options on currency
and purchase or sell forward foreign currency exchange contracts to manage
exchange rates. In addition, the Portfolio may write covered call and put
options and purchase call and put options on any security in which the Portfolio
may invest, including the purchase of options to close out previously written
options of the same series. The Portfolio may, for hedging purposes, purchase
and sell futures contracts and put and call options on futures contracts. The
Portfolio may purchase securities on a when-issued or forward commitment basis
and may engage in the lending of portfolio securities.
The Portfolio is authorized to enter into forward currency exchange contracts
if, as a result, no more than 75% of the value of the investing classes of the
Portfolio would be committed to the consummation of such contracts; provided,
however, that the Fund has satisfied the requirements imposed by the Securities
and Exchange Commission under the Investment Company Act of 1940 ("1940 Act").
In addition to the options, futures contracts and forwards mentioned above, if
consistent with its investment objectives, the Portfolio may also invest in
certain other types of derivative instruments, including collateralized mortgage
obligations, structured notes, interest rate swaps, index swaps, currency swaps
and caps and floors. These vehicles can also be combined to create more complex
products called hybrid derivatives or structured securities.
The Portfolio 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 Portfolio has valued such
securities on its books, and (2) limiting its holdings of such securities to 15%
of net assets.
For further information about the types of investments and investment
techniques available to the Portfolio, including the risks associated, see the
section of this prospectus entitled "Additional Investment Information" and the
statement of additional information.
NATURE OF INVESTMENT OBJECTIVES
The Portfolio's investment objectives are nonfundamental and may be changed
without the vote of a majority of the shareholders. If the investment objectives
are changed and a shareholder determines that the Portfolio is no longer an
appropriate investment, the shareholder may redeem his shares, but may be
subject to a contingent deferred sales charge upon redemption.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below on behalf
of its portfolios, which may not be changed without the approval of a majority
(as defined in the 1940 Act) of the portfolio's outstanding shares. These
restrictions and certain other fundamental and nonfundamental restrictions are
contained in the statement of additional information.
Generally, the Portfolio may not do the following:
(1) purchase securities of any one issuer if as a result more than 10% of
the outstanding voting secutities of such issuer would be held by the
Portfolio, or invest more than 5% of the Portfolio's total assets (taken at
market value) in the securities of any one issuer, except securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
provided that the Portfolio may invest up to 25% of its total assets in
securities issued or guaranteed by any single foreign government and up to 10%
of its total assets in securities issued or guaranteed by any single
multinational agency;
(2) borrow money, except from a bank for temporary or emergency purposes
(not for leveraging or investment) and may not borrow money in an amount
exceeding one-third of the value of its total assets (less liabilities other
than borrowings); any borrowings that come to exceed one-third of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three days to the extent necessary to comply with the one-third
limitation; the Portfolio will not purchase securities while temporary bank
borrowings in excess of 5% of its total assets are outstanding; and
(3) invest more than 25% of its total assets (taken at market value) in
securities of issuers in a particular industry or group of related industries,
except U.S. government securities.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of risk.
Before you invest in the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
By itself, the Portfolio does not constitute a balanced investment program.
You should take into account your own investment objectives as well as your
other investments when considering an investment in the Portfolio.
Should the Portfolio need to raise cash to meet a large number of redemptions
it may have to sell portfolio securities at a time when it would be
disadvantageous to do so.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in "Additional Investment Information" and in
the Statement of Additional Information.
FOREIGN SECURITIES
In addition, investing in the Portfolio, with its globally varied investments,
involves greater risk than investing in a fund with a portfolio consisting
solely of 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 Portfolio may incur fees on currency exchanges when it changes
investments from one country to another;
(7) the Portfolio's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization, establishment of exchange controls,
political or social instability or diplomatic developments;
(8) foreign governments may withhold income on investments; and
(9) fluctuations in foreign exchange rates will affect the value of the
Portfolio'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.
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.
BELOW INVESTMENT GRADE BONDS
The Portfolio may invest up to 35% of its assets in high yielding, high risk
bonds and other similar securities commonly referred to as "junk bonds."
Investment in such bonds involves risks that are greater than the risks of
investing in higher quality debt securities and may result in greater upward and
downward movement of the net asset value per share of the Portfolio. As a
result, such risks should be carefully considered by investors. These risks,
discussed in greater detail below, include risks from:
(1) interest rate fluctuations;
(2) changes in credit status, including weaker overall credit condition of
issuers and risks of default;
(3) industry, market and economic risk;
(4) volatility of price resulting from broad and rapid changes in the
value of underlying securities; and
(5) greater price variability and credit risks of certain high yield
securities such as zero coupon bonds and payment-in-kind bonds ("PIKs").
More specifically, investors should be aware of the following risks:
(1) Securities rated BB or lower by S&P or Ba or lower by Moody's are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments.
(2) The lower ratings of certain securities held by the Portfolio reflect a
greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both, or an unanticipated rise
in interest rates, may impair the ability of the issuer to make payments of
interest and principal, especially if the issuer is highly leveraged. Such
issuer's ability to meet its debt obligations may also be adversely affected
by specific corporate developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Also, an economic downturn or an increase in interest rates may increase the
potential for a default by the issuers of these securities.
(3) The value of certain securities held by the Portfolio may be more
susceptible to real or perceived adverse economic, company or industry
conditions and publicity than is the case for higher quality securities.
(4) The values of certain securities, like those of other fixed income
securities, fluctuate in response to changes in interest rates. When interest
rates decline, the value of a portfolio invested in bonds can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
in bonds can be expected to decline. For example, in the case of an investment
in a fixed income security, if interest rates increase after the security is
purchased, the security, if sold prior to maturity, may return less than its
cost. The prices of noninvestment grade bonds, however, are generally less
sensitive to interest rate changes than higher rated bonds, but more sensitive
to adverse or positive economic changes or individual corporate developments.
With respect to derivative or structured securities, the market value of such
securities may vary depending on the manner in which such securities have been
structured. As a result, the value of such investments may change at a more
rapid rate than that of traditional fixed income securities.
(5) The secondary market for certain securities held by the Portfolio may be
less liquid at certain times than the secondary market for higher quality debt
securities, which may have an adverse effect on market price and the
Portfolio's ability to dispose of particular issues and may also make it more
difficult for the Portfolio to obtain accurate market quotations for purposes
of valuing its assets.
(6) Zero coupon bonds and PIKs involve additional special considerations.
For example, zero coupon bonds do not require the periodic payment of
interest. PIK bonds are debt obligations that provide that the issuer may, at
its option, pay interest on such bonds in cash or in the form of additional
debt obligations. Such investments may experience greater fluctuation in value
due to changes in interest rates than debt obligations that pay current
interest currently. Even though these investments do not pay current interest
in cash, the Portfolio is, nonetheless, required by tax laws to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders. Thus the Portfolio could be required at times to
liquidate investments in order to fulfill its intention to distribute
substantially all of its net income as dividends. The Portfolio will not be
able to purchase additional income producing securities with cash used to make
such distributions, and its direct income may be reduced as a result.
The Portfolio may invest in securities that are rated as low as D by S&P and
C- by Moody's. It is possible for securities rated D or C-, respectively, to
have defaulted on payments of principal and/or interest at the time of
investment. The section of this prospectus entitled "Additional Investment
Information" describes these rating categories. The Portfolio intends to invest
in D rated debt only in cases where, in the adviser's judgment, there is a
distinct prospect of improvement in the issuer's financial position as a result
of the completion of reorganization or otherwise. The Portfolio may also invest
in unrated securities that, in the adviser's judgment, offer comparable yields
and risks to those of securities that are rated, as well as in non-investment
quality zero coupon bonds and PIKs.
RULE 144A SECURITIES
The Portfolio 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 Portfolio may
purchase Rule 144A securities when such securities present an attractive
investment opportunity and otherwise meet the Portfolio's selection criteria.
The Board of Trustees has adopted guidelines and procedures pursuant to which
the liquidity of the Portfolio's Rule 144A securities is determined by Keystone,
the Portfolio's adviser. The Board of Trustees monitors Keystone's
implementation of such guidelines and procedures.
At the present time, the Portfolio cannot accurately predict exactly how the
market for Rule 144A securities will develop. A Rule 144A security that was
readily marketable upon purchase may subsequently become illiquid. In such an
event, the Board of Trustees will consider what action, if any, is appropriate.
PRICING SHARES
The net asset value of a share of the Portfolio 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
Portfolio shares) except on days when changes in the value of the Portfolio's
securities do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Portfolio is arrived at by determining the
value of the Portfolio's assets, subtracting its liabilities and dividing the
result by the number of its shares outstanding.
Current values for the Portfolio's securities are determined as follows:
(1) bonds, debentures and other debt securities, whether or not listed on
any national securities exchange, are valued at a price supplied by a pricing
service or a bond dealer selected by the Portfolio's adviser;
(2) common stock, preferred stock and other equity securities listed on the
Exchange are valued on the basis of the last sale price on the Exchange; in
the absence of any sales, such securities are valued at the mean between the
closing asked price and the closing bid price;
(3) common stock, preferred stock and other equity securities listed on
other U.S. or foreign exchanges will be valued as described in paragraph (1)
using quotations on the exchange on which the security is most extensively
traded;
(4) common stock, preferred stock and other equity securities unlisted and
quoted on the National Market System ("NMS") are valued at the last sale
price, provided a sale has occurred; in the absence of any sales, such
securities are valued at the high or "inside" bid supplied by the NASD on its
NASDAQ system for securities traded in the over-the-counter market;
(5) common stock, preferred stock and other equity securities quoted on the
NASDAQ system, but not listed on NMS, are valued at the high or "inside" bid;
(6) common stock, preferred stock and other equity securities not listed and
not quoted on the NASDAQ system for which over-the-counter market quotations
are readily available are valued at the mean between the current bid and asked
prices for such securities;
(7) non-U.S. common stock, preferred stock and other equity securities not
listed or listed and subject to restrictions on sale are valued at prices
supplied by a dealer selected by the Portfolio's adviser;
(8) short-term instruments having maturities of more than sixty days for
which market quotations are readily available are valued at current market
value; where market quotations are not available, such instruments are valued
at fair value as determined by the Fund's Board of Trustees;
(9) short-term instruments purchased with maturities of sixty days or less
(including all master demand notes) 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 instruments maturing in more than sixty days when purchased and
held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest,
approximates market and, in any case, reflects fair value as determined by the
Fund's Board of Trustees;
(10) options, futures contracts and options on futures listed or traded on a
national securities exchange are valued at the last sale price on such
exchange prior to the time of determining net asset value or, if no sale is
reported, are valued at the mean between the most recent bid and asked prices;
(11) forward currency contracts are valued at their last sale as reported by
a pricing service, and in the absence of a report at a value determined on the
basis of the underlying currency at prevailing exchange rates;
(12) securities subject to restrictions on resale are valued at fair value
at least monthly by a pricing service under the direction of the Fund's Board
of Trustees; and
(13) all other assets are valued at fair market value as determined by or
under the direction of the Fund's Board of Trustees.
DIVIDENDS AND TAXES
The Portfolio has qualified and intends to qualify in the future as a
regulated investment company under the Internal Revenue Code. The Portfolio
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Portfolio also intends
to make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year. Any
taxable distributions declared in October, November, or December to shareholders
of record in such a month and paid by the following January 31 will be taxable
to shareholders as if paid on December 31 of the year in which declared. If the
Portfolio qualifies and if it distributes substantially all of its net
investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
The Fund declares and distributes dividends from the Portfolio's net
investment income monthly. Distributions of short-term and long-term capital
gains, if any, will be made at least annually. Shareholders receive Fund
distributions in the form of additional shares of that class of shares upon
which the distribution is based or, at the shareholder's option, in cash. Fund
distributions in the form of additional shares are made at net asset value
without the imposition of a sales charge.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front end sales charge while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher than
those attributable to Class A shares, and income distributions paid by the Fund
with respect to Class A shares will generally be greater than those paid with
respect to Class B and Class C shares.
Income dividends and net short-term gains distributions are taxable as
ordinary income and net long-term gains distributions are taxable as capital
gains regardless of how long Fund shares have been held. However, if Fund shares
held for less than six months are sold at a loss, such loss will be treated for
tax purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received. The Fund advises shareholders annually as to the
federal tax status of all distributions made during the year.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Fund's Board of Trustees, Keystone, the Fund's
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. (formerly named Keystone Group, 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 and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Investments Family of
Funds.
Under its Investment Advisory and Management Agreement (the "Advisory
Agreement") with the Fund, Keystone manages the investment and reinvestment of
the Portfolio'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 Portfolio pays Keystone a fee for its services at the annual rates set
forth below:
Aggregate Net Asset
Management Value of the Shares
Fee Income of the Portfolio
- ------------------------------------------------------------------------------
1.5% of Gross Income plus
0.50% of the first $ 500,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of amounts over $1,000,000,000
Keystone's fee is computed as of the close of business on each business day
and payable daily.
For the fiscal period ended October 31, 1995, including indirectly paid
expenses, the Portfolio paid to Keystone management fees of $93,806, which
represented 0.65% of the Portfolio's average net assets.
To the extent the Portfolio's management fee exceeds 0.75% of the Portfolio's
average net assets, the fee would be higher than that paid by most other
investment companies. The Portfolio's fee structure is comparable, however, to
that of other global and international funds subject to the higher costs
involved in managing a portfolio of predominantly international securities.
The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Fund's Board
of Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund or Keystone. The Advisory Agreement will terminate automatically upon its
assignment.
FUND EXPENSES
The Portfolio will pay all of its expenses. In addition to the investment
advisory, management and Distribution Plan fees discussed herein, the principal
expenses the Portfolio is expected to pay include its share (currently 100%) of
the expenses of certain Trustees; the Fund's transfer, dividend disbursing and
shareholder servicing agent expenses; the Fund's custodian expenses; fees of the
Fund's accountants, as well as legal counsel to the Fund's Trustees; fees
payable to government agencies, including registration and qualification fees
attributable to the Fund and its shares under federal and state securities laws;
and certain extraordinary expenses. In addition, each class will pay all of the
expenses attributable to it. Such expenses are currently limited to Distribution
Plan expenses. The Portfolio also pays its brokerage commissions, interest
charges and taxes.
For the fiscal year ended October 31, 1995, the Portfolio's Class A, Class B,
and Class C shares paid 2.46%, 3.21%, and 3.21%, respectively, of such class'
average net assets in expenses. These percentages are after Keystone's
reimbursement of certain of the Fund's expenses pursuant to voluntary expense
limitations, which were in effect until December 31, 1994. In connection with
such voluntary expense limits, Keystone reimbursed the Fund $597, $190 and $156
for Class A, Class B and Class C shares, respectively. Keystone would not be
required to reimburse the Fund to the extent such reimbursement would result in
the Fund's inability to qualify as a regulated investment company under the
Internal Revenue Code.
During the fiscal year ended October 31, 1995, the Portfolio paid or accrued
to Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend paying agent, $19,141 for certain accounting and printing services and
$74,907 for transfer agent services. KIRC is a wholly-owned subsidiary of
Keystone.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Gilman C. Gunn is the Fund's portfolio manager. Mr. Gunn is a Keystone
Senior Vice President and Group Head. An investment professional with 23 years
of experience, he has spent over ten years in London, Kuwait and Thailand.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, the Portfolio's adviser
selects broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions, the
Portfolio's adviser may consider as a factor the number of shares of the
Portfolio sold by such broker-dealer. In addition, broker-dealers executing
portfolio transactions may, from time to time, be affiliated with the Fund,
Keystone, the Fund's principal underwriter or their affiliates.
The Portfolio may pay higher commissions to broker-dealers that provide
research services. Keystone may use these services in advising the Portfolio as
well as in advising its other clients.
PORTFOLIO TURNOVER
The Portfolio's turnover rates for the ten-month period ended October 31, 1994
and the fiscal year ended October 31, 1995 were 100% and 108%, respectively.
High portfolio turnover involves correspondingly greater brokerage commissions
and other transaction costs, which will be borne directly by the Portfolio as
well as additional gains and/or losses. The Portfolio pays brokerage commissions
in connection with the writing of options and effecting the closing purchase or
sale transactions as well as for some purchases and sales of portfolio
securities.
HOW TO BUY SHARES
You may purchase shares of the Portfolio from any broker-dealer that has a
selling agreement with Keystone Investment Distributors Company (formerly named
Keystone Distributors, Inc.) (the "Principal Underwriter"). The Principal
Underwriter, a wholly-owned subsidiary of Keystone, is located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the
Portfolio 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 Portfolio. You may also open an account by
telephoning 1-800-343-2898 to obtain the number of an account to which you can
wire or electronically transfer funds, and then sending in a completed account
application. Subsequent investments in Portfolio shares in any amount may be
made by check, by wiring Federal funds or by an electronic funds transfer
("EFT").
Orders for the purchase of shares of the Portfolio will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Principal Underwriter (generally as
of the close of the Exchange on that day) plus, in the case of Class A shares,
the sales charge. Orders received by dealers or other firms prior to the close
of the Exchange and received by the Principal Underwriter prior to the close of
its business day will be confirmed at the offering price effective as of the
close of the Exchange on that day.
Orders for shares received, other than as stated above, will receive the
offering price equal to the net asset value per share next determined (generally
the next business day's offering price) plus, in the case of Class A shares, the
sales charge.
An initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases. The Fund reserves the right to determine the net asset
value more frequently than once a day if deemed desirable. Dealers and other
financial services firms are obligated to transmit orders promptly.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which this prospectus was
received.
ALTERNATIVE SALES OPTIONS
Generally, the Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a sales charge when they are redeemed except as
follows: Class A shares purchased on or after April 10, 1995 (1) in an amount
equal to or exceeding $1,000,000 or (2) by a corporate qualified retirement plan
or a non-qualified deferred compensation plan sponsored by a corporation having
100 or more eligible employees (a "Qualifying Plan"), in either case without a
front end sales charge, will be subject to a contingent deferred sales charge
for the 24 month period following the date of purchase. Certain Class A shares
purchased prior to April 10, 1995 may be subject to a deferred sales charge upon
redemption during the one year period following the date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a deferred sales charge if they are
redeemed. Class B shares purchased on or after June 1, 1995 are subject to a
deferred sales charge upon redemption during the 72 month period from and
including the month of purchase. Class B shares purchased prior to June 1, 1995
are subject to a deferred sales charge upon redemption during the four calendar
years following purchase. Class B shares purchased on or after June 1, 1995 that
have been outstanding for eight years from and including the month of purchase
will automatically convert to Class A shares without imposition of a front-end
sales charge or exchange fee. Class B shares purchased prior to June 1, 1995
will retain their existing conversion rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its Distribution Plan or other plans, as the
case may be, pays an annual service fee of 0.25% of the Fund's average daily net
assets attributable to that class. In addition to the 0.25% service fee the
Class B and C Distribution Plans provide for the payment of an annual
distribution fee of up to 0.75% of the average net assets attributable to their
respective classes. As a result, income distributions paid by the Fund with
respect to Class B and Class C shares will generally be less than those paid
with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Depending on the amount of the purchase and the intended length of
investment, other investors might consider Class B or Class C shares, in which
case 100% of the purchase price is invested immediately. The Fund will not
normally accept any purchase of Class B shares in the amount of $250,000 or
more, and will not normally accept any purchase of Class C shares in the amount
of $1,000,000 or more.
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 ................................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000 .................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 .................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 .................. 1.50% 1.52% 1.50%
- ----------
*Rounded to the nearest one-hundredth percent.
</TABLE>
----------------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a tax-sheltered
annuity plan sponsored by public educational organization having 5,000 or more
eligible employees (a "TSA Plan") will be at net asset value without the
imposition of a front-end sales charge (each such purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay broker/
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
1.00% of the investment amount up to $2,999,999; plus 0.50% of the investment
amount between $3,000,000 and $4,999,999; plus 0.25% of the investment amount
over $4,999,999.
With the exception of Class A shares acquired by a TSA Plan in an NAV
Purchase, as described above, Class A shares acquired on or after April 10, 1995
in an NAV Purchase are subject to a contingent deferred sales charge of 1.00%
upon redemption during the 24 month period commencing on the date the shares
were originally purchased. Class A shares acquired by a TSA Plan in an NAV
Purchase are not subject to a contingent deferred sales charge. Certain Class A
shares purchased without a front-end sales charge prior to April 10, 1995 are
subject to a contingent deferred sales charge of 0.25% upon redemption during
the one year period commencing on the date such shares were originally
purchased.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.25% of
the average daily net asset value of Class A shares maintained by such recipient
on the books of the Fund for specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are included in a broker-dealer or investment adviser managed fee based
program (a wrap account) through broker dealers or investment advisers who have
entered into special agreements with the Principal Underwriter. Initial sales
charges may be reduced or eliminated for persons or organizations purchasing
Class A shares of the Fund alone or in combination with Class A shares of other
Keystone America Funds. See Exhibit A to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the amount
invested represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front end sales
charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds. This
special net asset value purchase is currently offered only one calendar month by
month basis and may be modified or terminated in the near future.
In addition, upon prior notification to the Principal Underwriter, Class A
shares may be purchased at net asset value by clients of registered
representatives within six months after a change in the registered
representative's employment when the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by Keystone or its affiliates; and the shareholder either
(1) paid a front end sales charge, or (2) was at some time subject to, but did
not actually pay, a contingent deferred sales charge with respect to the
redemption proceeds.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
("Class A Distribution Plan") that provides for expenditures, currently limited
to 0.25% annually of the average daily net asset value of Class A shares, to pay
expenses associated with the distribution of Class A shares. Payments under the
Class A Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) as shareholder service fees
at an annual rate of up to 0.25% of the average daily net asset value of Class A
shares maintained by such recipients on the books of the Fund for specified
periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period .................... 5.00%
Second twelve month period ................... 4.00%
Third twelve month period .................... 3.00%
Fourth twelve month period ................... 3.00%
Fifth twelve month period .................... 2.00%
Sixth twelve month period .................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plan are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver of Sales
Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of a front-end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 will similarly convert to Class A shares
at the end of seven calendar years after the year of purchase. (Conversion of
Class B shares represented by stock certificates will require the return of the
stock certificates to KIRC.) The Class B shares so converted will no longer be
subject to the higher expenses borne by Class B shares. Because the net asset
value per share of the Class A shares may be higher or lower than that of the
Class B shares at the time of conversion, although the dollar value will be the
same, a shareholder may receive more or fewer Class A shares than the number of
Class B shares converted. Under current law, it is the Fund's opinion that such
a conversion will not constitute a taxable event under federal income tax law.
In the event that this ceases to be the case, the Board of Trustees will
consider what action, if any, is appropriate and in the best interests of the
Class B shareholders.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans and other plans with respect to its
Class B shares (all such plans collectively, "Class B Distribution Plans") that
provide for expenditures at an annual rate of up to 1.00% of the average daily
net asset value of Class B shares to pay expenses of the distribution of Class B
shares. Payments under the Class B Distribution Plans are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
(1) as commissions for Class B shares sold and (2) as shareholder service fees.
Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the
aggregate may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
equal to 4.00% of the price paid for each Class B share sold plus the first
year's service fee in advance in the amount of 0.25% of the price paid for each
Class B share sold. Beginning approximately 12 months after the purchase of a
Class B share, the broker or other party will receive service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient on the books of the Fund for specified periods. See
"Distribution Plans" below.
CLASS C SHARES
Class C shares are offered only through dealers who have special distribution
agreements with the Principal Underwriter. Class C shares are offered at net
asset value, without an initial sales charge. With certain exceptions, the Fund
may impose a deferred sales charge of 1.00% on shares redeemed within one year
after the date of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to a shareholder. The deferred sales
charge is retained by the Principal Underwriter. See "Contingent Deferred Sales
Charges and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLANS
The Fund has adopted a Distribution Plan and other plans with respect to its
Class C shares (all such plans collectively, the "Class C Distribution Plans")
that provide for expenditures at an annual rate of up to 1.00% of the average
daily net asset value of Class C shares to pay expenses of the distribution of
Class C shares. Payments under the Class C Distribution Plans 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. Amounts paid or accrued to the Principal Underwriter under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
in the amount of 0.75% of the price paid for each Class C share sold, plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class C share sold, and, beginning approximately fifteen months after
purchase, a commission at an annual rate of 0.75% (subject to NASD rules -- see
"Distribution Plans") plus service fees at an annual rate of 0.25%,
respectively, of the average daily net asset value of each Class C share
maintained by such recipients on the books of the Fund for specified periods.
See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES Any contingent
deferred sales charge imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net asset value at the time of purchase of such shares. No
contingent deferred sales charge is imposed when a shareholder redeems amounts
derived from (1) increases in the value of an account above the net 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; (3) certain Class A shares held for more than one
year or two years, as the case may be; (4) Class B shares held during more than
four consecutive calendar years or more than 72 months, as the case may be; or
(5) Class C shares held for more than one year. Upon request for redemption,
shares not subject to the contingent deferred sales charge will be redeemed
first. Thereafter, shares held the longest will be the first to be redeemed.
The Fund also may sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with the Principal Underwriter and to a bank or trust company acting
as a trustee for a single account.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder;
(2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified
under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3)
automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2
years old; (4) involuntary redemptions of accounts having an aggregate net asset
value of less than $1,000; (5) automatic withdrawals under an automatic
withdrawal plan of up to 1 1/2% 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.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of Fund shares. In addition, dealers may, from time to time, receive
additional cash payments. The Principal Underwriter may also provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency, such as the NASD. Dealers to whom substantially the entire sales charge
is reallowed may be deemed to be underwriters as that term is defined under the
1933 Act.
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 made allowable 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 Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans and other plans adopted with respect to its Class A,
Class B and Class C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD currently limits the amount that a fund may pay annually in
distribution costs for the sale of its shares and shareholder service fees. The
NASD limits annual expenditures to 1.00% of the aggregate average daily net
asset value of a fund's shares, of which 0.75% may be used to pay such
distribution costs and 0.25% may be used to pay shareholder service fees. The
NASD also limits the aggregate amount that the Fund may pay for such
distribution costs to 6.25% of gross share sales since the inception of the
12b-1 Distribution Plans, plus interest at the prime rate plus 1% on such
amounts (less any contingent deferred sales charges paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund. The Principal Underwriter intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect would
be to extend the period of time during which the Fund incurs the maximum amount
of costs allowed by a Distribution Plan. If a Distribution Plan is terminated,
the Principal Underwriter will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to adverse
distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class.
For Class B shares sold prior to June 1, 1995, unreimbursed distribution
expenses at October 31, 1995 were $191,513 (5.2% of such Class B assets at
October 31, 1995). For Class B shares sold on or after June 1, 1995,
unreimbursed distribution expenses at October 31, 1995 were $18,809 (1.0% of
such Class B net assets at October 31, 1995). Unreimbursed distribution expenses
at October 31, 1995 for Class C shares were $117,401 (9.9% of Class C net assets
at October 31, 1995).
For the fiscal year ended October 31, 1995, the Fund paid the Principal
Underwriter $22,659, $31,853 ($29,857 with respect to Class B shares sold prior
to June 1, 1995 and $1,996 with respect to Class B shares sold on or after June
1, 1995) and $13,920 pursuant to its Class A, Class B and Class C Distribution
Plans, respectively.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Portfolio shares for cash at their net asset value upon written
order to the Fund c/o KIRC, 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. In order
to redeem by telephone, you must have completed the authorization in your
account application.
The redemption value equals the net asset value per share and may be more or
less than your cost depending upon changes in the value of the Portfolio's
securities between purchase and redemption.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check which may take up to 15 days or
more. Any delay may be avoided by purchasing shares either with a certified
check or by Federal Reserve or bank wire of funds or by EFT. Although the
mailing of a redemption check or the wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed or the proceeds wired or
sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable contingent deferred sales
charge (as described above), will be made within seven days thereafter except as
discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Portfolio
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 fees 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, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may waive this
requirement 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 order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. To engage in telephone
transactions generally, you must complete the appropriate sections of the Fund's
application.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
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 for shares to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act to redeem for cash all shares presented for redemption by any
one shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Portfolio's net assets at the beginning of such period. Securities delivered in
payment of redemptions would be valued at the same value assigned to them in
computing the net asset value per share and would, to the extent permitted by
law, be readily marketable. Shareholders receiving such securities would incur
brokerage costs when these securities are sold.
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 which KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
The Keystone Automated Response Line offers you specific fund account
information and price and yield quotations as well as the ability to do account
transactions, including investments, exchanges and redemptions. You may access
KARL by dialing toll free 1-800-346-3858 on any touch-tone telephone, 24 hours a
day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of
the Portfolio for shares of other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares, except as noted below, may be exchanged for the same type of
Class B shares of other Keystone America Funds and the same type of Class B
shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
Class B shares purchased on or after June 1, 1995 cannot be exchanged for
Class B shares of Keystone Capital Preservation and Income Fund during the 24
month period commencing with and including month of purchase.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are:
(1) Class A shares acquired in an NAV Purchase or otherwise without a front
end sales charge,
(2) Class B shares that have been held for less than 72 months or four years,
as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares by calling toll free 1-800-343-2898 (provided you have
selected such option on the application), by writing KIRC or by calling KARL.
Shares purchased by check are eligible for exchange after 15 days. 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. As indicated above, if the shares being tendered
for exchange 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 providing the required notice to shareholders, to
terminate this exchange offer or to change its terms, including the right to
change the fee for any exchange.
Orders to exchange a certain class of shares of the Portfolio for the
corresponding class of shares of KLT will be executed by redeeming the shares of
the Portfolio and purchasing the corresponding class of shares of KLT at the net
asset value of such shares next determined after the proceeds from such
redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund prior
to 4:00 p.m. eastern time on any day the Fund is 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. eastern time on
any business day will be executed at the respective net asset values determined
at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments into your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase the specified class of shares in the Portfolio. You
will receive confirmation from the Principal Underwriter for every transaction.
To change the amount of a Keystone America Money Line service or to terminate
such service (which could take up to 30 days), you must write to Keystone
Investor Resource Center, Inc., P.O. Box 2121, Boston, Massachusetts 02106-2121,
and include your account number.
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 ("SEP's"); Tax Sheltered Annuity Plans ("TSA's"); 401 (k)
Plans; Keogh Plans; Corporate Profit-Sharing Plans; Money Purchase Pension Plans
and Salary-Reduction Plans. For details, including fees and application forms,
call toll free 1-800-247-4075 or write to KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Portfolio shares
in your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Moreover, because of the effect
of the applicable sales charge, a Class A investor should not make continuous
purchases of the Portfolio's shares while participating in an Automatic
Withdrawal Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high, which
may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund. If you are a Class A investor and paid a sales
charge on your initial purchase, the shares purchased will be eligible for
Rights of Accumulation, and the sales charge applicable to the purchase will be
determined accordingly. In addition, the value of shares purchased will be
included in the total amount required to fulfill a Letter of Intent. If a sales
charge was not paid on the initial purchase, a sales charge will be imposed at
the time of subsequent purchases and the value of shares purchased will become
eligible for Rights of Accumulation and Letters of Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time the Portfolio may advertise "total return" and "current
yield." ALL DATA IS BASED ON HISTORICAL EARNINGS AND IS NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. Total return and current yield are computed separately for
each class of shares of the Fund. Total return refers to the Portfolio's average
annual compounded rates of return over specified periods determined by comparing
the initial amount invested in a particular class to the ending redeemable value
of that amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc., Ibbotson Associations or other
industry publications.
FUND SHARES
Generally, the Fund currently issues three classes of shares of the Portfolio,
which participate in dividends and distributions and have equal voting,
liquidation and other rights except that (1) expenses related to the
distribution of each class of shares or other expenses that the Board of
Trustees may designate as class expenses from time to time, are borne solely by
such class; (2) each class of shares has exclusive voting rights with respect to
its Distribution Plan; (3) each class has different exchange privileges; and (4)
each class generally has a different designation. 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. Shares are redeemable, transferable
and freely assignable as collateral. The Fund is authorized to issue additional
series (portfolios) and classes of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by class. The Fund does not have annual
meetings. The Fund will have special meetings from time to time as required
under its Declaration of Trust and under the 1940 Act. As provided in the
Declaration of Trust of the Fund, shareholders have the right to remove Trustees
by an affirmative vote of two-thirds of the outstanding shares. A special
meeting of the shareholders will be held when holders of 10% of the outstanding
shares request a meeting for the purpose of removing a Trustee. As prescribed by
Section 16(c) of the 1940 Act, shareholders may be eligible for shareholder
communication assistance in connection with the special meeting.
The Fund's Declaration of Trust provides that shareholders shall not be
subject to any personal liability for the Fund's obligations and provides
indemnification from Fund assets for any shareholder held personally liable for
the Fund's obligations. Disclaimers of such liability are included in each Fund
agreement. Under Massachusetts law, however, it is possible that a Fund
shareholder might be held personally liable for certain of the Fund's
obligations.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE PORTFOLIO
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
CORPORATE BOND RATINGS
Higher yields are usually available on securities that are lower rated or that
are unrated. Bonds rated Baa by Moody's are considered as medium grade
obligations which are neither highly protected nor poorly secured. Debt rated
BBB by S&P is regarded as having an adequate capacity to pay interest and repay
principal, although adverse economic conditions are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Lower rated securities are usually defined as
Baa or lower by Moody's or BBB or lower by S&P. The Fund may purchase unrated
securities, which are not necessarily of lower quality than rated securities but
may not be attractive to as many buyers. Debt rated BB, B, CCC, CC and C by S&P
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. Debt rated CI by S&P is debt (income
bonds) on which no interest is being paid. Debt rated D by S&P is in default and
payment of interest and/or repayment of principal is in arrears. The Fund
intends to invest in D-rated debt only in cases where in Keystone's judgment
there is a distinct prospect of improvement in the issuer's financial position
as a result of the completion of reorganization or otherwise. Bonds that are
rated Caa by Moody's are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds that are rated Ca by Moody's represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings. Bonds that are rated C by Moody's are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
ZERO COUPON BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest or principal payments on specific underlying notes and bonds, including
coupons relating to such notes and bonds. The interest and principal payments
are direct obligations of the issuer. Coupon zero coupon bonds of any series
mature periodically from the date of issue of such series through the maturity
date of the securities related to such series. Principal zero coupon bonds
mature on the date specified therein, which is the final maturity date of the
related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond. Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights and
privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individually against the issuer and are not required to act in concert with
other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds or
coupon zero coupon bonds (either initially or in the secondary market) is
treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market value at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds.
PAYMENT-IN-KIND SECURITIES
PIK securities pay interest in either cash or additional securities, at the
issuer's option, for a specified period. The issuer's option to pay in
additional securities typically ranges from one to six years compared to an
average maturity for all PIK securities of eleven years. Call protection and
sinking fund features are comparable to those offered on traditional debt
issues.
PIKs, like zero coupon bonds, are designed to give the issuer flexibility in
managing cash flow. Several PIKs are senior debt. In other cases, where PIKs are
subordinated, most senior lenders view them as equity equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities -- is
that interest payments are automatically compounded (reinvested) at the stated
coupon rate, which is not the case with cash-paying securities. However, PIKs
are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest). Their price
is expected to reflect an amount representing accreted interest since the last
payment. PIKs generally trade at higher yields than comparable cash-paying
securities of the same issuer. Their premium yield is the result of the lesser
desirability of non-cash interest, the more limited audience for non-cash paying
securities, and the fact that many PIKs have been issued to equity investors who
do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash flow
analysis if the security (ex interest) is trading at a premium or a discount
because the realizable value of additional payments is equal to the current
market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements; i.e., the Portfolio
purchases a security subject to the Portfolio's obligation to resell and the
seller's obligation to repurchase that security at an agreed upon price and
date, such date usually being not more than seven days from the date of
purchase. The resale price is based on the purchase price plus an agreed upon
market rate of interest that is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement imposes an obligation on the seller
to pay the agreed upon price, which obligation is in effect secured by the value
of the underlying security. The value of the underlying security is at least
equal to the amount of the agreed upon resale price and marked to market daily.
The Portfolio may enter into such agreements only with respect to U.S.
government and foreign government securities, which may be denominated in U.S.
or foreign currencies. The Portfolio may enter into such repurchase agreements
with foreign banks and securities dealers approved in advance by the Fund's
Trustees. Whether a repurchase agreement is the purchase and sale of a security
or a collateralized loan has not been definitively established. This might
become an issue in the event of the bankruptcy of the other party to the
transaction. It does not presently appear possible to eliminate all risks
involved in repurchase agreements. These risks include the possibility of a
decline in the market value of the underlying securities, as well as delay and
costs to the Portfolio in connection with bankruptcy proceedings. Therefore, it
is the policy of the Portfolio to enter into repurchase agreements only with
large, well-capitalized banks that are members of the Federal Reserve System and
with primary dealers in U.S. government securities (as designated by the Federal
Reserve Board) whose creditworthiness has been reviewed and found satisfactory
by the Portfolio's adviser. The Portfolio anticipates that less than 10% of its
net assets will be invested in repurchase agreements maturing in more than seven
days.
CONVERTIBLE SECURITIES
The Portfolio may invest in convertible securities. These securities, which
include bonds, debentures, corporate notes, preferred stocks and other
securities, are securities which the holder can convert into common stock.
Convertible securities rank senior to common stock in a corporation's capital
structure and, therefore, entail less risk than that corporation's common stock.
The value of a convertible security is a function of its investment value (its
market worth without a conversion privilege) and its conversion value (its
market worth if exchanged). If a convertible security's investment value is
greater than its conversion value, its price primarily will reflect its
investment value and will tend to vary inversely with interest rates. (The
issuer's creditworthiness and other factors also may affect its value.) If a
convertible security's conversion value is greater than its investment value,
its price will tend to be higher than its conversion value, and it will tend to
fluctuate directly with the price of the underlying equity security.
WHEN ISSUED AND FORWARD COMMITMENT
TRANSACTIONS
The Portfolio may purchase newly issued securities on a when issued and
delayed delivery basis and may purchase or sell securities on a forward
commitment basis. When issued or delayed delivery transactions arise when
securities are purchased by the Portfolio 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 Portfolio at the time of entering into the transaction. A
forward commitment transaction is an agreement by the Portfolio to purchase or
sell securities at a specified future date. When the Portfolio engages in these
transactions, the Portfolio relies on the buyer or seller, as the case may be,
to consummate the sale. Failure to do so may result in the Portfolio 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. However, no payment
or delivery is made by the Portfolio 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.
SHORT SALES
The Portfolio may make short sales of securities "against the box." A short
sale involves the borrowing of a security, which must eventually be returned to
the lender. A short sale is "against the box" if, at all times when the short
position is open, the Portfolio owns the securities sold short or owns an equal
amount of securities convertible into, or exchangeable without further
consideration for, securities identical to the securities sold short. Short
sales against the box are used to defer recognition of gains or losses or in
order to receive a portion of the interest earned by the executing broker from
the proceeds of such sale. The proceeds of a short sale are held by the broker
until the settlement date when the Portfolio delivers the convertible security
to close out its short position. Although prior to such delivery the Portfolio
will have to pay an amount equal to any dividends paid on the securities sold
short, the Portfolio will receive the dividends from the securities convertible
into the securities sold short, plus a portion of the interest earned from the
proceeds of the short sale. The Portfolio will not make short sales of
securities subject to outstanding call options written by it. The Portfolio will
segregate the securities sold short or appropriate convertible securities in a
special account with the Fund's custodian in connection with its short sales
"against the box."
LOANS OF SECURITIES
The Portfolio may lend its securities to broker-dealers or other institutional
borrowers for use in connection with such borrowers' short sales, arbitrages or
other securities transactions. Such loan transactions afford the Portfolio an
opportunity to continue to earn income on the securities loaned and at the same
time to earn income on the collateral held by it to secure the loan. Loans of
portfolio securities will be made (if at all) in strict conformity with
applicable federal and state rules and regulations. There may be delays in
recovery of loaned securities or even a loss of rights in collateral should the
borrower fail financially. Therefore, loans will be made only to firms deemed by
the Portfolio's adviser to be of good standing and will not be made unless, in
the judgment of the adviser, the consideration to be earned from such loans
justifies the risk. The Fund understands that it is the current view of the
staff of the SEC that the Portfolio is permitted to engage in loan transactions
only if it meets the following conditions: (1) the Portfolio must receive 100%
collateral in the form of cash or cash equivalents, e.g., U.S. Treasury bills or
notes, from the borrower; (2) the borrower must increase the collateral whenever
the market value of the securities (determined on a daily basis) exceeds the
value of the collateral; (3) the Portfolio must be able to terminate the loan,
after notice, at any time; (4) the Portfolio must receive reasonable interest on
the loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest or other distributions on the securities loaned and any
increase in the securities' market values, which could result from the returned
loaned securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower; however, if a material event affecting the securities
occurs, the Portfolio must be able to terminate the loan and vote proxies or
enter into an alternative arrangement with the borrower to enable the Fund to
vote proxies. Excluding items (1) and (2), these procedures may be amended from
time to time, as regulatory policies may permit, by the Fund's Board of Trustees
without shareholder approval. Such loans may not exceed 25% of the Portfolio's
total assets.
DERIVATIVES
The Fund may use derivatives only in a manner consistent with its investment
objectives. 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 use of derivatives for non-hedging purposes
entails greater risks 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. With respect to the
Portfolio, Keystone does not currently intend to aggressively use derivatives.
However, the Portfolio 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 Portfolio'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.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Indexed Commercial Paper" and
"Structured Securities" below. The term "derivative" is also sometimes used to
describe securities involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments are passed
through to the owner of, or that collateralize, the securities. See "Mortgage
Related Securities," "Collateralized Mortgage Obligations," "Adjustable Rate
Mortgage Securities," "Stripped Mortgage Securities," "Mortgage Securities -
Special Considerations," and "Other Asset-Backed Securities" and the Fund's
statement of additional information.
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 Portfolio'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 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 Portfolio
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 the Portfolio. 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 Portfolio's use
of derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Portfolio's investment objectives.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Portfolio may write (i.e., sell) covered call and
put options. No more than 25% of the Portfolio's net assets will be subject to
covered options. By writing a call option, the Portfolio 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 Portfolio
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 Portfolio may only write "covered" options. This means that so long as the
Portfolio 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 Portfolio might own substantially similar U.S. Treasury
bills. If the Portfolio has written options against all of its securities that
are eligible for writing options, the Portfolio 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 Portfolio does not expect, however, that this
will occur.
The Portfolio will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains liquid assets having a value equal to or greater than the
exercise price of the option with the Fund's custodian in a segregated account.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Portfolio 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 Portfolio might lose the potential for gain on the
underlying security while the option is open, and by writing a put option, the
Portfolio might become obligated to purchase the underlying security for more
than its current market price upon exercise.
PURCHASING OPTIONS. The Portfolio may purchase call and put options.
The Portfolio would normally purchase call options to hedge against an
increase in the market value of the Portfolio's securities. The purchase of a
call option would entitle the Portfolio, in return for the premium paid, to
purchase specified securities at a specified price, upon exercise of the option,
during the option period. The Portfolio would ordinarily realize a gain if,
during the option period, the value of such securities exceeds the sum of the
exercise price, the premium paid and transaction costs; otherwise the Portfolio
would realize a loss on the purchase of the call option.
The Portfolio 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 Portfolio is unable to effect a closing
purchase transaction with respect to covered options it has written, the
Portfolio will not be able to sell the underlying securities until the options
expire or are exercised.
The Portfolio would normally purchase put options to hedge against a decline
in the market value of securities in its portfolio (protective puts). The
Portfolio will not engage in such transactions for speculation. The purchase of
a put option would entitle the Portfolio, in exchange for the premium paid, to
sell specified securities at a specified price, upon exercise of the option,
during the option period. Gains and losses on the purchase of protective put
options would tend to be offset by countervailing changes in the value of
underlying portfolio securities. The Portfolio would ordinarily realize a gain
if, during the option period, the value of the underlying securities declined
below the exercise price sufficiently to cover the premium and transaction
costs; otherwise the Portfolio would realize a loss on the purchase of the put
option.
The Portfolio may purchase put and call options on securities indices for the
same purposes as the purchase of options on securities. Currently, only options
on stock indices are traded and only on national exchanges. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Portfolio's purchases of securities index options is subject to the risk
that the value of its portfolio securities may not change as much as an index
because the Portfolio's investments generally cannot match exactly the
composition of an index.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Portfolio 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.
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 Portfolio's
ability to use such options to achieve its investment objectives.
OPTIONS TRADING MARKETS
Options in which the Portfolio will trade are generally listed on national
securities exchanges. Exchanges on which such options currently are traded
include the Chicago Board Options Exchange and the New York, American, Pacific
and Philadelphia Stock Exchanges. Options on some securities may not be listed
on any exchange but traded in the over-the-counter market. Options traded in the
over-the-counter market involve the additional risk that securities dealers
participating in such transactions could fail to meet their obligations to the
Portfolio. The use of options traded in the over-the-counter market may be
subject to limitations imposed by certain state securities authorities.
The staff of the Securities and Exchange Commission ("SEC") is of the view
that the premiums that the Portfolio pays for the purchase of unlisted options
and the value of securities used to cover unlisted options written by the
Portfolio are considered to be invested in illiquid securities or assets for the
purpose of calculating whether the Portfolio is in compliance with its
fundamental investment restrictions relating to illiquid securities.
FUTURES TRANSACTIONS
The Portfolio may enter into futures contracts for the purchase or sale of
securities or currencies or futures contracts based on securities indices and
may write options on such contracts. The Portfolio intends to enter into such
contracts and related options for hedging purposes. The Portfolio may enter into
other types of futures contracts that may become available and relate to the
securities held by the Portfolio. A futures contract is an agreement to buy or
sell securities or currencies at a specified price during a designated month.
The Portfolio 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 Portfolio may sell or purchase futures contracts. When a futures contract
is sold by the Portfolio, 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 Portfolio would sell
futures contracts in order to offset a possible decline in the value of its
securities or currencies. If a futures contract were purchased by the Portfolio,
the value of the contract would tend to rise when the value of the underlying
securities or currencies increased and to fall when the value of such securities
or currencies declined. The Portfolio intends to purchase futures contracts in
order to fix what is believed by its advisers to be a favorable price and rate
of return for securities or favorable exchange rate for currencies the Portfolio
intends to purchase.
The Portfolio also may purchase put and call options on securities and
currency futures contracts for hedging purposes. A put option purchased by the
Portfolio would give it the right to assume a position as the seller of a
futures contract. A call option purchased by the Portfolio 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 Portfolio to pay a premium. In
exchange for the premium, the Portfolio 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 Portfolio's loss will be limited to the amount of the
premium and any transaction costs.
In addition, the Portfolio may write (sell) put and call options on futures
contracts for hedging purposes. The writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the
price of securities that the Portfolio intends to purchase. However, the
Portfolio becomes obligated to purchase a futures contract, which may have a
value lower than the exercise price. Conversely, the writing of a call option on
a futures contract generates a premium which may partially offset a decline in
the value of the Portfolio's assets. By writing a call option, the Portfolio
becomes obligated, in exchange for the premium, to sell a futures contract which
may have a value higher than the exercise price.
The Portfolio 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 Portfolio'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 Portfolio will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Portfolio is not able to enter into an offsetting transaction, the Portfolio
will continue to be required to maintain the margin deposits on the contract and
to complete the contract according to its terms, in which case it would continue
to bear market risk on the transaction.
Although futures and options transactions are intended to enable the Portfolio
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 the
Portfolio's adviser correctly predicts interest or exchange rate movements, a
hedge could be unsuccessful if changes in the value of the Portfolio's futures
position did not correspond to changes in the value of its investments. This
lack of correlation between the Portfolio'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 Portfolio's futures position and the securities or currencies
held by or to be purchased for the Portfolio. In addition, futures contracts
transactions involve the remote risk that a party participating in a transaction
will not be able to fulfill its obligations and the amount of the obligation
will exceed the ability of the clearing broker to satisfy. The adviser will
attempt to minimize these risks through careful selection and monitoring of the
Portfolio's futures and options positions.
The Portfolio does not intend to use futures transactions for speculation or
leverage. The Portfolio may not purchase or sell futures contracts or options on
futures, except for closing purchase or sale transactions, if immediately
thereafter the sum of margin deposits on the Portfolio's outstanding futures and
options positions and premiums paid for outstanding options on futures would
exceed 5% of the market value of the Portfolio's total assets. The Fund will not
change these policies of the Portfolio without supplementing the information
contained in its prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
The Portfolio may invest in securities of foreign issuers. When the Portfolio
invests in foreign securities they usually will be denominated in foreign
currencies, and the Portfolio temporarily may hold funds in foreign currencies.
Thus, the value of Portfolio shares will be affected by changes in exchange
rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Portfolio 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 Portfolio will deliver and receive when the contract is completed) is fixed
when the Portfolio enters into the contract. The Portfolio usually will enter
into these contracts to stabilize the U.S. dollar value of a security it has
agreed to buy or sell. The Portfolio intends to use these contracts to hedge the
U.S. dollar value of a security it already owns, particularly if the Portfolio
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Portfolio will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on its adviser's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Portfolio's investments
denominated in foreign currencies will depend on the relative strength of those
currencies and the U.S. dollar, and the Portfolio 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 Portfolio. The Portfolio may
also purchase and sell options related to foreign currencies in connection with
hedging strategies.
INTEREST RATE TRANSACTIONS (SWAPS, CAPS AND FLOORS). If the Portfolio enters
into interest rate swap, cap or floor transactions, it expects to do so
primarily for hedging purposes, which may include preserving a return or spread
on a particular investment or portion of its portfolio or protecting against an
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio does not currently intend to use these transactions in
a speculative manner.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). Interest rate caps and floors
are similar to options in that the purchase of an interest rate cap or floor
entitles the purchaser, to the extent that a specified index exceeds (in the
case of a cap) or falls below (in the case of a floor) a predetermined interest
rate, to receive payments of interest on a contractually-based principal
("notional") amount from the party selling the interest rate cap or floor. The
Portfolio may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or liabilities, and will usually enter into interest rate swaps on a net
basis (i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments).
The swap market has grown substantially in recent years, with a large number
of banks and investment banking firms acting as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become more established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions also involve the delivery of securities or other
underlying assets and principal. Accordingly, the risk of loss to the Portfolio
from interest rate transactions is limited to the net amount of interest
payments that the Portfolio is contractually obligated to make.
INDEXED COMMERCIAL PAPER. Indexed commercial paper may have its principal linked
to changes in foreign currency exchange rates whereby its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the referenced exchange rate. If permitted by its investment
policies, the Portfolio will purchase such commercial paper with the currency in
which it is denominated and, at maturity, will receive interest and principal
payments thereon in that currency, but the amount of principal payable by the
issuer at maturity will change in proportion to the change (if any) in the
exchange rate between the two specified currencies between the date the
instrument is issued and the date the instrument matures. While such commercial
paper entails the risk of loss of principal, the potential for realizing gains
as a result of changes in foreign currency exchange rates enables the Portfolio
to hedge (or cross-hedge) against a decline in the U.S. dollar value of
investments denominated in foreign currencies while providing an attractive
money market rate of return.
MORTGAGE-RELATED SECURITIES. The mortgage-related securities in which the
Portfolio may invest typically are securities representing interests in pools of
mortgage loans made to home owners. Mortgage-related securities bear interest at
either a fixed rate or an adjustable rate determined by reference to an index
rate. The mortgage loan pools may be assembled for sale to investors (such as
the Portfolio) by governmental or private organizations. Mortgage-related
securities issued by the Government National Mortgage Association ("GNMA") are
backed by the full faith and credit of the U.S. government; those issued by
Federal National Mortgage Associated ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") are not so backed.
Securities representing interests in pools created by private issuers
generally offer a higher rate of interest than securities representing interests
in pools created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit enhancement to
support the timely payment of interest and principal with respect to their
securities if the borrowers on the underlying mortgages fail to make their
mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support
and would be adversely affected if the rating of such an enhancer were
downgraded. The Portfolio may buy mortgage-related securities without credit
enhancement if the securities meet the Portfolio's investment standards.
Although the market for mortgage-related securities is becoming increasingly
liquid, those of certain private organizations may not be readily marketable.
One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an undivided beneficial
interest in the underlying pool of mortgage loans and receives a pro rata share
of the monthly payments made by the borrowers on their mortgage loans, net of
any fees paid to the issuer or guarantor of the securities. Prepayments of
mortgages resulting from the sale, refinancing or foreclosure of the underlying
properties are also paid to the holders of these securities. Some
mortgage-related securities, such as securities issued by GNMA, are referred to
as "modified pass-through" securities. The holders of these securities are
entitled to the full and timely payment of principal and interest, net of
certain fees, regardless of whether payments are actually made on the underlying
mortgages. Another form of mortgage-related security is a "pay-through"
security, which is a debt obligation of the issuer secured by a pool of mortgage
loans pledged as collateral that is legally required to be paid by the issuer
regardless of whether payments are actually made on the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS. ("CMOs") are the predominant type of
"pay-through" mortgage-related security. CMOs are designed to reduce the risk of
prepayment for investors by issuing multiple classes of securities, each having
different maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated among the several
classes in various ways. The collateral securing the CMOs may consist of a pool
of mortgages, but may also consist of mortgage-backed bonds or pass-through
securities. CMOs may be issued by a U.S. government instrumentality or agency or
by a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by GNMA,
FNMA or FHLMC, these CMOs represent obligations solely of the private issuer and
are not insured or guaranteed by GNMA, FNMA, FHLMC, any other governmental
agency or any other person or entity.
INVERSE FLOATING RATE COLLATERALIZED MORTGAGE OBLIGATIONS. In addition to
investing in fixed rate and adjustable rate CMOs, the Portfolio may also invest
in CMOs with rates that move inversely to market rates ("inverse floaters").
An inverse floater bears an interest rate that resets in the opposite
direction of the change in a specified interest rate index. As market interest
rates rise, the interest rate on the inverse floater goes down, and vice versa.
Inverse floaters tend to exhibit greater price volatility than fixed-rate bonds
of similar maturity and credit quality. The interest rates on inverse floaters
may be significantly reduced, even to zero, if interest rates rise. Moreover,
the secondary market for inverse floaters may be limited in rising interest rate
environments.
ADJUSTABLE RATE MORTGAGE SECURITIES. Another type of mortgage-related security,
known as adjustable-rate mortgage securities ("ARMS"), bears interest at a rate
determined by reference to a predetermined interest rate or index. There are two
main categories of rates or indices: (1) rates based on the yield on U.S.
Treasury securities and (2) indices derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Some rates and
indices closely mirror changes in market interest rate levels, while others tend
to lag changes in market rate levels and tend to be somewhat less volatile.
ARMS may be secured by adjustable-rate mortgages or fixed-rate mortgages. ARMS
secured by fixed-rate mortgages generally have lifetime caps on the coupon rates
of the securities. To the extent that general interest rates increase faster
than the interest rates on the ARMS, these ARMS will decline in value. The
adjustable-rate mortgages that secure ARMS will frequently have caps that limit
the maximum amount by which the interest rate or the monthly principal and
interest payments on the mortgages may increase. These payment caps can result
in negative amortization (i.e., an increase in the balance of the mortgage
loan). Furthermore, since many adjustable-rate mortgages only reset on an annual
basis, the values of ARMS tend to fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable-rate mortgages.
STRIPPED MORTGAGE SECURITIES. Stripped mortgage-related securities ("SMRS") are
mortgage-related securities that are usually structured with two classes of
securities collateralized by a pool of mortgages or a pool of mortgaged-backed
bonds or pass-through securities, with each class receiving different
proportions of the principal and interest payments from the underlying assets. A
common type of SMRS has one class of interest-only securities ("IOs") receiving
all of the interest payments from the underlying assets, while the other class
of securities, principal-only securities ("POs"), receives all of the principal
payments from the underlying assets. IOs and POs are extremely sensitive to
interest rate changes and are more volatile than mortgage-related securities
that are not stripped. IOs tend to decrease in value as interest rates decrease,
while POs generally increase in value as interest rates decrease. If prepayments
of the underlying mortgages are greater than anticipated, the amount of interest
earned on the overall pool will decrease due to the decreasing principal balance
of the assets. Changes in the values of IOs and POs can be substantial and occur
quickly, such as occurred in the first half of 1994 when the value of many POs
dropped precipitously due to increase in interest rates. For this reason the
Portfolio does not rely on IOs and POs as the principal means of furthering its
investment objective.
MORTGAGE-RELATED SECURITIES -- SPECIAL CONSIDERATIONS. The value of
mortgage-related securities is affected by a number of factors. Unlike
traditional debt securities, which have fixed maturity dates, mortgage-related
securities may be paid earlier than expected as a result of prepayment of the
underlying mortgages. If property owners make unscheduled prepayments of their
mortgage loans, these prepayments will result in the early payment of the
applicable mortgage-related securities. In that event the Portfolio may be
unable to invest the proceeds from the early payment of the mortgage-related
securities in an investment that provides as high a yield as the
mortgage-related securities. Consequently, early payment associated with
mortgage-related securities causes these securities to experience significantly
greater price and yield volatility than experienced by traditional fixed-income
securities. The occurrence of mortgage prepayments is affected by the level of
general interest rates, general economic conditions and other social and
demographic factors. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate
of mortgage prepayments usually decreases, thereby tending to increase the life
of mortgage-related securities. If the life of a mortgage-related security is
inaccurately predicted, the Portfolio may not be able to realize the rate of
return it expected.
As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest rates
relative to the yield provided by such securities. Such adverse effect is
especially possible with fixed-rate mortgage securities. If the yield available
on other investments rises above the yield of the fixed-rate mortgage securities
as a result of general increases in interest rate levels, the value of the
mortgage-related securities will decline. Although the negative effect could be
lessened if the mortgage-related securities were to be paid earlier (thus
permitting the Portfolio to reinvest the prepayment proceeds in investments
yielding the higher current interest rate), as described above the rate of
mortgage prepayments and earlier payment of mortgage-related securities
generally tends to decline during a period of rising interest rates.
Although the value of ARMS may not be affected by rising interest rates as
much as the value of fixed-rate mortgage securities is affected by rising
interest rates, ARMS may still decline in value as a result of rising interest
rates. Although, as described above, the yield on ARMS varies with changes in
the applicable interest rate or index, there is often a lag between increases in
general interest rates and increases in the yield on ARMS as a result of
relatively infrequent interest rate reset dates. In addition, adjustable-rate
mortgages and ARMS often have interest rate or payment caps that limit the
ability of the adjustable-rate mortgages or ARMS to fully reflect increases in
the general level of interest rates.
OTHER ASSET-BACKED SECURITIES. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card receivables,
home equity loans, equipment leases and trade receivables, are being securitized
in structures similar to the structures used in mortgage securitizations. These
asset-backed securities are subject to risks associated with changes in interest
rates and prepayment of underlying obligations similar to the risks of
investment in mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively burdensome
to perfect the interest of the security issuer in the underlying collateral and
the underlying collateral may become damaged or stolen.
VARIABLE, FLOATING AND LEVERAGED INVERSE FLOATING RATE INSTRUMENTS. Fixed-income
securities may have fixed, variable or floating rates of interest. Variable and
floating rate securities pay interest at rates that are adjusted periodically,
according to a specified formula. A "variable" interest rate adjusts at
predetermined intervals (e.g., daily, weekly or monthly), while a "floating"
interest rate adjusts whenever a specified benchmark rate (such as the bank
prime lending rate) changes.
If permitted by its investment policies, the Portfolio may invest in
fixed-income securities that pay interest at a coupon rate equal to a base rate,
plus additional interest for a certain period of time if short-term interest
rates rise above a predetermined level or "cap." The amount of such an
additional interest payment typically is calculated under a formula based on a
short-term interest rate index multiplied by a designated factor.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities represent interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations or foreign government securities.
This type of restructuring involves the deposit with or purchase by an entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of structured securities backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured securities to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to structured securities is dependent on the extent of the cash
flow on the underlying instruments. Because structured securities typically
involve no credit enhancement, their credit risk generally will be equivalent to
that of the underlying instruments. Structured securities of a given class may
be either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured securities typically have higher yields and
present greater risks than unsubordinated structured securities.
BRADY BONDS. Brady Bonds are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the
over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations that
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments, but generally are not collateralized. Brady
Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds. Only Class A shares subject to
an initial or deferred sales charge are eligible for inclusion in the reduced
sales charge program.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined under "Right of Accumulation." For example, if a Purchaser
concurrently invested $75,000 in one of the other "Eligible Funds" and $75,000
in the Fund, the sales charge would be that applicable to a $150,000 purchase,
i.e., 3.75% of the offering price, as indicated in the sales charge schedule in
the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the Fund's
Class A shares, a Purchaser is entitled to accumulate current purchases with the
current value of previously purchased Class A shares of the Fund and Class A
shares of certain other eligible funds that are still held in (or exchanged for
shares of and are still held in) the same or another eligible fund ("Eligible
Fund(s)") irrespective of class. The Eligible Funds are the Keystone America
Funds and Keystone Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the sales
charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount that, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by KIRC. Any redemptions made by the Purchaser during the
thirteen-month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
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KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
- ------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[Recycle Logo]
-----------------------------
KEYSTONE
---------------
---------------
WORLD
BOND FUND
-----------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE WORLD BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 27, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
World Bond Fund (formerly named Keystone America World Bond Fund) (the "Fund")
dated February 27, 1996. A copy of the prospectus may be obtained from Keystone
Investments Distributors Company (formerly named Keystone Distributors, Inc.)
(the "Principal Underwriter"), the Fund's principal underwriter, 200 Berkeley
Street, Boston, Massachusetts 02116-5034, or your broker-dealer.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Restrictions 2
Dividends and Taxes 6
Valuation of Securities 7
Brokerage 9
Sales Charges 11
Distribution Plans 15
Trustees and Officers 19
Fund Expenses 22
Investment Adviser 24
Principal Underwriter 25
Declaration of Trust 27
Standardized Total Return
and Yield Quotations 29
Additional Information 30
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-15
<PAGE>
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THE FUND
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company commonly known as
a mutual fund. The Fund is authorized to issue series of shares representing
portfolios of its assets. At this time, the Fund issues shares of one portfolio,
the World Bond Portfolio (the "Portfolio"). The Portfolio seeks current income
by investing primarily in a non-diversified portfolio consisting of debt
securities denominated in United States ("U.S.") and foreign currencies.
Interest income will be an important factor in securities selection, but only if
consistent with management's outlook for local bond prices and currency
movements. The Portfolio seeks capital appreciation as a secondary objective.
Upon formation, the Portfolio was known as the Global Income Plus
Portfolio of International Heritage Fund, which was formed as a Massachusetts
business trust on September 5, 1986. On April 19, 1989, the International
Heritage Fund joined the Keystone America Funds. In 1989, the Fund and the
Portfolio were renamed Keystone America World Bond Fund and World Bond
Portfolio, respectively. On May 1, 1995, the Fund changed its name from Keystone
America World Bond Fund to its present name.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
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INVESTMENT RESTRICTIONS
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The Fund has adopted, on behalf of the Portfolio, the fundamental
investment restrictions set forth below, which may not be changed without the
vote of a majority of the Portfolio's outstanding shares. Unless otherwise
stated, all references to Portfolio assets are in terms of current market value.
A portfolio of the Fund may not do the following:
(1) issue senior securities, except as appropriate to evidence
indebtedness which the portfolio is permitted to incur pursuant to Investment
Restriction (3) and except for shares of any additional series or portfolios
which may be established by the Trustees;
(2) (a) sell securities short (except by selling futures contracts or
covered options), unless it owns, or by virtue of ownership of other securities
has the right to obtain without additional consideration, securities identical
in kind and amount to the securities sold, or (b) purchase securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions, and provided that a portfolio may make initial and variation
margin payments in connection with purchases or sales of futures contracts or of
options on futures contracts;
(3) borrow money, except from a bank for temporary or emergency
purposes (not for leveraging or investment) and may not borrow money in an
amount exceeding one-third of the value of its total assets (less liabilities
other than borrowings); any borrowings that come to exceed one-third of a
portfolio's total assets by reason of a decline in net assets will be reduced
within three days to the extent necessary to comply with the one-third
limitation; a portfolio will not purchase securities while temporary bank
borrowings in excess of 5% of its total assets are outstanding;
(4) underwrite securities issued by others, except to the extent that a
portfolio may be deemed an underwriter in connection with the disposition of
restricted securities;
(5) invest in real estate or mortgages (but may invest in real estate
investment trusts or companies whose business involves the purchase or sale of
real estate or mortgages except real estate limited partnerships) or commodities
or commodity contracts, except futures contracts and options on futures
contracts, including, but not limited to, contracts for the future delivery of
securities or currency, contracts based on securities indices and forward
foreign currency exchange contracts;
(6) invest 25% or more of the portfolio's total assets (taken at market
value) in securities of issuers in a particular industry or group of related
industries, except U.S. government securities;
(7) make loans, except (a) through the purchase of a portion of an
issue of publicly distributed debt securities in accordance with its investment
objectives, policies and restrictions, and (b) by entering into (i) loan
transactions and (ii) repurchase agreements with respect to portfolio securities
if, as a result thereof, not more than 25% of the portfolio's total assets
(taken at current value) would be subject to loan transactions;
(8) invest in companies for the purpose of exercising control or
management, provided, however, that this limitation shall not preclude a
portfolio from exercising its rights as a security holder to participate in or
influence decisions to be made by the security holders or management of such
companies with respect to matters affecting the value of such companies'
securities or the interests of the portfolio;
(9) pledge, mortgage or hypothecate its assets, except that a portfolio
may pledge not more than one-third of its total assets (taken at current value)
to secure borrowings made in accordance with Investment Restriction (3) above,
and provided that a portfolio may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts;
(10) invest in oil, gas or other mineral exploration or development
programs (although a portfolio may invest in companies which own or invest in
such interests);
(11) purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those Trustees or directors and officers of the Fund or its
investment manager or advisers, who individually own beneficially more than 1/2
of 1% of the outstanding securities of such issuer, together own beneficially
more than 5% of such outstanding securities; and
(12) purchase securities of any one issuer if as a result more than 10%
of the outstanding voting securities of such issuer would be held by the
portfolio, or invest more than 5% of the portfolio's total assets (taken at
market value) in the securities of any one issuer, except securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
provided that a portfolio may invest up to 25% of its total assets in securities
issued or guaranteed by any single foreign government and up to 10% of its total
assets in securities issued or guaranteed by any single multinational agency.
The Fund has adopted the nonfundamental policies set forth below, in
order to permit the sale of shares in certain states, which may be changed as to
any portfolio without shareholder approval or notification.
A portfolio may not do the following:
(1) pledge, mortgage or hypothecate its assets in excess of an amount
equal to 10% of its net assets, except to secure borrowings made in accordance
with Investment Restriction (3) above, and provided that the portfolio may make
initial and variation margin payments in connection with purchases or sales of
futures contracts or of options on futures contracts;
(2) purchase any option on securities or a securities index if, as a
result, the aggregate premiums paid for all options it owns would exceed 5% of
its net assets at the time of such purchase;
(3) purchase warrants, valued at the lower of cost or market, in excess
of 5% of the value of the portfolio's net assets; included within that amount,
but not to exceed 2% of the value of the portfolio's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges; warrants
acquired by the portfolio at any time in units or attached to securities are not
subject to this restriction;
(4) purchase the securities of any issuer if, as a result, more than 5%
of the portfolio's total assets (taken at current value) would be invested in
the securities of companies which, including predecessors, have a record of less
than three years' continuous operation, except obligations issued or guaranteed
by the U.S. government or a foreign government or their respective agencies and
instrumentalities and except securities of closed-end investment companies;
(5) enter into futures contracts if, as a result, the aggregate value
of initial margin deposits made by a portfolio in connection with such contracts
and premiums paid for options on futures would exceed 5% of the value of the
portfolio's total assets;
(6) write covered options, unless the securities underlying such
options are listed on a national securities exchange and the options are issued
by the Options Clearing Corporation, provided, however, that the securities
underlying such options may be traded on the automated quotation system
("NASDAQ") of the National Association of Securities Dealers, Inc. ("NASD"), if,
and to the extent, permitted by applicable state regulations;
(7) write or sell covered call or put options with respect to more than
25% of the portfolio's net assets at the time such options are written, purchase
protective puts with a value in excess of 25% of the portfolio's net assets or
purchase calls and puts, other than protective puts, with a value in excess of
5% of the portfolio's net assets;
(8) purchase the securities of other registered investment companies,
except (a) securities of a "money market" fund sponsored, managed or advised by
one of the Fund's investment advisers, or an affiliate thereof, but only to the
extent authorized by an order of the Securities and Exchange Commission, (b) by
purchase in the open market when no commission or profit to a sponsor or dealer
results from such purchase, other than the customary broker's commission, or (c)
when such purchase, though not made on the open market, is part of a plan of
merger or consolidation;
(9) simultaneously purchase and sell the same or an equivalent security
in order to profit from price discrepancies; and
(10) invest in oil, gas and other mineral leases.
The Portfolio's purchase of securities of other investment companies
would result in a layering of expenses, such that the Portfolio's shareholders
would indirectly bear a proportionate share of the expenses of those investment
companies, including operating costs, investment advisory and administrative
fees. The Portfolio does not anticipate purchasing the securities of other
investment companies.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid, securities which
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued such securities on
its books and (2) limiting its holdings of such securities to 15% of net assets.
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DIVIDENDS AND TAXES
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The Fund intends to distribute dividends from the Portfolio's net
investment income monthly and all net realized long-term capital gains, if any,
annually. Fund distributions are made in additional shares of that class of
shares upon which the distribution is based or, at the option of the
shareholder, in cash. Distributions are taxable whether paid in cash or
additional Fund shares. Shareholders who have not opted, prior to the record
date for any distribution, to receive cash will have the number of such shares
determined on the basis of 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 regardless of the period of time Portfolio shares have been held by
the shareholder. However, if 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 gains distribution received in
connection with such shares. If the net asset value of the Portfolio's shares is
reduced below a shareholder's cost by any 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 Portfolio, they may
or may not occur. The foregoing comments relating to the taxation of dividends
and distributions paid on the Portfolio's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution on behalf of the Portfolio, it
intends to distribute only the Portfolio's net capital gains and such income as
has been pre-determined to the best of the Fund's ability to be taxable as
ordinary income. Shareholders of the Portfolio will be advised annually of the
federal income tax status of distributions.
If more than 50% of the value of the Portfolio'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 Portfolio's
shareholders, a shareholder will be required to include in his gross income both
cash 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 Portfolio's investments. The shareholder will be entitled, however, to take
his share of 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, 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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VALUATION OF SECURITIES
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Current values for the Portfolio's securities are determined as
follows:
(1) Common stock, preferred stock and other equity securities listed on
the New York Stock Exchange (the "Exchange") are valued on the basis of the last
sale price on the Exchange. In the absence of any sales, such securities are
valued at the mean between the closing asked price and the closing bid price.
(2) Common stock, preferred stock and other equity securities listed on
other U.S. or foreign exchanges will be valued as described in (1) above using
quotations on the exchange on which the security is most extensively traded.
(3) Common stock, preferred stock and other equity securities unlisted
and quoted on the National Market System ("NMS") are valued at the last sale
price, provided a sale has occurred. In the absence of any sales, such
securities are valued at the high or "inside" bid, which is the bid supplied by
the NASD on its NASDAQ system for securities traded in the over-the-counter
market.
(4) Common stock, preferred stock and other equity securities quoted on
the NASDAQ system, but not listed on NMS, are valued at the high or "inside"
bid.
(5) Common stock, preferred stock and other equity securities not
listed and not quoted on the NASDAQ System and for which over-the-counter market
quotations are readily available are valued at the mean between the current bid
and asked prices for such securities.
(6) Non-U.S. common stock, preferred stock and other equity securities
not listed or listed and subject to restrictions on sale are valued at prices
supplied by a dealer selected by Keystone Investment Management Company
(formerly named Keystone Custodian Funds, Inc.) ("Keystone").
(7) Bonds, debentures and other debt securities, whether or not listed
on any national securities exchange, are valued at a price supplied by a pricing
service or a bond dealer selected by Keystone.
(8) Short-term instruments having maturities of more than sixty days
for which market quotations are readily available are valued at current market
value. Where market quotations are not available, such instruments are valued at
fair value as determined by the Fund's Board of Trustees.
(9) Short-term instruments 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 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.
(10) Options, futures contracts and options on futures listed or traded
on a national securities exchange are valued at the last sale price on such
exchange prior to the time of determining net asset value or, if no sale is
reported, are valued at the mean between the most recent bid and asked prices.
(11) Forward currency contracts are valued at their last sales price as
reported by a pricing service, and, in the absence of a report, at a value
determined on the basis of the underlying currency at prevailing exchange rates.
(12) Securities subject to restrictions on resale are valued at fair
value at least monthly by a pricing service under the direction of the Fund's
Board of Trustees.
(13) All other assets are valued at fair market value as determined by
or under the direction of the Fund's Board of Trustees.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in securities
for the Portfolio, 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 Portfolio (involving both price paid or received and any
commissions and other costs paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all where a large block is
involved, the availability of the broker to stand ready to execute potentially
difficult transactions in the future and the financial strength and stability of
the broker. Such considerations are weighed by 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 as well as other statistical
and factual information (including related computer services and equipment). Any
such research and other statistical and factual information provided by brokers
to the Fund or Keystone are considered to be in addition to and not in lieu of
services required to be performed by Keystone under its Investment Advisory and
Management Agreement with the Fund. The cost, value and specific application of
such information are indeterminable and cannot be practically allocated among
the Fund and other clients of 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 its Investment Advisory and Management Agreement with the
Fund, Keystone is 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 does follow such a practice, it will
do so on a basis that is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities for the
Portfolio usually will be principal transactions. Such securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually will be no brokerage commissions paid by the Fund
for such purchases. Purchases from underwriters will include the underwriting
commission or concession, and purchases from dealers serving as market makers
will include a dealer's mark up or reflect a dealer's mark down. Where
transactions are made in the over-the-counter market, the Fund will deal with
primary market makers unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities, thereby taking
advantage of the lower purchase price available to such a group.
Neither Keystone nor the Fund has any intention of placing the
Portfolio's securities transactions with any particular broker-dealer or group
thereof. The Fund's Board of Trustees has determined, however, that the Fund may
follow a policy of considering sales of shares of the Portfolio as a factor in
the selection of broker-dealers to execute portfolio transactions, subject to
the requirements of best execution, described above.
In addition, securities for the Portfolio will not be purchased from or
sold to Keystone, the Principal Underwriter, or any of their affiliated persons
except in accordance with the Investment Company Act of 1940 (the "1940 Act")
and rules and regulations issued thereunder.
Investment decisions for the Portfolio are made independently from
those of the other funds and investment accounts managed by Keystone. It may
frequently develop, however, that the same investment decision is made for more
than one fund. Simultaneous transactions are inevitable when the same security
is suitable for the investment objective of more than one account. When two or
more funds or accounts are engaged in the purchase or sale of the same security,
the transactions are allocated as to amount in accordance with a formula that is
equitable to each fund or account. 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 Portfolio is concerned. In other cases, however, it is believed that
the ability of the Portfolio to participate in volume transactions will produce
better executions for the Portfolio. It is the opinion of the Fund's Board of
Trustees that the desirability of retaining Keystone as investment adviser to
the Fund outweighs any disadvantages that may result from exposure to
simultaneous transactions.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees 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.
During the fiscal years ended December 31, 1992 and 1993, the Fund did
not pay any brokerage commissions. During the ten-month period ended October 31,
1994, the Fund paid $9,000 in brokerage commissions. During the fiscal year
ended October 31, 1995, the Fund paid $6,695 in brokerage commissions.
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SALES CHARGES
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GENERAL
Generally, the Fund offers three classes of shares. Class A shares are
offered with a maximum front-end sales charge of 4.75% payable at the time of
purchase ("Front End Load Option"). Class B shares purchased on or after June 1,
1995 are subject to a contingent deferred sales charge payable upon redemption
during the 72 month period from and including the month of purchase. Class B
shares purchased prior to June 1, 1995 are subject to a contingent deferred
sales charge upon redemption within three calendar years following the year of
purchase ("Back End Load Option"). Class B shares purchased on or after June 1,
1995 that have been outstanding eight years from and including the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. Class B shares purchased prior to June
1, 1995 that have been outstanding during seven calendar years will similarly
convert to Class A shares. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to Keystone
Investor Resource Center, Inc., the Fund's transfer and dividend disbursing
agent ("KIRC").) Class C shares are sold subject to a contingent deferred sales
charge payable upon redemption within one year after purchase ("Level Load
Option"). Class C shares are available only through dealers who have entered
into special distribution agreements with the Principal Underwriter. The
prospectus contains a general description of how investors may buy shares of the
Fund, as well as a table of applicable sales charges for Class A shares, a
discussion of reduced sales charges that may apply to subsequent purchases and a
description of applicable contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (See "Distribution Plans"), a contingent deferred sales
charge is imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after
April 10, 1995 (1) in an amount equal to or exceeding $1,000,000 and/or (2) by a
corporate qualified retirement plan or a non-qualified deferred compensation
plan sponsored by a corporation having 100 or more eligible employees (a
"Qualifying Plan"), in either case without a front-end sales charge, will be
subject to a contingent deferred sales charge of 1.00% during the 24 month
period following the date of purchase. Certain Class A shares purchased without
a front-end sales charge prior to April 10, 1995 may be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one-year period
commencing on the date such shares were originally purchased. The contingent
deferred sales charge will be retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of the lesser of net asset value or net cost of such Class B shares
redeemed during succeeding twelve month periods as follows: 5% during the first
twelve month period; 4% during the second twelve month period; 3% during the
third twelve month period; 3% during the fourth twelve month period; 2% during
the fifth twelve month period; and 1% during the sixth twelve month period. No
deferred sales charge is imposed on amounts redeemed thereafter. See
"Calculation of Contingent Deferred Sales Charge" below.
With respect to Class B shares sold prior to June 1, 1995, the Fund,
with certain exceptions, will impose a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and during the first calendar year
after purchase; 2.00% on shares redeemed during the second calendar year after
purchase; and 1.00% on shares redeemed during the third calendar year after
purchase. No deferred sales charge is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS C SHARES
With certain exceptions, the Fund will impose a deferred sales charge
of 1% on Class C shares redeemed within one year after the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net 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; (3) certain Class A shares held for more than one
or two years, as the case may be; (4) Class B shares held during more than four
consecutive calendar years or more than 72 months, as the case may be; or (5)
Class C shares held for more than one year from the date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge imposed when the shares of a class are exchanged for the shares of the
same class of another Keystone America Fund. Moreover, when shares of one such
class of a fund have been exchanged for shares of another such class of a fund,
for purpose of any future contingent deferred sales charge the calendar year of
the purchase of the shares of the fund exchanged into is deemed to be the year
shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Portfolio may also be sold, to the extent permitted by
applicable law, regulations, interpretations or exemptions, at net asset value
without the imposition of an initial sales charge to (1) an eligible officer,
Director, Trustee, full-time employee or sales representative of the Fund,
Keystone, Keystone Investments, Inc. (formerly named Keystone Group, Inc.)
("Keystone Investments"), their subsidiaries or the Principal Underwriter who
have been such for not less than ninety days; (2) a pension and profit-sharing
plan established by such companies, their subsidiaries and affiliates for the
benefit of their officers, Directors, Trustees, full-time employees and sales
representatives; or (3) a registered representative of a firm with a dealer
agreement with the Principal Underwriter, provided all such sales are made upon
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge is imposed on purchases of shares of the
Portfolio 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
Portfolio or any fund in the Keystone Investments Family of Funds purchased
pursuant to this waiver, is at least $500,000 and any commission paid at the
time of such purchase is not more than 1% of the amount invested. In addition,
no deferred sales charge is imposed on redemptions of such shares.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no contingent
deferred sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.
In addition, no 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 benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of accounts having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan
of up to 1.5% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
The Fund's prospectus enumerated certain additional deferred sales
charge waivers.
REDEMPTION OF SHARES
The Fund has obligated itself 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 assets.
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DISTRIBUTION PLANS
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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's Class A, B and
C Distribution Plans have been approved by the Fund's Board of Trustees,
including a majority of the Trustees who are not interested persons of the Fund
as defined in the 1940 Act ("Independent Trustees") and a majority of the
Trustees who have no direct or indirect financial interest in the Distribution
Plans, or any agreement related thereto (the "Rule 12b-1 Trustees," who are the
same as the Independent Trustees).
The NASD limits the amount that a Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees. The NASD 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 also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the 12b-1 Plans, plus interest at the prime rate
plus 1% on such amounts (less any contingent deferred sales charges paid by
shareholders to the Principal Underwriter).
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that
the Fund may expend daily amounts at an annual rate, which is currently limited
up to 0.25% of the Fund's average daily net asset value attributable to Class A
shares, to finance any activity that is primarily intended to result in the sale
of Class A shares, including, without limitation, expenditures consisting of
payments to the principal underwriter of the Fund (currently the Principal
Underwriter) to enable the Principal Underwriter to pay or to have paid to
others who sell Class A shares a service or other fee, at such intervals as the
Principal Underwriter may determine, in respect of Class A shares maintained by
any such recipients on the books of the Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.25% of the average net asset value of Class A shares maintained by such
others on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS. The Fund has adopted Distribution Plans and
other plans with respect to its Class B shares that provide that the Fund may
expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class B shares to finance any activity
that is primarily intended to result in the sale of Class B shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter of the Fund (currently the Principal Underwriter) (1) to enable the
Principal Underwriter to pay to others (dealers) commissions in respect of Class
B shares sold since inception of the Distribution Plan; and (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipients on the books of the Fund for specified
periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient on the books of the Fund for specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that
the Fund may expend daily amounts at an annual rate of up to 1.00% of the Fund's
average daily net asset value attributable to Class C shares to finance any
activity that is primarily intended to result in the sale of Class C shares,
including, without limitation, expenditures consisting of payments to the
principal underwriter of the Fund (currently the Principal Underwriter) (1) to
enable the Principal Underwriter to pay to others (dealers) commissions in
respect of Class C shares sold since inception of the Distribution Plan; and (2)
to enable the Principal Underwriter to pay or to have paid to others a service
fee, at such intervals as the Principal Underwriter may determine, in respect of
Class C shares maintained by any such recipients on the books of the Fund for
specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
on the books of the Fund for specified periods.
DISTRIBUTION PLANS IN GENERAL
Whether any expenditure under a 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 Portfolio's total operating
expenses for purposes of determining compliance with state expense limits.
A Distribution Plan may be terminated at any time by a vote of a
majority of the Fund's Rule 12b-1 Trustees or by vote of a majority of the
outstanding voting shares of the respective class of Portfolio shares. Any
change in a Distribution Plan that would materially increase the distribution
expenses of the Portfolio provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by the
Trustees, including the Fund's Rule 12b-1 Trustees.
For Class B shares sold prior to June 1, 1995, unreimbursed
distribution expenses at October 31, 1995 were $191,513 (5.2% of such Class B
net assets at October 31, 1995). For Class B shares sold on or after June 1,
1995, unreimbursed distribution expenses at October 31, 1995 were $18,809 (1.0%
of such Class B net assets at October 31, 1995). Unreimbursed distribution
expenses at October 31, 1995 for Class C shares were $117,401 (9.9% of Class C
net assets at October 31 1995).
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by a Distribution Plan as stated
above.
The Independent Trustees of the Fund have determined that the sales of
the Portfolio's shares resulting from payments under the Distribution Plans are
expected to benefit the Portfolio.
For the fiscal year ended December 31, 1992, the Portfolio paid the
Principal Underwriter $22,420 in Class A Distribution Plan expenses. This amount
was used to pay commissions and maintenance fees.
For the fiscal year ended December 31, 1993, the Fund paid the
Principal Underwriter $19,751 pursuant to its Class A Distribution Plan. For the
period beginning August 2, 1993 (date of initial public offering) to December
31, 1993, the Fund paid the Principal Underwriter $5,359 and $3,715 pursuant to
its Class B and C Distribution Plans, respectively. These amounts were used to
pay commissions and maintenance fees.
For the ten month period ended October 31, 1994, the Fund paid the
Principal Underwriter $13,778, $26,882 and $14,984 pursuant to its Class A, B
and C Distribution Plans, respectively. These amounts were used to pay
commissions and service fees.
For the fiscal year ended October 31, 1995, the Fund paid the Principal
Underwriter $22,659, $31,853 ($29,857 with respect to Class B shares sold prior
to June 1, 1995 and $1,996 with respect to Class B shares sold on or after June
1, 1995) and $13,920 pursuant to its Class A, Class B and Class C Distribution
Plans, respectively. These amounts were used to pay commissions and service
fees.
TRUSTEES AND OFFICERS
Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments; President, Chief Executive Officer and
Trustee or Director of all 30 funds in the Keystone Investments Family
of Funds; Director and Chairman of the Board, Chief Executive Officer
and Vice Chairman of Keystone; 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, Chairman of the
Board, Chief Executive Officer and President of Keystone Management,
Keystone Software Inc. ("Keystone Software"); 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 of Robert Van Partners, Inc.; and former Trustee of Neworld
Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments 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: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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 Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other Keystone Investments Funds; former Director and Chairman of
the Board of Hartwell Keystone; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital (and Chairman of its
Investment Committee); former Chairman of the Board and Chief Executive
Officer of Keystone Investments; and former Chief Executive Officer of
the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.;
and former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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 Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford
School and Greater Hartford YMCA; former Director, Executive Vice
President and Vice Chairman of The Travelers Corporation; and former
Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former President, Nassau County Bar
Association; and former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments 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,
and Keystone Software; Vice President and Treasurer of KFIA; and
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 Keystone Investments Funds; and President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; former Vice President and Controller of Keystone
Investments, Keystone, the Principal Underwriter, FICO and Keystone
Software; and former Controller of Keystone Asset Corporation and
Keystone Capital Corporation.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President certain other
Keystone Investment Funds; and Senior Vice President of Keystone.
GILMAN C. GUNN, III: Vice President of the Fund; Vice President of certain
other Keystone Investments Funds; and Senior Vice President of
Keystone.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments 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 Trustee 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 October 31, 1995, no Trustee affiliated
with Keystone nor any officer received any direct remuneration from the Fund.
For the fiscal year ended October 31, 1995, the nonaffiliated Trustees and
officers of the Fund did not receive any retainers or fees. As of November 30,
1995, the Fund's Trustees and officers beneficially owned none of the Fund's
then outstanding shares. For the year ended December 31, 1994, aggregate
compensation received by the Independent Trustees on a fund complex wide basis
was $585,990.
The address of the Fund's Trustees and officers and the address of the
Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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FUND EXPENSES
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In addition to its investment advisory and management fee, the Fund, on
behalf of the Portfolio, assumes and pays its direct expenses and all other
expenses, including, without limitation, the following: (1) all charges and
expenses of any custodian or depository appointed by the Fund for the
safekeeping of the Fund's cash, securities and other property; (2) all charges
and expenses for bookkeeping and auditors; (3) all charges and expenses of any
transfer agents and registrars appointed by the Fund; (4) all fees of all
Trustees of the Fund who are not affiliated with Keystone or any of its
affiliates; (5) all brokers' fees, expenses and commissions and issue and
transfer taxes chargeable to the Fund in connection with transactions involving
securities and other property to which the Fund is a party; (6) all costs and
expenses of distribution of its shares incurred pursuant to a Distribution Plan
adopted under Rule 12b-1 issued under the 1940 Act; (7) all taxes and corporate
fees payable by the Fund to federal, state or other governmental agencies; (8)
all costs of certificates representing shares of the Portfolio; (9) all fees and
expenses involved in registering and maintaining registrations of the Portfolio
and of its shares with the Securities and Exchange Commission (the "SEC" or
"Commission") and registering or qualifying its shares under state or other
securities laws, including the preparation and printing of prospectuses for
filing with the Commission and other authorities; (10) expenses of preparing,
printing and mailing prospectuses to shareholders of the Portfolio; (11) all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
mailing notices, reports and proxy materials to shareholders of the Fund; (12)
all charges and expenses of legal counsel for the Fund and for Trustees of the
Fund in connection with legal matters relating to the Fund including, without
limitation, legal services rendered in connection with the Fund's existence,
business trust and financial structure and relations with its shareholders,
registrations and qualifications of securities under federal, state and other
laws, issues of securities, expenses that the Fund has assumed, whether
customary or not, and extraordinary matters; (13) all charges and expenses of
filing annual and other reports with the Commission; and (14) all extraordinary
expenses and charges of the Fund. In the event Keystone provides any of these
services or pays any of these expenses, the Fund will promptly reimburse
Keystone therefor.
The Portfolio is also subject to certain state annual expense limits,
the most restrictive of which is currently as follows:
2.5% of the first $30 million of Fund average net assets; 2.0% of the
next $70 million of Fund average net assets; and 1.5% of Fund average net assets
over $100 million.
Capital charges and certain expenses, including a portion of the
Portfolio's distribution plan fees, are not included in the calculation of the
state expense limitation. This limitation may be modified or eliminated in the
future.
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INVESTMENT ADVISER
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Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, organized in 1932, has been retained under an Investment Advisory
and Management Agreement (the "Advisory Agreement") to provide investment advice
and, in general, to manage the investment and reinvestment of the assets of the
Portfolio.
Keystone is a wholly-owned subsidiary of 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 and Ralph J. Spuehler, Jr. Keystone Investments provides
accounting, bookkeeping, legal, personnel and general corporate services to
Keystone, its affiliates and the Keystone Investments Family of Funds.
The overall supervision and management of the Fund rests with its Board
of Trustees. Pursuant to the Advisory Agreement, Keystone furnishes to the Fund
investment advisory, management and administrative services, office facilities,
equipment and personnel in connection with its services for managing the
investment and reinvestment of the Portfolio's assets, and pays (or causes to be
paid) the compensation of all officers and employees of the Fund.
As compensation for its services to the Portfolio, Keystone is entitled
to a fee at the annual rate set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee Income of the Portfolio
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1.5% of Gross
Income Plus
0.50% of the first $ 500,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of amounts over $1,000,000,000
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computed as of the close of business on each business day and paid daily.
For the fiscal year ended October 31, 1995, the Portfolio paid to
Keystone fees of $93,806, which represented 0.65% of the Portfolio's average net
assets. For the fiscal years ended December 31, 1992 and 1993 and the ten-month
period ended October 31, 1994, the Portfolio paid to Keystone fees of $53,621,
$49,732 and $61,697, respectively.
All expenses (other than those specifically referred to as being borne
by Keystone) incurred in the operation of the Fund, and any public offering of
its shares, are borne by the Fund. To the extent that Keystone provides certain
of such services, the Fund promptly reimburses Keystone therefor. The fee
charged to the Fund is higher than that charged to most other investment
companies with different investment objectives and policies. However, the fee is
comparable to fees charged to other global and international funds that are
subject to the higher costs involved in managing a portfolio of predominantly
international securities.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect from year to year only so
long as such continuance is specifically approved at least annually by the
Fund's Board of Trustees or by vote of a majority of the outstanding shares. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund or Keystone or may be terminated by a vote of the Fund's shareholders. The
Agreement will terminate automatically upon its assignment.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (the
"Principal Underwriting Agreements") with the Principal Underwriter, a
wholly-owned subsidiary of Keystone.
The Principal Underwriter, as agent, currently has the right to obtain
subscriptions for and to sell shares of the Fund to the public. In so doing, the
Principal Underwriter may retain and employ representatives to promote
distribution of the shares and may obtain orders from brokers, dealers or
others, acting as principals, for sales of shares. No such representative,
dealer or broker has any authority to act as agent for the Fund. The Principal
Underwriter has not undertaken to buy or to find purchasers for any specific
number of shares. The Principal Underwriter may receive payments from the Fund
pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Fund's Declaration of Trust, By-Laws, the current prospectus
and statement of additional information. All orders are subject to acceptance by
the Fund, and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Principal Underwriting Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Principal Underwriting Agreements to pay
all expenses in connection with registration of its shares with the Commission
as well as auditing and filing fees in connection with registration of its
shares under the various state "blue-sky" laws. The Principal Underwriter
assumes the cost of sales literature and preparation of prospectuses used by it
and certain other expenses.
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.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares and will indemnify and hold harmless the Fund, and each person who has
been, is or may be a Trustee or officer of the Fund, against expenses reasonably
incurred by any of them in connection with any claim or in connection with any
action, suit or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Principal Underwriter or any other person for
whose acts the Principal Underwriter is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the Fund.
The Principal Underwriting Agreements will remain in effect as long as
their terms and continuance are approved by a majority of the Fund's Independent
Trustees at least annually at a meeting called for that purpose and if their
continuance is approved annually by vote of a majority of Trustees or by vote of
a majority of the outstanding shares.
The Principal Underwriting Agreements may be terminated, without
penalty, on 60 days' written notice by the Fund's Board of Trustees or by a vote
of a majority of outstanding shares. The Principal Underwriting Agreements will
terminate automatically upon their "assignment" as that term is defined in the
1940 Act.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is organized as a Massachusetts business trust. Under its
Declaration of Trust, the Fund is authorized to issue more than one series
(portfolio) and may divide any series into more than one class of shares. The
Portfolio is currently the only series the Fund issues and the Portfolio
currently issues three classes of shares. The Fund is the successor to
International Heritage Fund, which was organized as a Massachusetts business
trust on September 5, 1986, and Keystone America Global Income Fund, which was
formed on April 19, 1989. The Fund is similar in most respects to a business
corporation. The principal distinction between the Fund and a corporation
relates to shareholder liability as described below. A copy of the Declaration
of Trust is filed as an exhibit to the Fund's Registration Statement, of which
this statement of additional information is a part. This summary is qualified in
its entirety by reference to the Declaration of Trust. On July 27, 1993, the
Fund's shareholders approved a restatement of the entire Declaration of Trust
(the "Restatement"). The purpose of the Restatement is to authorize the issuance
of additional classes of shares. The Restatement also omits provisions which are
reiterations of statutes, rules and regulations or which are otherwise
unnecessary and expands certain provisions for clarification or ease of
administration.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares, each of which represents
an equal proportionate interest in the Fund with each other share of that class.
Shares are entitled upon liquidation of the Fund to a pro rata share of the Fund
based on the relative net assets of each class. Shareholders have no preemptive
or conversion rights. Shares are redeemable, transferable and freely assignable
as collateral. Shareholders representing 10% or more of the Fund may, as set
forth in the Declaration of Trust, call meetings for any purpose, including the
purpose of voting on removal of one or more Trustees.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. Even if, however, the Fund were held to be a partnership, the possibility
of the shareholders incurring financial loss for that reason appears remote
because (1) the Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for obligations of the Fund and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (2) the Declaration of Trust
provides for indemnification out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that the Fund will, upon request, assume the defense of any claim made
against any shareholder of the Fund for any act or obligation of the Fund and
satisfy any judgment thereon from the assets of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. However, at meetings called for the initial election of
Trustees or to consider other matters, shares are entitled to one vote per
share. Classes of shares of the Fund have equal voting rights except that each
class of shares has exclusive voting rights with respect to its respective
Distribution Plan. No amendment may be made to the Declaration of Trust that
adversely affects any class of shares without the approval of a majority of the
shares of that class. Shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees to be elected at a meeting and, in such event,
the holders of the remaining 50% or less of the shares voting will not be able
to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Fund and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of the Fund or promoting the interests of the Fund and the
shareholders
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of a Portfolio of the
Fund as they may appear from time to time in advertisements are calculated by
finding the average annual compounded rates of return over one, five and ten
year periods, or the time periods for which such class of shares has been
effective, whichever is relevant, on a hypothetical $1,000 investment that would
equate the initial amount invested in the class to the ending redeemable value.
All dividends and distributions are added to the initial investment, the maximum
sales load deducted and all recurring fees charged to all shareholder accounts
are deducted. The ending redeemable value assumes a complete redemption at the
end of the relevant periods.
The Portfolio's Class A total return for the one and five year periods
ended October 31, 1995 were (2.51)% and 31.93%, respectively (including any
applicable sales charge). The Portfolio's Class A total return for the period
January 9, 1987 (commencement of operations) to October 31, 1995 was 69.97%
(including any applicable sales charge). The Portfolio's Class A compounded
average rate of return for the period January 9, 1987 (commencement of
operations) to October 31, 1995 was 6.21% (including any applicable sales
charge). The Portfolio's Class A compounded average rate of return for the five
year period ended October 31, 1995 was 5.70% (including any applicable sales
charge). The total returns for Class B and Class C of the Portfolio for the
period August 2, 1993 (date of initial public offering) through October 31, 1995
were 0.24% and 2.59%, respectively (including any applicable sales charge). The
total return figures do not reflect expense subsidizations by International
Heritage Corp. or Keystone, the Portfolio's advisers during these periods.
Effective April 19, 1989, Keystone became investment adviser to the Portfolio.
Total return figures are included for historical purposes.
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 Portfolio, 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 Portfolio presently does
not intend to advertise current yield.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
To the best of the Fund's knowledge, there were no shareholders of
record who owned 5% or more of the Portfolio's outstanding Class A shares as of
November 30, 1995.
As of November 30, 1995, Merrill Lynch Pierce Fenner & Smith, Attn:
Book Entry, 4800 Deer Lake Dr. E, 3rd Floor, Jacksonville, FL 32246-6484; and
Alan Baker Co., 160 Sylvester Rd., South San Francisco, CA 94080-6014 owned
6.112% and 5.565%, respectively, of the Portfolio's outstanding Class B shares.
As of November 30 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr. E, 3rd Floor, Jacksonville, FL 32246-6484; PaineWebber
for the Benefit of PaineWebber Cdn., FBO: Howard I. Richert, PO Box 3321,
Weehawken, NJ 07087; PaineWebber for the Benefit of Paine Webber Cdn., FBO:
Jerry H. Hall, P.O. Box 3321, Weehawken, NJ 07087; and State Street Bank and
Trust Co., Cust., Univ. of Texas/Austin Orp., FBO: Arnold H. Buss, 3318 Parry
Lane, Austin, TX 78731-5331 owned 13.074%, 7.917%, 6.484% and 5.154%,
respectively, of the Portfolio's outstanding Class C shares.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian ("Custodian") of all securities and cash
of the Fund. The Custodian performs no investment management functions for the
Fund, but, in addition to its custodial services, is responsible for accounting
and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142, is a
wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, 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 statement of additional information omit
certain information contained in the Fund's Registration Statement filed with
the Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of 16 different investment companies in the Keystone
America Fund Family. The Keystone America Funds offers a range of choices to
serve shareholder needs. The other Keystone America Funds consist of the funds
having the various investment objectives described below:
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high level of current
income, consistent with low volatility of principal, by investing in adjustable
rate securities issued by the U.S. government, its agencies or
instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE FUND OF THE AMERICAS - Seeks long term growth of capital through
investments in equity securities in North America (the United States and Canada)
and Latin America (Mexico and countries in South and Central America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long term capital growth by
investing primarily in equity securities.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long term capital growth through
investments primarily in equity securities of companies with small market
capitalizations.
<PAGE>
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APPENDIX
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MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the United States ("U.S.") government, its agencies or
instrumentalities, some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper, including commercial paper of foreign issuers, will
consist of issues rated at the time of purchase A-1 by Standard & Poor's
Corporation ("S&P"), or PRIME-1 by Moody's Investors Service, Inc., ("Moody's");
or, if not rated, will be issued by companies that have an outstanding debt
issue rated at the time of purchase Aaa, Aa or A by Moody's, or AAA, AA or A by
S&P, or will be determined by Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
a. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated PRIME-1 (or related supporting institutions) are deemed
to have a superior capacity for repayment of short term promissory obligations.
Repayment capacity of PRIME-1 issuers is normally evidenced by the following
characteristics:
(1) leading market positions in well-established industries;
(2) high rates of return on funds employed;
(3) conservative capitalization structures with moderate reliance on
debt and ample asset protection;
(4) broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and
(5) well established access to a range of financial markets and assured
sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
U.S. CERTIFICATES OF DEPOSIT
U.S. certificates of deposit are receipts issued by a U.S. 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.
U.S. certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks, including their branches abroad, that are members of
the Federal Reserve System or the Federal Deposit Insurance Corporation, and of
U.S. branches of foreign banks, each of which have total deposits at the time of
purchase in excess of $1 billion.
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 and securities issued by the Government
National Mortgage Association ("GNMA"). Treasury bills have maturities of one
year or less. Treasury notes have maturities of one to ten years and Treasury
bonds generally have maturities of greater than ten years at the date of
issuance. GNMA securities include GNMA mortgage pass-through certificates. Such
securities are supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the United States government is not
obligated by law to provide support to an instrumentality it sponsors, the
Portfolio will invest in the securities issued by such an instrumentality only
when Keystone determines under standards established by the Board of Trustees
that the credit risk with respect to the instrumentality does not make its
securities unsuitable investments. While the Portfolio may invest in such
instruments, United States government securities do not include international
agencies or instrumentalities in which the United States government, its
agencies or instrumentalities participate, such as the World Bank, Asian
Development Bank or the Interamerican Development Bank, or issues insured by the
Federal Deposit Insurance Corporation.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees. Ratings of foreign obligors
do not take into account currency exchange and related uncertainties. The
ratings are based on current information furnished by the issuer or obtained by
S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in a small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
6. CI - The rating CI is reserved for income bonds on which no interest
is being paid.
7. D - Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
3. A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds that are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
7. Caa - Bonds that are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal and interest.
8. Ca - Bonds that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds that are rated as C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
COMMON AND PREFERRED STOCK RATINGS
S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others, S&P
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. S&P rankings,
however, do not reflect all of the factors, tangible or intangible, that bear on
stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
MOODY'S COMMON STOCK RANKINGS
Moody's presents a concise statement of the important characteristics
of a company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten year comparative
statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. aa: An issue that is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
3. a: An issue that is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. baa: An issue that is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. ba: An issue that is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. b: An issue that is rated "b" generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. caa: An issue that is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. ca: An issue that is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS
The Portfolio writes only covered options. Options written by the
Portfolio will normally have expiration dates of not more than nine months from
the date written. The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities at the times the
options are written.
Unless the option has been exercised, the Portfolio may close out an
option it has written by effecting a closing purchase transaction, whereby it
purchases an option covering the same underlying security and having the same
exercise price and expiration date ("of the same series") as the one it has
written. If the Portfolio desires to sell a particular security on which it has
written a call option, it will effect a closing purchase transaction prior to or
concurrently with the sale of the security. If the Portfolio is able to enter
into a closing purchase transaction, the Portfolio will realize a profit (or
loss) from such transaction if the cost of such transaction is less (or more)
than the premium received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Portfolio 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 Portfolio as a covered call option writer is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying securities until the option expires or it delivers the underlying
securities upon exercise.
Because the Portfolio intends to qualify as a regulated investment
company under the Internal Revenue Code, the extent to which the Portfolio may
write covered call options and enter into so-called "straddle" transactions
involving put and call options may be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation ("OCC"),
a clearing corporation which assumes responsibility for the completion of
options transactions.
OPTION WRITING AND RELATED RISKS
The Portfolio may write covered call and put options with respect to up
to 25% of its net assets. A call option gives the purchaser of the option the
right to buy, and the writer the obligation to sell, the underlying security at
the exercise price during the option period. Conversely, a put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the exercise price during the option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges"), to secure the obligation to deliver the underlying security in
the case of a call option, the writer of the option is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the OCC, an institution created to interpose itself between buyers and sellers
of options. Technically, the OCC assumes the order side of every purchase and
sale transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such security.
Because the Portfolio can write only covered options, it may at times
be unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, on a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS
The Portfolio can close out a put option it has purchased by effecting
a closing sale transaction; for example, the Portfolio may close out a put
option it has purchased by selling a put option. If, however, a secondary market
does not exist at a time the Portfolio wishes to effect a closing sale
transaction, the Portfolio will have to exercise the option to realize any
profit. In addition, in a transaction in which the Portfolio does not own the
security underlying a put option it has purchased, the Portfolio would be
required, in the absence of a secondary market, to purchase the underlying
security before it could exercise the option. In each such instance, the
Portfolio would incur additional transaction costs. The Portfolio may also
purchase call options for the purpose of offsetting previously written call
options of the same series.
The Portfolio would normally purchase call options in anticipation of
an increase in the market value of securities of the type in which the Portfolio
may invest. The purchase of a call option would entitle the Portfolio, in return
for the premium paid, to purchase specified securities at a specified price
during the option period. The Portfolio would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the Portfolio
would realize a loss on the purchase of the call option.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell specified securities at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Portfolio's securities. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities. Put options may also be
purchased by the Portfolio for the purpose of affirmatively benefitting from a
decline in the price of securities that the Portfolio does not own. The
Portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Portfolio
would realize a loss on the purchase of the put option.
The Portfolio may purchase put and call options on securities indices
for the same purposes as the purchase of options on securities. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
OPTIONS TRADING MARKETS
Options in which the Portfolio will trade are generally listed on
Exchanges. Exchanges on which such options currently are traded include the
Chicago Board Options Exchange and the New York, American, Pacific, and
Philadelphia Stock Exchanges. Options on some securities may not be listed on
any Exchange but traded in the over-the-counter market. Options traded in the
over-the-counter market involve the additional risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Portfolio. 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 Portfolio is
subject to the investment restrictions described in the prospectus and the
statement of additional information.
The staff of the Commission currently is of the view that the premiums
that the Portfolio pays for the purchase of unlisted options and the value of
securities used to cover unlisted options written by the Portfolio are
considered to be invested in illiquid securities or assets for the purpose of
calculating whether the Portfolio is in compliance with its fundamental
investment restriction prohibiting it from investing more than 10% of its total
assets (taken at current value) in any combination of illiquid assets and
securities. The Portfolio intends to request that the Commission staff
reconsider its current view. It is the intention of the Portfolio to comply with
the staff's current position and the outcome of such reconsideration.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Portfolio holds a long position
in U.S. Treasury bills with a principal amount corresponding to the option
contract size, the Portfolio may be hedged from a risk standpoint. In addition,
to ensure that it can meet its open option obligations the Portfolio will
maintain in a segregated account with the Fund's Custodian liquid assets
maturing no later than those which would be deliverable in the event of an
assignment of an exercise notice.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Portfolio may purchase and write such
options in the over the counter market or, should they commence trading, on any
Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Portfolio, as a writer of a
covered GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Portfolio will enter into a closing
purchase transaction or will purchase additional GNMA certificates from the same
pool (if obtainable) or replacement GNMA certificates in the cash market in
order to remain covered.
A GNMA certificate held by the Portfolio to cover an option position in
any but the nearest expiration month may cease to represent cover for the option
in the event of a decline in the GNMA coupon rate at which new pools are
originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Portfolio will no longer be covered, and the Portfolio will
either enter into a closing purchase transaction or replace the GNMA certificate
with a certificate which represents cover. When the Portfolio closes its
position or replaces the GNMA certificate, it may realize an unanticipated loss
and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Portfolio will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any particular
time, and for some options no secondary market may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and might incur transaction costs in connection therewith. If
the Portfolio as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or a broker to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options that had
been issued as a result of trades would generally continue to be exercisable in
accordance with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Portfolio 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 Portfolio or as a hedge against changes in the prices of
securities or currencies held by the Portfolio or to be acquired by the
Portfolio. The Portfolio'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.
The Portfolio intends to engage in options transactions that are
related to currency and other financial futures contracts for hedging purposes
and in connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Portfolio's
exposure to interest rate and/or market fluctuations, the Portfolio 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 Portfolio does not
intend to take delivery of the instruments underlying futures contracts it
holds, the Portfolio 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 that 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 United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Portfolio intends to purchase call and put options on currency and
other financial futures contracts and sell such options. Options on currency and
other financial futures contracts are similar to options on stocks except that
an option on a currency or other financial futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) rather than to purchase or sell stock, currency or other
financial instruments at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. This amount represents the amount by which the market price of
the futures contract at exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and value of
the futures contract.
The Portfolio intends to use options on currency and other financial
futures contracts in connection with hedging strategies. In the future the
Portfolio may use such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts
is analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Portfolio. 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 call options on currency and other financial futures
contracts represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency or other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Portfolio is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Portfolio may employ new investment techniques involving currency
and other financial futures contracts and related options. The Portfolio intends
to take advantage of new techniques in these areas which may be developed from
time to time and which are consistent with the Portfolio's investment objective.
The Portfolio believes that no additional techniques have been identified for
employment by the Portfolio 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 Portfolio will not enter into a futures contract if, as a result
thereof, more than 5% of the Portfolio's total assets (taken at market value at
the time of entering into the contract) would be committed to margin deposits on
such futures contracts and premiums on options futures contracts.
The Portfolio 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 Portfolio owns or futures contracts will be purchased to
protect the Portfolio against an increase in the price of securities it intends
to purchase. The Portfolio does not intend to enter into futures contracts for
speculation.
In instances involving the purchase or sale of futures contracts by the
Portfolio, an amount of cash and cash equivalents or securities equal to the
market value of the futures contracts will be deposited in a segregated account
with the Fund's custodian. In addition, in the case of a purchase, the Portfolio
may be required to make a deposit to a margin account with a Broker to
collateralize the position, and in the case of a sale, the Portfolio may be
required to make daily deposits to the buyer's margin account. The Portfolio
would make such deposits in order to insure that the use of such futures is
unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Portfolio 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 Portfolio 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 Portfolio'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 Portfolio 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; and 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 Portfolio's portfolio. A
decision of whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Portfolio 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 Portfolio has
sufficient assets to satisfy its obligations under a futures contract, the
Portfolio will establish a segregated account in connection with its futures
contracts which will hold cash or cash equivalents equal in value to the current
value of the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular option or at any particular time. The Portfolio 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 Portfolio 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 Portfolio, 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 Portfolio may invest in securities of foreign issuers. When the
Portfolio invests in foreign securities they usually will be denominated in
foreign currencies and the Portfolio temporarily may hold funds in foreign
currencies. Thus, the Portfolio's share value will be affected by changes in
exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Portfolio may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Portfolio will deliver or receive when
the contract is completed) is fixed when the Portfolio enters into the contract.
The Portfolio usually will enter into these contracts to stabilize the U.S.
dollar value of a security it has agreed to buy or sell. The Portfolio also may
use these contracts to hedge the U.S. dollar value of a security it already
owns, particularly if the Portfolio expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Portfolio
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
Portfolio's investments denominated in foreign currencies will depend on the
relative strength of those currencies and the U.S. dollar, and the Portfolio 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
Portfolio.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC") and National Futures
Association ("NFA"). Currently the only national futures exchange on which
currency futures are traded is the International Monetary Market of the Chicago
Mercantile Exchange. Foreign currency futures trading is conducted in the same
manner and subject to the same regulations as trading in interest rate and index
based futures. The Portfolio intends to only engage in currency futures
contracts for hedging purposes, and not for speculation. The Portfolio may
engage in currency futures contracts for other purposes if authorized to do so
by the Board. The hedging strategies that will be used by the Portfolio in
connection with foreign currency futures contracts are similar to those
described above for forward foreign currency exchange contracts.
Currently currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark, Swiss and French Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the United States and Europe. On the Philadelphia
Stock Exchange, for example, contracts for half the size of the corresponding
futures contracts on the Chicago Board Options Exchange are traded with up to
nine months maturity in Marks, Sterling, Yen, Swiss Francs and Canadian dollars.
Options can be exercised at any time during the contract life and require a
deposit subject to normal margin requirements. Since a futures contract must be
exercised, the Portfolio must continually make up the margin balance. As a
result, a wrong price move could result in the Portfolio losing more than the
original investment as it cannot walk away from the futures contract as it can
an option contract.
The Portfolio will purchase call and put options and sell such options
to terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Portfolio. Put options may be purchased to hedge a
portfolio of foreign stocks or foreign debt instruments or a position in the
foreign currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Portfolio 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 Portfolio is not fully invested.
The Portfolio 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 Portfolio's investment objective. The Portfolio believes that no
additional techniques have been identified for employment by the Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio 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 Portfolio intends to evaluate the
creditworthiness of each other party.
Credit risk exists because the Portfolio'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 portfolio relies
on each contract being completed. If the contract is not performed, then the
Portfolio's hedge is eliminated, and the Portfolio 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 Portfolio
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 that are advantageous to the company but
disclaim those contracts that are disadvantageous, resulting in losses to the
Portfolio.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Portfolio sells sterling it
generally must pay pounds to a counterparty earlier in the day than it will be
credited with dollars in New York. In the intervening hours, the buyer can go
into bankruptcy or can be declared insolvent. Thus, the dollars may never be
credited to the Portfolio.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Portfolio 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 Portfolio.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Portfolio 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 Portfolio. This aspect of country risk is a major
element in the Portfolio's credit judgment as to with whom it will deal and in
what amounts.
<PAGE>
PAGE 9
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SCHEDULE OF INVESTMENTS--October 31, 1995
<TABLE>
<CAPTION>
COUPON MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
==================================================================================================
<S> <C> <C> <C> <C>
FOREIGN GOVERNMENT AGENCIES AND ISSUES (90.1%)
[bullet] AUSTRALIAN DOLLAR (3.2%)
New South Wales Treasury Corp. 12.600% 5/01/2006 500,000 $ 470,114
- --------------------------------------------------------------------------------------------------
[bullet] BRITISH POUND STERLING (3.2%)
European Investor Bank 8.000 6/10/2003 306,000 478,654
- --------------------------------------------------------------------------------------------------
[bullet] CANADIAN DOLLAR (13.1%)
Government of Canada 8.750 12/01/2005 1,500,000 1,215,293
Government of Canada 7.500 9/01/2000 950,000 721,470
- --------------------------------------------------------------------------------------------------
1,936,763
- --------------------------------------------------------------------------------------------------
[bullet] DANISH KRONE (5.3%)
Kingdom of Denmark 9.000 11/15/1998 4,000,000 783,382
- --------------------------------------------------------------------------------------------------
[bullet] NETHERLANDS GUILDER (5.1%)
Government of Netherlands 7.750 3/01/2005 1,100,000 758,873
- --------------------------------------------------------------------------------------------------
[bullet] NEW ZEALAND DOLLAR (8.6%)
Government of New Zealand 6.500 2/15/2000 1,150,000 738,249
Government of New Zealand 8.000 4/15/2004 325,000 224,190
Government of New Zealand
(Effective Yield 8.780%) (d) 0.000 3/20/1996 500,000 320,250
- --------------------------------------------------------------------------------------------------
1,282,689
- --------------------------------------------------------------------------------------------------
[bullet] SPANISH PESETA (4.5%)
Government of Spain 11.450 8/30/1998 32,000,000 269,701
Government of Spain 11.850 8/30/1996 24,000,000 199,425
Government of Spain 12.250 3/25/2000 23,000,000 199,407
- --------------------------------------------------------------------------------------------------
668,533
- --------------------------------------------------------------------------------------------------
[bullet] SWEDISH KRONA (6.5%)
Kingdom of Sweden 10.250 5/05/2003 6,000,000 957,320
- --------------------------------------------------------------------------------------------------
[bullet] UNITED STATES DOLLAR (40.6%)
CVRD Cenibra 9.375 12/21/2003 830,000 796,800
Companhia Brasileiras de Petroleo Ipiranga 8.625 2/25/2002 550,000 530,750
Ispat Mexicana S.A. 10.375 3/15/2001 1,025,000 902,000
Kingdom of Thailand 8.250 3/15/2002 1,000,000 1,088,030
Klabin Fabricadora Papel 12.125 12/28/2002 250,000 248,750
Republic of Argentina 8.375 12/20/2003 350,000 253,313
Telecom Argentina 8.375 10/18/2000 500,000 433,750
Telecom Brasileiras S.A. (a) 10.000 10/22/1997 500,000 503,750
Telefonica de Argentina 11.875 11/01/2004 760,000 741,000
Yacimientos Petroliferos Fiscales S.A. (YPF) 8.000 2/15/2004 600,000 512,250
- --------------------------------------------------------------------------------------------------
6,010,393
- --------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
<PAGE>
PAGE 10
- --------------------------------------
Keystone World Bond Fund
SCHEDULE OF INVESTMENTS--October 31, 1995
COUPON MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
==================================================================================================
TOTAL FOREIGN GOVERNMENT AGENCIES & ISSUES (Cost--$12,778,963) $13,346,721
==================================================================================================
Maturity
Value
==================================================================================================
REPURCHASE AGREEMENT (2.6%)
Keystone Joint Repurchase Agreement
(Investments in repurchase agreements, in
a joint trading account, purchased
10/31/95)(Cost $387,000) (c) 5.872% 11/01/1995 $387,187 387,000
==================================================================================================
TOTAL INVESTMENTS (Cost $13,165,963) (b) 13,733,721
OTHER ASSETS AND LIABILITIES--NET (7.3%) 1,085,226
- --------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $14,818,947
==================================================================================================
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Securities that may be resold to "qualified institutional buyers" under
Rule 144A of the Federal Securities Act of 1933. These securities have
been determined to be liquid under guidelines established by the Board of
Trustees.
(b) The cost of investments for federal income tax purposes is identical.
Gross unrealized appreciation and depreciation of investments based on
identified tax cost, is as follows:
Gross unrealized
appreciation $ 688,552
Gross unrealized
depreciation (120,794)
---------
Net unrealized depreciation $ 567,758
=========
(c) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at October 31, 1995.
(d) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an accrual basis until maturity date.
See Notes to Financial Statements.
<PAGE>
PAGE 11
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Period from January 9, 1987
Year Ended January 1, 1994 (Commencement of
October 31, to October 31, Year Ended December 31, Operations to
1995 1994 1993 1992 1991 1990 1989 1988 December 31, 1987
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $ 8.42 $ 9.56 $ 8.69 $10.77 $ 9.82 $ 9.76 $ 10.04 $11.02 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
Income from
investment
operations
Net investment
income 0.61 0.32 0.44 0.64 0.66 0.63 0.61 0.54 0.56
Net realized and
unrealized gain
(loss) on
investment and
foreign currency
related transactions (0.01) (0.96) 1.03 (0.79) 0.99 0.31 (0.27) (0.92) 1.27
- ------------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 0.60 (0.64) 1.47 (0.15) 1.65 0.94 0.34 (0.38) 1.83
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions
from:
Net investment
income (0.54) 0 (0.43) (0.96) (0.45) (0.52) (0.62) (0.54) (0.56)
In excess of net
investment income
(c) 0 0 (0.17) (0.28) 0 (0.04) 0 0 0
Tax basis return of
capital (0.06) (0.50) 0 0 0 0 0 0 0
Net realized gains
on investment and
foreign currency
related
transactions 0 0 0 (0.69) (0.25) (0.32) 0 (0.06) (0.25)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.60) (0.50) (0.60) (1.93) (0.70) (0.88) (0.62) (0.60) (0.81)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value end
of period $ 8.42 $ 8.42 $ 9.56 $ 8.69 $ 10.77 $ 9.82 $ 9.76 $10.04 $11.02
==============================================================================================================================
Total return (d) 7.62% (6.72%) 17.26% (1.24%) 17.48% 10.11% 3.07% (3.34%) 19.10%
Ratios/supplemental
data
Ratios to average
net assets:
Total expenses (a) 2.46%(e) 2.20%(b) 2.20% 2.20% 2.00% 2.00% 1.81% 1.19% 1.88%(b)
Net investment
income 7.21% 4.66%(b) 4.62% 5.44% 6.43% 6.48% 5.81% 5.34% 5.68%(b)
Portfolio turnover
rate 108% 100% 107% 185% 204% 154% 73% 335% 171%
- ------------------------------------------------------------------------------------------------------------------------------
Net assets end of
period (thousands) $9,956 $6,047 $8,403 $7,121 $11,843 $13,833 $14,806 $5,043 $4,774
==============================================================================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.25%,
3.12%, 2.50%, 2.15% and 2.47% for the period from January 1, 1994 to
October 31, 1994 and the years ended December 31, 1993, 1992, 1991 and
1990, respectively.
(b) Annualized.
(c) Effective January 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 capital gains". For the fiscal years ended
December 31, 1992 and 1990, distributions in excess of book basis net
investment income were charged to paid-in capital.
(d) Excluding applicable sales charges.
(e) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.44%.
See Notes to Financial Statements.
<PAGE>
PAGE 12
- --------------------------------------
Keystone World Bond Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
August 2, 1993
Period from (Date of Initial
Year Ended January 1, 1994 to Public Offering) to
October 31, 1995 October 31, 1994 December 31, 1993
================================================================================================================
<S> <C> <C> <C>
Net asset value beginning of period $ 8.46 $ 9.58 $ 9.47
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.52 0.31 0.16
Net realized and unrealized gain (loss) on
investment and foreign currency related
transactions 0.01 (0.99) 0.21
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.53 (0.68) 0.37
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.48) 0 (0.11)
In excess of net investment income (c) 0 0 (0.15)
Tax basis return of capital (0.06) (0.44) 0
Net realized gains on investment and foreign
currency related transactions 0 0 0
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.44) (0.26)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 8.45 $ 8.46 $ 9.58
================================================================================================================
Total return (d) 6.68% (7.18%) 3.93%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 3.21%(e) 2.95%(b) 2.95%(b)
Net investment income 6.43% 4.05%(b) 3.79%(b)
Portfolio turnover rate 108% 100% 107%
- ----------------------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $3,680 $3,429 $2,544
================================================================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
"Ratio of total expenses to average net assets would have been 3.03% and
3.47% for the period from January 1, 1994 to October 31, 1994 and for the
period from August 2, 1993 (Date of Initial Public Offering) to December
31, 1993, respectively.
(b) Annualized.
(c) Effective January 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 capital gains".
(d) Excluding applicable sales charges.
(e) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 3.19%
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
August 2, 1993
Year Ended Period from (Date of Initial
October 31, January 1, 1994 to Public Offering) to
1995 October 31, 1994 December 31, 1993
================================================================================================================
<S> <C> <C> <C>
Net asset value beginning of period $ 8.42 $ 9.58 $ 9.47
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.56 0.30 0.18
Net realized and unrealized gain (loss) on
investment and foreign currency related
transactions (0.02) (1.02) 0.19
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.54 (0.72) 0.37
- ----------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.48) 0 (0.12)
In excess of net investment income (c) 0 0 (0.14)
Tax basis return of capital (0.06) (0.44) 0
Net realized gains on investment and foreign
currency related transactions 0 0 0
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.44) (0.26)
- ----------------------------------------------------------------------------------------------------------------
Net asset value end of period $ 8.42 $ 8.42 $ 9.58
================================================================================================================
Total return (d) 6.83% (7.61%) 3.93%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 3.21%(e) 2.95%(b) 2.95%(b)
Net investment income 6.49% 3.94%(b) 3.79%(b)
Portfolio turnover rate 108% 100% 107%
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period (thousands) $1,183 $1,591 $1,878
================================================================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 3.03% and
3.40% for the period from January 1, 1994 to October 31, 1994 and for the
period from August 2, 1993 (Date of Initial Public Offering) to December
31, 1993, respectively.
(b) Annualized.
(c) Effective January 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 capital gains".
(d) Excluding applicable sales charges.
(e) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 3.19%.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------------------------
Keystone World Bond Fund
STATEMENT OF ASSETS AND LIABILITIES--
October 31, 1995
=======================================================================
Assets:
Investments at market value
(identified cost--$13,165,963) (Notes 1 and 6) $13,733,721
Cash 984
Receivable for:
Investments sold 802,497
Unrealized appreciation on open currency contracts
(Notes 1 and 6) 152,139
Interest 409,636
Fund shares sold 258
Foreign taxes reclaimed 5,783
Prepaid expenses 7,368
- -----------------------------------------------------------------------
Total assets 15,112,386
- -----------------------------------------------------------------------
Liabilities:
Payable for:
Unrealized depreciation on open currency contracts
(Notes 1 and 6) 193,620
Fund shares redeemed 4,758
Income distribution 24,167
Foreign taxes withheld 2,399
Other accrued expenses 68,495
- -----------------------------------------------------------------------
Total liabilities 293,439
- -----------------------------------------------------------------------
Net assets $14,818,947
=======================================================================
Net assets represented by: (Note 1)
Paid-in capital $15,595,032
Accumulated distributions in excess of net investment
income (24,213)
Accumulated net realized loss on investment and
foreign currency related transactions (1,279,623)
Net unrealized appreciation (depreciation) on:
Investments, foreign currency related transactions
and other assets and liabilities 569,232
Open currency contracts (41,481)
- -----------------------------------------------------------------------
Total net assets $14,818,947
=======================================================================
Net Asset Value: (Note 1)
Class A Shares
Net assets of $9,956,467 / 1,182,807 shares
outstanding $8.42
Offering price per share ($8.42 / 0.9525)
(based on a sales charge of 4.75% of the
offering price) $8.84
Class B Shares
Net assets of $3,679,877 / 435,713 shares
outstanding $8.45
Class C Shares
Net assets of $1,182,603 / 140,478 shares
outstanding $8.42
- -----------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended October 31, 1995
=======================================================================
Investment income: (Note 1)
Interest (net of foreign withholding
taxes of $12,648) $1,399,550
Expenses: (Notes 2 and 4)
Management fee $ 93,806
Transfer agent fees 74,907
Accounting, auditing and legal fees 44,513
Custodian fees 36,114
Printing expenses 25,991
Distribution Plan expenses 68,432
Registration fees 45,584
Miscellaneous 1,720
- -----------------------------------------------------------------------
Total expenses 391,067
Less: Expenses paid indirectly (Note 4) (2,523)
- -----------------------------------------------------------------------
Net expenses 388,544
- -----------------------------------------------------------------------
Net investment income 1,011,006
- -----------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment and foreign
currency related transactions:
(Notes 1 and 3)
Net realized loss on investment and
foreign currency related
transactions (583,415)
- -----------------------------------------------------------------------
Net change in unrealized
appreciation or depreciation on
investment and other assets and
liabilities 654,874
Net change in unrealized
appreciation or depreciation on
open currency contracts 30,546
- -----------------------------------------------------------------------
Net change in unrealized
appreciation or depreciation 685,420
- -----------------------------------------------------------------------
Net gain on investment and foreign
currency related transactions 102,005
- -----------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,113,011
=======================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 15
- --------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period from
Year Ended January 1, 1994 to
October 31, 1995 Ocotber 31, 1994
===============================================================================================================
<S> <C> <C>
Operations:
Net investment income $ 1,011,006 $ 448,846
Net realized loss on investment and foreign currency
related transactions (583,415) (728,796)
Net change in unrealized appreciation or depreciation 685,420 (665,302)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 1,113,011 (945,252)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders from: (Note 1)
Net investment income:
Class A Shares (653,425) 0
Class B Shares (187,676) 0
Class C Shares (82,887) 0
Tax basis return of capital:
Class A Shares (65,389) (389,502)
Class B Shares (24,167) (165,761)
Class C Shares (7,767) (85,383)
- ---------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,021,311) (640,646)
- ---------------------------------------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Shares issued in acquisition of Keystone Australia Income Fund:
(Note 5) 6,401,180 0
Proceeds from shares sold:
Class A Shares 379,004 455,701
Class B Shares 1,382,294 1,661,349
Class C Shares 226,771 833,775
Payments for shares redeemed:
Class A Shares (3,470,274) (2,151,391)
Class B Shares (1,277,770) (497,081)
Class C Shares (680,398) (948,169)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A shares 467,191 267,045
Class B shares 168,229 140,950
Class C shares 64,105 66,089
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions 3,660,332 (171,732)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 3,752,032 (1,757,630)
- ---------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period 11,066,915 12,824,545
- ---------------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of net
investment income on October 31, 1995 of ($24,213) and
undistributed net investment income on October 31, 1994 of $22]
(Note 1) $14,818,947 $11,066,915
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 16
- --------------------------------------
Keystone World Bond Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone World Bond Fund (the "Fund") (formerly Keystone America World Bond
Fund) is a Massachusetts business trust for which Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is
the investment adviser. The Fund became part of the Keystone America Family
on April 19, 1989 and Keystone became the Fund's adviser on that date. It is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end investment company.
The Fund offers three classes of shares. Class A shares are offered at a
public offering price which includes a maximum sales charge of 4.75% payable
at the time of purchase. Class B shares are sold subject to a contingent
deferred sales charge payable upon redemption which decreases depending on
when shares were purchased and how long they have been held. Class C shares
are sold subject to a contingent deferred sales charge payable upon
redemption within one year of purchase. Class C shares are available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company (formerly Keystone Distributors,
Inc.) ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of current and former members
of management of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"),
a wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments 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, by or under the direction of the Board of Trustees, to
be fair: (a) securities (including restricted 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. 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
dates of such transactions. Net unrealized foreign exchange gains/losses are
a component of unrealized appreciation/depreciation of investments, foreign
currency related transactions, and other assets and liabilities.
Short-term investments, if purchased with maturities of sixty days or
less, are valued at amortized cost (original purchase price 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, which are held on the sixtieth day prior to maturity, are valued
at amortized cost (market value on the sixtieth day adjusted for amortization
of premium or accretion of discount) which, when combined with accrued
interest, approximates market. All other securities and other assets are
valued at fair value as determined in good faith using methods prescribed by
the Board of Trustees.
<PAGE>
PAGE 17
- --------------------------------------
Investments denominated in foreign currencies are adjusted daily to
reflect changes in exchange rates. Market quotations are not considered to be
readily available for long-term corporate bonds and notes; such investments
are stated at fair value on the basis of valuations furnished by a pricing
service, approved by the Board of Trustees, which determines valuations for
normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders.
B. Securities transactions are accounted for no later than the day following
the trade date. 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. Interest income is
recorded on the accrual basis and dividend income is recorded on the
ex-dividend date. Distributions to the shareholders are recorded by the Fund
at the close of business on the record date.
C. 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 or excise 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 any excise tax liability by making
the required distributions under the Internal Revenue Code.
D. 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 agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
E. 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 and marked-to-market daily. Realized gains and
losses arising from such transactions are included in net realized gain
(loss) on foreign
<PAGE>
PAGE 18
- --------------------------------------
Keystone World Bond Fund
currency related transactions. The Fund is subject to the credit risk that
the other party will not complete the obligations of the contract.
F. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income are based on tax
basis net income. Distributions from taxable net income can exceed book basis
net investment income and net capital gains can exceed book basis net
investment income and net capital gains.
The significant differences between financial statement amounts available
for distribution and distributions made in accordance with income tax
regulations are due to the deferral of losses for income tax purposes that
have been recognized for financial statement purposes and treatment of
foreign currency gains as ordinary income for tax purposes.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the Fund were as follows:
<TABLE>
<CAPTION>
Class A Shares
- ----------------------------------------------------------------
Period from
Year Ended January 1, 1994 to
October 31, 1995 October 31, 1994
- ----------------------------------------------------------------
<S> <C> <C>
Shares sold 42,522 49,122
Shares redeemed (425,398) (240,295)
Shares issued in
acquisition of
Australia Income
Fund (Note 5) 789,935 0
Shares issued in
reinvestment of
dividends and
distributions 57,481 30,841
- ----------------------------------------------------------------
Net increase
(decrease) 464,540 (160,332)
================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
- ----------------------------------------------------------------
Period from
Year Ended January 1, 1994 to
October 31, 1995 October 31, 1994
- ----------------------------------------------------------------
<S> <C> <C>
Shares sold 166,498 179,486
Shares redeemed (156,895) (55,559)
Shares issued in
reinvestment of
dividends and
distributions 20,548 16,263
- ----------------------------------------------------------------
Net increase 30,151 140,190
================================================================
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
- ----------------------------------------------------------------
Period from
Year Ended January 1, 1994 to
October 31, 1995 October 31, 1994
- ----------------------------------------------------------------
<S> <C> <C>
Shares sold 27,481 88,183
Shares redeemed (83,800) (102,789)
Shares issued in
reinvestment of
dividends and
distributions 7,882 7,619
- ----------------------------------------------------------------
Net decrease (48,437) (6,987)
================================================================
</TABLE>
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940
Act").
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of up to 0.25% of
the average net asset value of Class A shares maintained by such others and
remaining outstanding on the Fund's books for specified periods.
<PAGE>
PAGE 19
- --------------------------------------
The Class B Distribution Plan provides for payments at an annual rate of up to
1.00% of the average daily net asset value of Class B shares to pay expenses of
the distribution of Class B shares. Amounts paid by the Fund under the Class B
Distribution Plan are currently used to pay others (dealers) a commission at the
time of purchase normally equal to 4.00% of the price paid for each Class B
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class B share sold. Beginning approximately 12 months
after the purchase of a Class B share, the dealer or other party will receive
service fees at an annual rate of 0.25% of the average daily net asset value of
such Class B shares maintained by such others and remaining outstanding on the
Fund's books for specified periods. A contingent deferred sales charge will be
imposed, if applicable, on Class B shares purchased after June 1, 1995 at rates
decreasing from a maximum of 5.00% of amounts redeemed during the first 12
months following the date of purchase to 1.00% of amounts redeemed during the
sixth twelve month period following the date of purchase. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
following the month of purchase will automatically convert to Class A shares
without a front end sales charge or exchange fee. Class B shares purchased prior
to June 1, 1995 will retain their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase in the amount of 0.75% of the
price paid for each Class C share sold, plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class C share sold.
Beginning approximately 15 months after purchase, the dealer or other party
will receive a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by the rules of the National Association of Securities
Dealers, Inc.) ("NASD Rule") and service fees at the annual rate of 0.25%,
respectively, of the average net asset value of each Class C share maintained
by such others and remaining outstanding on the Fund's books for specified
periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
For the year ended October 31, 1995, the Fund paid KIDC $22,659 under its
Class A Distribution Plan. The Fund paid KIDC $29,857 for Class B shares sold
prior to June 1, 1995, and $1,996 for Class B Shares sold on or after June 1,
1995. The Fund paid KIDC $13,920 under its Class C Distribution Plan.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Distribution Plans were $191,513 for
Class B shares purchased prior to June 1, 1995, and $18,809 for Class B
shares purchased on or after June 1, 1995. The maximum uncollected amount for
which KIDC may seek payment from the Fund under its Class C Distribution Plan
was $117,401 as of October 31, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
<PAGE>
PAGE 20
- --------------------------------------
Keystone World Bond Fund
(3.) Securities Transactions
Keystone World Bond FundAs of October 31, 1995, the Fund has a capital
loss carryover for federal income tax purposes of approximately $1,286,000
which expires as follows: $472,000-2002 and $814,000-2003. Purchases and
sales of investment securities (including proceeds received at maturity) for
the year ended October 31, 1995 were as follows:
Cost of Proceeds
Purchases From Sales
=============================================================
Portfolio securities $ 16,444,213 $ 14,016,995
Short-term investments 163,288,618 163,319,824
- -------------------------------------------------------------
$179,732,831 $177,336,819
=============================================================
(4.) Investment Management and Transactions with Affiliates
Under the terms of an Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provides investment management and
administrative services to the Fund. In return, Keystone receives a fee,
computed and charged to the net assets of the Fund daily, calculated at a
rate of 1.5% of gross investment income plus an amount determined by applying
percentage rates, which start at 0.50% and decline, as net assets increase,
to 0.40% per annum, to the net asset value of the Fund. During the year ended
October 31, 1995, the Fund paid or accrued to Keystone investment management
and advisory fees of $93,806, which represented 0.65% of the Fund's average
net assets.
During the year ended October 31, 1995, the Fund paid or accrued to KII
$19,141 as reimbursement for certain accounting and printing services and
$74,907 was paid to KIRC for transfer agent fees.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended October 31, 1995, the Fund paid custody fees in
the amount of $33,591 and received a credit of $2,523 pursuant to the expense
offset arrangement, resulting in a total expense of $36,114. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in an income producing asset.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of Fund
average net assets; 2.0% of the next $70 million of Funds average net assets;
and 1.5% of Fund average net assets over $100 million.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently, the Independent Trustees of
the Fund receive no compensation for their services.
(5.) Fund Reorganization
On December 30, 1994, the Fund acquired the net assets of Keystone Australia
Income Fund in exchange for Class A Shares of the Fund pursuant to a plan of
reorganization approved by the shareholders of Keystone World Bond Fund on
December 30, 1994. The acquisition was accomplished by a tax-free exchange of
789,935 shares of the Fund for the net assets of Keystone Australia Income
Fund. The net assets of Keystone Australia Income Fund on that date,
including $32,769 of unrealized depreciation on investments, were combined
with the assets of the Fund. The aggregate net assets of the Fund and
Keystone Australia Income Fund immediately before the acquisition
<PAGE>
PAGE 21
- --------------------------------------
were $10,313,320 and $6,401,180, respectively. The net assets of the Fund
immediately after the acquisition was $16,714,500.
(6.) Forward Foreign Currency Exchange Contracts
At October 31, 1995, the Fund had entered into the following forward
foreign currency exchange contracts that obligate the Fund to deliver
currencies at specified future dates. The net unrealized depreciation of
$41,481 on these contracts is included in the accompanying financial
statements. The terms of the open contracts are as follows:
<TABLE>
<CAPTION>
Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered at 10/31/95 be received at 10/31/95
- --------- ---------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
11/01/95 4,384,843 $ 802,497 $ 809,027 $ 809,027
Danish Krone U.S.$
11/03/95 482,292 482,292 2,440,494 499,036
U.S.$ French Francs
11/03/95 185,145 185,145 936,871 191,573
U.S.$ French Francs
11/03/95 2,440,494 499,036 511,334 511,334
French Francs U.S.$
11/03/95 936,871 191,573 185,000 185,000
French Francs U.S.$
11/10/95 1,110,000 1,110,000 1,510,718 1,150,193
U.S.$ Australian$
11/10/95 1,248,000 1,248,000 1,687,901 1,285,092
U.S.$ Australian$
11/10/95 225,000 225,000 304,395 231,753
U.S.$ Australian$
11/10/95 3,794,595 2,889,034 2,811,795 2,811,795
Australian$ U.S.$
11/10/95 180,000 180,000 22,456,800 183,798
U.S.$ Sp. Peseta
11/10/95 41,571,852 $ 340,246 $ 342,381 $ 342,381
Sp. Peseta U.S.$
11/20/95 352,000 352,000 1,969,440 360,507
U.S.$ Danish Krone
11/20/95 211,000 211,000 1,151,997 210,874
U.S.$ Danish Krone
11/20/95 4,165,676 762,530 728,138 728,138
Danish Krone U.S.$
11/20/95 112,000 112,000 71,538 113,049
U.S.$ Pound Sterling
11/20/95 148,316 234,378 229,979 229,979
Pound Sterling U.S.$
11/20/95 166,256 166,257 267,705 169,860
Netherland
U.S.$ Guilders
11/20/95 573,128 363,653 348,756 348,756
Netherland
Guilders U.S.$
12/08/95 354,250 354,250 1,761,083 359,868
U.S.$ French Francs
12/08/95 184,685 184,685 910,589 186,074
U.S.$ French Francs
12/08/95 2,671,673 545,943 525,000 525,000
French Francs U.S.$
01/03/96 1,544,569 231,477 221,000 221,000
Swedish Krona U.S.$
01/25/96 1,267,480 945,572 921,000 921,000
Canadian$ U.S.$
- --------- -------------- ------------ -------------- ----------
Total $12,616,568 $12,575,087
- --------- -------------- ------------ -------------- ----------
</TABLE>
<PAGE>
PAGE 22
- --------------------------------------
Keystone World Bond Fund
(7.) Distributions to Shareholders
A distribution of net investment income of $0.05, $0.045 and $0.045 for Class A,
Class B and Class C shares, respectively, was declared payable December 6, 1995,
for shareholders of record November 24, 1995. This distribution is not reflected
in the accompanying financial statements. The Fund distributes to its
shareholders dividends from net investment income monthly and all net realized
long-term capital gains, if any, annually. Any taxable distribution which is
declared in December and paid in the following fiscal year will be taxable to
shareholders in the year declared.
- -------------------------------------------------------------------------------
<PAGE>
PAGE 23
- --------------------------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone World Bond Fund
We have audited the accompanying statement of assets and liabilities of
Keystone World Bond Fund (formerly Keystone America World Bond Fund),
including the schedule of investments, as of October 31, 1995, and the
related statement of operations for the year then ended, the statements of
changes in net assets for the year then ended and for the period from January
1, 1994 to October 31, 1994, and the financial highlights for the year then
ended, the period from January 1, 1994 to December 31, 1994, and the five
year period ended December 31, 1993 for Class A shares and for the year ended
October 31, 1995 and the periods from January 1, 1994 to October 31, 1994 and
August 2, 1993 (date of initial public offering) to December 31, 1993 for
Class B and Class C shares. 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. The financial highlights for the
year ended December 31, 1988 and for the period January 9, 1987 (commencement
of operations) to December 31, 1987 were audited by other auditors whose
report, dated February 3, 1989, expressed an unqualified opinion thereon.
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 October 31, 1995 by correspondence with the custodian.
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 World Bond Fund as of October 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for the
year then ended and for the period from January 1, 1994 to October 31, 1994,
and the financial highlights for each of the years or periods specified in
the first paragraph above in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 8, 1995
