1933 Act Registration No. 33_______
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
KEYSTONE STRATEGIC INCOME FUND
(Exact name of registrant as specified in charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
(Address of principal executive offices)
Dorothy E. Bourassa, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
(Name and address of agent for service)
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act
of 1940 (File No. 33-11050); accordingly, no fee is payable herewith. A Rule
24f-2 Notice for the Registrant's most recent fiscal year ended July 31, 1996
was filed with the Commission on or about September 25, 1996.
It is proposed that this filing will become effective thirty days after
filing pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Statement Cross Reference Sheet; Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Fee Table, Synopsis Information and Comparison of Fees and Expenses;
Risk Factors Comparison of Investment Objectives
and Policies; Summary; Risks
4. Information About the Transaction Summary; Reasons for the
Reorganization; Comparative
Information on Shareholders' Rights;
Voting Information Concerning the
Meeting; Exhibit A (Agreement and
Plan of Reorganization)
5. Information about the Registrant Cover Page; Summary; Comparison of
Investment Objectives and Policies;
Reasons for the Reorganization;
Comparative Information on
Shareholders' Rights; Additional
Information
6. Information about the Company Cover Page; Summary; Comparison of
Being Acquired Investment Objectives and Policies;
Reasons for the Reorganization;
Comparative Information on
Shareholders' Rights; Additional
Information
7. Voting Information Cover Page; Summary; Comparative
Information on Shareholders'
Rights; Voting Information
Concerning the Meeting
8. Interest of Certain Persons Financial Statements and Experts;
and Experts Legal Matters
9. Additional Information Required for Inapplicable
Reoffering by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information About the Statement of Additional Information
Registrant of Keystone Strategic Income Fund
dated November 29, 1996, as
supplemented January 1, 1997
<PAGE>
13. Additional Information about Statement of Additional Information
the Company Being Acquired of Keystone World Bond Fund dated
February 28, 1997
14. Financial Statements Financial Statements dated July 31,
1996 and January 31, 1997 of
Keystone Strategic Income Fund
Financial Statements dated October
31, 1996 of Keystone World Bond Fund
Item of Part C of Form N-14
15. Indemnification Incorporated by Reference to Part A
Caption - "Comparative Information
on Shareholders' Rights - Liability
and Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
[EVERGREEN KEYSTONE LOGO]
May, 1997
Dear Shareholder:
We are pleased to announce that the combination of the Evergreen and Keystone
organizations is well underway, and with the combined power of Evergreen
Keystone we will be able to bring our investment and service capabilities to a
new level. One of the areas we are focusing on is merging funds with similar
objectives to maximize the potential for greater operating efficiencies and
lower overall fees and expenses.
The enclosed Prospectus/Proxy Statement contains our proposal to combine
Keystone World Bond Fund with Keystone Strategic Income Fund. This proposal is
scheduled to be voted on at a special meeting of shareholders of Keystone World
Bond Fund on July 14, 1997.
The reorganization has been structured as a tax-free transaction for
shareholders. We believe it will result in one combined fund with lower
management fees and operating expenses and greater efficiencies than two
separate funds. This reorganization is not expected to affect the total value of
your investment.
SUMMARY OF BENEFITS
o Lower management fees and operating expenses
o Potential for greater operating efficiencies
The Fund's Trustees have very carefully reviewed this proposed reorganization
and believe it is in the best interests of shareholders. They recommend you vote
FOR the proposal, which is described in detail in the attached Prospectus/Proxy
Statement.
VOTING INSTRUCTIONS
This package contains the materials you will need to vote. To vote, please sign
the attached proxy card and return it today in the postage-paid envelope. It is
extremely important that you vote, no matter how many shares you own. This is an
opportunity to voice your opinion on an important matter affecting your
investment.
18995
<PAGE>
If you have any questions regarding the proposed transaction or if you would
like additional information about the Evergreen Keystone family of mutual funds,
please telephone your financial adviser or Evergreen Keystone at 1-800-xxx-xxxx.
Albert H. Elfner, III George S. Bissell
CHAIRMAN CHAIRMAN OF THE BOARD
Keystone Investment Management Company Keystone Funds
<PAGE>
KEYSTONE WORLD BOND FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
--------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 14, 1997
--------------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Meeting") of
Shareholders of the World Bond Portfolio of Keystone World Bond Fund will be
held at the offices of the Fund, 200 Berkeley Street, Boston, Massachusetts, on
Monday, July 14, 1997 at 3:00 p.m., Eastern time, for the following purposes:
1. To approve or disapprove an Agreement and Plan of Reorganization
(the "Plan"), providing for the acquisition of all of the assets of the World
Bond Portfolio of Keystone World Bond Fund by Keystone Strategic Income Fund in
exchange for shares of Keystone Strategic Income Fund, and the assumption by
Keystone Strategic Income Fund of ______________ liabilities of Keystone World
Bond Fund. The Plan also provides for distribution of such shares of Keystone
Strategic Income Fund to shareholders of Keystone World Bond Fund in liquidation
and subsequent termination of Keystone World Bond Fund. A vote in favor of the
Plan is a vote in favor of the liquidation and dissolution of Keystone World
Bond Fund.
2. To transact any other business which may properly come before the
Meeting or any adjournment thereof.
The Trustees of Keystone World Bond Fund have fixed the close of
business on May 16, 1997 as the record date for the determination of
shareholders of Keystone World Bond Fund entitled to notice of and to vote at
the Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
George O. Martinez
SECRETARY
May [ ___ ], 1997
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and may help to avoid the time and expense involved in validating your vote
if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears in the
Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of the party signing
should conform exactly to a name shown in the Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
Corporate Accounts
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
Trust Accounts
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
Custodial or Estate Accounts
John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Jr. John B. Smith, Jr., Executor
<PAGE>
SUBJECT TO COMPLETION, APRIL 14, 1997
PRELIMINARY COPY
PROSPECTUS/PROXY STATEMENT DATED MAY [ ___ ], 1997
ACQUISITION OF ASSETS OF
WORLD BOND PORTFOLIO
A PORTFOLIO OF
KEYSTONE WORLD BOND FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
TELEPHONE NUMBER (617) 338-3200
BY AND IN EXCHANGE FOR SHARES OF
KEYSTONE STRATEGIC INCOME FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
TELEPHONE NUMBER (617) 338-3200
This Prospectus/Proxy Statement is being furnished to shareholders of the
World Bond Portfolio of Keystone World Bond Fund ( "World Bond Fund") in
connection with a proposed Agreement and Plan of Reorganization (the "Plan") to
be submitted to shareholders of World Bond Fund for consideration at a Special
Meeting of Shareholders to be held on July 14, 1997 at 3:00 p.m. at the offices
of the Fund, 200 Berkeley Street, Boston, Massachusetts, 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
World Bond Fund to be acquired by Keystone Strategic Income Fund in exchange for
shares of Keystone Strategic Income Fund and the assumption by Keystone
Strategic Income Fund of _______________ liabilities of World Bond Fund
(hereinafter referred to as the "Reorganization"). Following the Reorganization,
shares of Keystone Strategic Income Fund will be distributed to shareholders of
World Bond Fund in liquidation of World Bond Fund, and World Bond Fund will be
terminated. Holders of shares of World Bond Fund will receive shares of the
Class of Keystone Strategic Income Fund (the "Corresponding Shares") having the
same letter designation and the same distribution-related fees, shareholder
servicing-related fees and contingent deferred sales charges ("CDSCs"), if any,
as the shares of the Class of World Bond Fund held by them prior to the
Reorganization. As a result of the proposed Reorganization, shareholders of
World Bond Fund will receive that number of full and fractional Corresponding
Shares of Keystone Strategic Income Fund having an aggregate net asset value
equal to the aggregate net asset value of such shareholder's shares of World
Bond Fund. The Reorganization is being structured as a tax-free reorganization
for federal income tax purposes.
Keystone Strategic Income Fund is an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). Keystone Strategic Income Fund seeks high current income from
interest on debt securities and, secondarily, considers potential for growth of
capital in selecting securities.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Keystone Strategic Income
Fund that shareholders of World Bond Fund should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated May __,
1997 relating to this Prospectus/Proxy Statement and the Reorganization, which
includes the financial statements of Keystone Strategic Income Fund dated July
31, 1996 and January 31, 1997 and the financial statements of World Bond Fund
dated October 31, 1996, has been filed with the SEC and is incorporated by
reference in its entirety into this Prospectus/Proxy Statement. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Keystone Strategic Income Fund at 200 Berkeley Street, Boston,
Massachusetts 02116 or by calling toll-free 1-800-343-2898.
The Prospectus of Keystone Strategic Income Fund dated November 29,
1996, as supplemented January 1, 1997, its Annual Report for the fiscal year
ended July 31, 1996 and its Semi-Annual Report for the fiscal period ended
January 31, 1997 are incorporated herein by reference in their entirety.
Shareholders of World Bond Fund will receive, with this Prospectus/Proxy
Statement, copies of the Prospectus pertaining to the class of shares of
Keystone Strategic Income Fund that they will receive as a result of the
consummation of the Reorganization. Additional information about Keystone
Strategic Income Fund is contained in its Statement of Additional Information
dated December 10, 1996, as supplemented January 1, 1997, which has been filed
with the SEC and which is available upon request and without charge by writing
or calling Keystone Strategic Income Fund at the address or telephone number
listed in the preceding paragraph.
The Prospectus of World Bond Fund dated February 28, 1997 is
incorporated herein by reference in its entirety. Copies of the Prospectus and a
Statement of Additional Information dated February 28, 1997 are available upon
request without charge by writing to World Bond Fund at 200 Berkeley Street,
Boston, Massachusetts 02116, or by calling toll-free 1-800-343- 2898.
Included as Exhibit A to this Prospectus/Proxy Statement is a copy of
the Plan.
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS
OR OBLIGATIONS OF FIRST UNION CORPORATION ("FIRST UNION") OR ANY OF ITS
SUBSIDIARIES, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION OR ANY OF ITS
SUBSIDIARIES, AND ARE NOT INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
PAGE
COMPARISON OF FEES AND EXPENSES.............................................10
SUMMARY.....................................................................11
Proposed Plan of Reorganization....................................12
Tax Consequences...................................................12
Investment Objectives and Policies of
Keystone Strategic Income Fund and World Bond Fund...........13
Comparative Performance Information of Each Fund...................13
Management of the Funds............................................14
Investment Adviser.................................................14
Portfolio Management...............................................15
Distribution of Shares.............................................15
Purchase and Redemption Procedures.................................18
Exchange Privileges................................................18
Dividend Policy....................................................18
RISKS.......................................................................19
REASONS FOR THE REORGANIZATION..............................................19
Agreement and Plan of Reorganization...............................21
Federal Income Tax Consequences....................................22
Pro-forma Capitalization...........................................24
Shareholder Information............................................25
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES............................26
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS.............................28
Form of Organization...............................................28
Capitalization.....................................................28
Shareholder Liability..............................................28
Shareholder Meetings and Voting Rights.............................29
Liquidation or Dissolution.........................................29
Liability and Indemnification of Trustees..........................29
Rights of Inspection...............................................30
ADDITIONAL INFORMATION......................................................30
VOTING INFORMATION CONCERNING THE MEETING...................................30
FINANCIAL STATEMENTS AND EXPERTS............................................33
LEGAL MATTERS...............................................................33
OTHER BUSINESS..............................................................33
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A, Class B, and Class C shares of Keystone
Strategic Income Fund set forth in the following tables and examples are based
on the expenses for the fiscal year ended July 31, 1996. The amounts for Class
A, Class B, and Class C shares of World Bond Fund set forth in the following
tables and in the examples are based on World Bond Fund's fiscal year ended
October 31, 1996. The amounts for Keystone Strategic Income Fund pro forma are
based on the combined expenses expected for the twelve months ending July 31,
1997.
The following table shows for Keystone Strategic Income Fund and World
Bond Fund the shareholder transaction expenses and annual fund operating
expenses associated with an investment in the Class A, Class B, and Class C
shares of each Fund.
<TABLE>
<CAPTION>
COMPARISON OF CLASS A, CLASS B AND CLASS C SHARES OF KEYSTONE STRATEGIC INCOME FUND WITH CORRESPONDING SHARES OF WORLD BOND FUND
Keystone Strategic Income Fund World Bond Fund Keystone Strategic Income Fund
Pro Forma
Class A Class B Class C Class A Class B Class C Class A Class B Class C
- ------------------------------ --------- ------- --------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
MAXIMUM SALES LOAD IMPOSED ON 4.75% NONE NONE 4.75% NONE NONE 4.75% NONE NONE
PURCHASES (AS A PERCENTAGE OF
OFFERING PRICE)
CONTINGENT DEFERRED SALES NONE 5.00%(1) 1.00% NONE 5.00%(1) 1.00% NONE 5.00%(1) 1.00%
CHARGE (AS A PERCENTAGE OF
ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS,
WHICHEVER IS LOWER)
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)
ADVISORY FEES 0.65% 0.65% 0.65% 0.64% 0.64% 0.64% 0.64% 0.64% 0.64%
12B-1 FEES(2) 0.23% 1.00% 1.00% 0.24% 1.00% 1.00% 0.23% 1.00% 1.00%
OTHER EXPENSES 0.42% 0.42% 0.42% 1.13% 1.12% 1.14% 0.41% 0.41% 0.41%
- ------------------------------- ---------- --------- ------- -------- -------- -------- -------- --------- ------
TOTAL FUND OPERATING EXPENSES 1.30% 2.07% 2.07% 2.01% 2.76% 2.78% 1.28% 2.05% 2.05%
- ------------------------------- ---------- --------- ------- -------- -------- -------- -------- --------- ------
</TABLE>
1 The deferred sales charge declines from 5.00% to 1.00% if shares are redeemed
during the month of purchase and the 72-month period following the month of
purchase.
2 The Class A 12b-1 fee is currently limited to up to 0.25 of 1.00% of average
net assets. For Class B and Class C shares of Keystone Strategic Income Fund,
a portion of the 12b-1 fee equivalent to 0.25 of 1.00% of average net assets
will be shareholder servicing-related. Distribution-related 12b-1 fees will
be limited to 0.75 of 1.00% of average net assets as permitted under the
rules of the National Association of Securities Dealers, Inc.
EXAMPLES. The following table shows for each Fund, and for Keystone
Strategic Income Fund, assuming consummation of the Reorganization, examples of
the cumulative effect of shareholder transaction expenses and annual fund
operating expenses indicated above on a $1,000 investment in each Class of
shares for the periods specified, assuming (i) a 5% annual return, and (ii)
redemption at the end of such period, and additionally for Class B and Class C
shares, no redemption at the end of each period.
<TABLE>
<CAPTION>
Keystone Strategic Income Fund World Bond Fund Keystone Strategic Income Fund
Pro Forma
One Three Five Ten One Three Five Ten One Three Five Ten
Year Years Years Years Year Years Years Years Year Years Years Years
- ---------------------- ----- ------- ------ ------- ------ ------- ----- ----- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $60 $87 $115 $197 $67 $108 $151 $270 $60 $86 $114 $195
Class B (assuming
redemption at end of
period) $71 $95 $131 $211 $78 $116 $166 $282 $71 $94 $130 $209
Class B (assuming no
redemption at end of
period) $21 $65 $111 $211 $28 $86 $146 $282 $21 $64 $110 $209
Class C (assuming
redemption at end of
period) $31 $65 $111 $240 $38 $86 $147 $311 $31 $64 $110 $238
Class C (assuming no
redemption at end of
period) $21 $65 $111 $240 $28 $86 $147 $311 $21 $64 $110 $238
- ---------------------- ----- ------- ------ ------- ------ ------- ----- ----- ------ ------- ------ --------
</TABLE>
The purpose of the foregoing examples is to assist a World Bond Fund
shareholder in understanding the various costs and expenses that an investor in
Keystone Strategic Income Fund as a result of the Reorganization would bear
directly and indirectly, as compared with the various direct and indirect
expenses currently borne by a shareholder in World Bond Fund. These examples
should not be considered a representation of past or future expenses or annual
returns. Actual expenses may be greater or less than those shown. Moreover,
while the examples assume a 5% annual return, a Fund's actual performance will
vary and may result in actual returns greater or less than 5%.
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ADDITIONAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT,
THE PROSPECTUS OF KEYSTONE STRATEGIC INCOME FUND DATED NOVEMBER 29, 1996, AS
SUPPLEMENTED JANUARY 1, 1997, AND THE PROSPECTUS OF WORLD BOND FUND DATED
FEBRUARY 28, 1997 (WHICH ARE INCORPORATED HEREIN BY REFERENCE) AND THE PLAN, A
FORM OF WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS EXHIBIT A.
PROPOSED PLAN OF REORGANIZATION
The Plan provides for the transfer of all of the assets of World Bond Fund
in exchange for shares of Keystone Strategic Income Fund and the assumption by
Keystone Strategic Income Fund of ______________ liabilities of World Bond Fund.
(World Bond Fund and Keystone Strategic Income Fund each may also be referred to
in this Prospectus/Proxy Statement as a "Fund" and together as the "Funds"). The
Plan also calls for the distribution of shares of Keystone Strategic Income Fund
to World Bond Fund shareholders in liquidation of World Bond Fund as part of the
Reorganization. As a result of the Reorganization, the shareholders of World
Bond Fund will become the owners of that number of full and fractional
Corresponding Shares of Keystone Strategic Income Fund having an aggregate net
asset value equal to the aggregate net asset value of the shareholder's shares
of World Bond Fund as of the close of business immediately prior to the date
that World Bond Fund's assets are exchanged for shares of Keystone Strategic
Income Fund.
The Trustees of World Bond Fund, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of World Bond Fund and that the interests of the
shareholders of World Bond Fund will not be diluted as a result of the
transactions contemplated by the Reorganization. Accordingly, the Trustees have
submitted the Plan for the approval of World Bond Fund's shareholders.
THE BOARD OF TRUSTEES OF WORLD BOND FUND RECOMMENDS APPROVAL BY WORLD BOND
FUND'S SHAREHOLDERS OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Keystone Strategic Income Fund have also approved the Plan
and, accordingly, Keystone Strategic Income Fund's participation in the
Reorganization.
Approval of the Reorganization on the part of World Bond Fund will require
the affirmative vote of a majority of the outstanding shares present and
entitled to vote, with all classes voting together as a single class, at a
meeting at which a quorum is present. A majority of the outstanding shares of
the Fund, represented in person or by proxy, is required to constitute a quorum
at the Meeting. See "Voting Information Concerning the Meeting." The
Reorganization is scheduled to take place on or about July 31, 1997.
If the shareholders of World Bond Fund do not vote to approve the
Reorganization, the Trustees of World Bond Fund will consider other possible
courses of action in the best interests of shareholders.
TAX CONSEQUENCES
Prior to or at the completion of the Reorganization, World Bond Fund will
have received an opinion of counsel that the Reorganization has been structured
so that no gain or loss will be recognized by World Bond Fund or its
shareholders for federal income tax purposes as a result of the receipt of
shares of Keystone Strategic Income Fund in the Reorganization. The holding
period and aggregate tax basis of the Corresponding Shares of Keystone Strategic
Income Fund that are received by World Bond Fund shareholders will be the same
as the holding period and aggregate tax basis of shares of World Bond Fund
previously held by such shareholders, provided that shares of World Bond Fund
are held as capital assets. In addition, the holding period and tax basis of the
assets of World Bond Fund in the hands of Keystone Strategic Income Fund as a
result of the Reorganization will be the same as in the hands of World Bond Fund
immediately prior to the Reorganization, and no gain or loss will be recognized
by Keystone Strategic Income Fund upon the receipt of the assets of World Bond
Fund in exchange for shares of Keystone Strategic Income Fund and the assumption
by Keystone Strategic Income Fund of ______________ liabilities of World Bond
Fund.
INVESTMENT OBJECTIVES AND POLICIES OF KEYSTONE STRATEGIC INCOME FUND AND WORLD
BOND FUND
The investment objective of Keystone Strategic Income Fund is to seek
current income from interest on debt securities and, secondarily, to consider
potential for growth of capital in selecting securities. Keystone Strategic
Income Fund allocates its assets principally between eligible domestic high
yield, high risk bonds and debt securities of foreign governments and foreign
corporations. In addition, the Fund will, from time to time, allocate a portion
of its assets to U.S. government securities. The Fund may also invest in
preferred stocks, common stocks and other equity securities, including
convertible securities and warrants.
The investment objective of World Bond Fund is to seek current income by
investing primarily in a nondiversified portfolio consisting of debt securities
denominated in U.S. and foreign currencies and, secondarily, capital
appreciation. In pursuing these objectives, World Bond Fund invests at least 65%
of its total assets in investment grade bonds denominated in at least three
currencies. The Fund's investments are in securities of issuers located in at
least three countries, including issuers located in emerging or developing
markets. The Fund may invest in obligations issued or guaranteed by foreign
governments and multinational agencies and in dividend-paying equity securities,
such as common stocks or preferred stocks, including convertible preferred
stock. See "Comparison of Investment Objectives and Policies."
COMPARATIVE PERFORMANCE INFORMATION OF EACH FUND
Discussions of the manner of calculation of total return and yield
quotations are contained in the respective Prospectuses and Statements of
Additional Information of the Funds. The average annualized total return of the
Class A, Class B and Class C shares of each Fund for the one and five year
periods ended March 31, 1997 and for the periods from inception through March
31, 1997 are set forth in the table below. The calculations of total return
assume the reinvestment of all dividends and capital gains distributions on the
reinvestment date and the deduction of all recurring expenses (including sales
charges) that were charged to shareholders' accounts.
Average Annualized Total Return
<TABLE>
<CAPTION>
KEYSTONE STRATEGIC INCOME FUND WORLD BOND FUND
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C>
One Year Ended March 31, 3.17% 3.53% 7.54% 4.31% 4.62% 8.65%
1997
Five Years Ended March 31, 8.08% N/A N/A 5.66% N/A N/A
1997
Ten Years Ended March 31,
1997 N/A N/A N/A 6.46% N/A N/A
Inception through March 31, 6.78% 6.91% 7.25% 6.63% 3.31% 3.91%
1997
Inception Date 4/14/87 2/1/93 2/1/93 1/9/87 8/2/93 8/2/93
</TABLE>
Important information about Keystone Strategic Income Fund is also contained
in Management's Discussion of Keystone Strategic Income Fund's Performance,
attached hereto as Exhibit B. This information also appears in Keystone
Strategic Income Fund's most recent Annual Report.
MANAGEMENT OF THE FUNDS
The overall management of Keystone Strategic Income Fund and of World Bond
Fund is the responsibility of, and is supervised by, their respective Boards of
Trustees.
INVESTMENT ADVISER
KEYSTONE STRATEGIC INCOME FUND. Keystone Investment Management Company
("Keystone) serves as investment adviser to Keystone Strategic Income Fund.
Keystone, with its predecessors, has served as investment adviser to the
Keystone family of mutual funds since 1932. Keystone is a wholly-owned
subsidiary of First Union Keystone, Inc. First Union Keystone, Inc, is a
wholly-owned subsidiary of First Union National Bank of North Carolina ("FUNB").
FUNB is a subsidiary of First Union Corporation, the sixth largest bank holding
company in the United States. The Capital Management Group of FUNB, Evergreen
Asset Management Corp., and Keystone manage the Evergreen Keystone family of
mutual funds with assets of approximately $29 billion as of February 28, 1997.
For further information regarding Keystone, FUNB and First Union Corporation,
see "Fund Management and Expenses - Investment Adviser" in the Prospectus of
Keystone Strategic Income Fund.
Keystone manages investments, provides various administrative services and
supervises the daily business affairs of Keystone Strategic Income Fund subject
to the authority of the Fund's Board of Trustees. The Fund pays Keystone a fee
for its services at the annual rate set forth below:
AGGREGATE NET
MANAGEMENT ASSET VALUE
FEE INCOME OF THE SHARES
OF THE FUND
- ------------------------ --------------------------- -----------------------
2.0% of Gross Dividend
and Interest Income plus
0.50% of the first $ 100,000,000 plus
0.45% of the next $ 100,000,000 plus
0.40% of the next $ 100,000,000 plus
0.35% of the next $ 100,000,000 plus
0.30% of the next $ 100,000,000 plus
0.25% of the amounts over $ 500,000,000.
WORLD BOND FUND. Keystone serves as the investment adviser to World Bond
Fund. Subject to the authority of the Fund's Board of Trustees, Keystone manages
the investment and reinvestment of the Fund's assets, supervises the operation
of the Fund and provides all necessary office space, facilities and equipment.
World Bond Fund pays Keystone a fee for its services at the annual rate set
forth below:
AGGREGATE NET
MANAGEMENT ASSET VALUE OF THE SHARES
FEE INCOME OF THE FUND
- -------------------------------------------------------------------------------
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.
PORTFOLIO MANAGEMENT
The portfolio manager of Keystone Strategic Income Fund is Prescott B.
Crocker who is a Senior Vice President, Senior Portfolio Manager and Head of the
High Yield Bond Team at Keystone. Mr. Crocker has 25 years of experience in
fixed income investment management and has served as the Fund's portfolio
manager since 1997.
DISTRIBUTION OF SHARES
Evergreen Keystone Distributor, Inc. ("EKD"), an indirect wholly-owned
subsidiary of The BISYS Group, Inc., acts as underwriter of shares of both
Keystone Strategic Income Fund and World Bond Fund. EKD distributes each Fund's
shares directly or through broker-dealers, banks (including FUNB), or other
financial intermediaries. Each of Keystone Strategic Income Fund and World Bond
Fund offers three Classes of shares: Class A, Class B, and Class C. Each Class
has separate distribution arrangements. (See "Distribution-Related and
Shareholder Servicing-Related Expenses" below.) No Class bears the distribution
expenses relating to the shares of any other Class.
In the proposed Reorganization, shareholders of World Bond Fund will
receive the corresponding Class of shares of Keystone Strategic Income Fund
which they currently hold in World Bond Fund. The Class A, Class B and Class C
shares of Keystone Strategic Income Fund have identical arrangements with
respect to the imposition of initial sales charges, CDSC's and distribution and
service fees as the comparable Class of shares of World Bond Fund. Because the
Reorganization will be effected at net asset value without the imposition of a
sales charge, shares of Keystone Strategic Income Fund acquired by shareholders
of World Bond Fund pursuant to the proposed Reorganization would not be subject
to any initial sales charge or CDSC as a result of the Reorganization. However,
holders of Keystone Strategic Income Fund shares acquired as a result of the
Reorganization would continue to be subject to a CDSC upon subsequent
redemptions to the same extent as if they had continued to hold their shares of
World Bond Fund.
The following is a summary description of charges and fees for each of the
different Classes of shares of both Keystone Strategic Income Fund and World
Bond Fund. More detailed descriptions of the distribution arrangements
applicable to the Classes of shares are contained in the respective Prospectuses
of Keystone Strategic Income Fund and World Bond Fund and in each Fund's
respective Statement of Additional Information.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge and, as indicated below, are subject to distribution-related fees.
CLASS B SHARES. Class B shares are sold without an initial sales charge but
are subject to a CDSC which ranges from 5% to 1% if shares are redeemed during
the month of purchase and the 72-month period following the month of purchase.
In addition, Class B shares are subject to distribution-related fees and
shareholder servicing-related fees as described below. Class B shares issued in
the Reorganization will automatically convert to Class A shares in accordance
with the conversion schedule in effect at the time shares of World Bond Fund
were originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares of each Fund on which a front-end sales charge is
imposed (until they convert to Class A shares). The higher fees mean a higher
expense ratio, so Class B shares pay correspondingly lower dividends and may
have a lower net asset value than Class A shares of the Fund.
CLASS C SHARES. Class C shares are sold without an initial sales charge
but, as indicated below, are subject to distribution and shareholder
servicing-related fees. Class C shares are subject to a 1% CDSC if such shares
are redeemed during the month of purchase and the twelve-month period following
the month of purchase. No CDSC is imposed on amounts redeemed thereafter. Class
C shares incur higher distribution and/or shareholder service fees than Class A
shares but, unlike Class B shares, do not convert to any other Class of shares.
The amount of the CDSC applicable to a redemption of Class B and Class C
shares is a percentage of the lesser of the net asset value at the time of
redemption or the net asset value at the time of purchase of such shares which
is deducted from the amount of the redemption and is paid to the respective
Fund's distributor or its predecessor, as the case may be. Shares of each Fund
acquired through dividend or distribution reinvestment are not subject to a
CDSC. For purposes of determining the schedule of CDSCs, and the time of
conversion to Class A shares applicable to Class B shares of Keystone Strategic
Income Fund received by World Bond Fund shareholders in the Reorganization,
Keystone Strategic Income Fund will treat such shares as having been sold on the
date the shares of World Bond Fund were originally purchased by the World Bond
Fund shareholder.
Additional information regarding the Classes of shares of each Fund is
included in its respective Prospectus and Statement of Additional Information.
DISTRIBUTION-RELATED AND SHAREHOLDER SERVICING-RELATED EXPENSES. Each Fund
has adopted a plan under Rule 12b-1 of the 1940 Act with respect to its Class A
shares under which the Class may pay for distribution-related expenses at an
annual rate which is currently limited to up to 0.25 of 1.00% of average daily
net assets attributable to the Class.
Each Fund has also adopted a Rule 12b-1 plan with respect to its Class B
and Class C shares under which each Class may pay for distribution-related and
shareholder servicing-related expenses at an annual rate which may not exceed
1.00% of average daily net assets attributable to the Class.
The Class B and Class C Rule 12b-1 plans provide for the payment in respect
of "shareholder services" at an annual rate which may not exceed 0.25 of 1.00%
(making total Rule 12b-1 fees for Class B and Class C shares payable at a
maximum annual rate of 1.00%). Consistent with the requirements of Rule 12b-1
and the applicable rules of the National Association of Securities Dealers,
Inc., following the Reorganization, Keystone Strategic Income Fund may make
distribution-related and shareholder servicing-related payments with respect to
World Bond Fund shares sold prior to the Reorganization, including payments to
World Bond Fund's former underwriter.
Additional information regarding the Rule 12b-l plans adopted by each Fund
is included in its respective Prospectus and Statement of Additional
Information.
PURCHASE AND REDEMPTION PROCEDURES
Information concerning applicable sales charges, distribution-related fees
and shareholder servicing-related fees are described above. Investments in the
Funds are not insured. The minimum initial purchase requirement for each Fund is
$1,000. There is no minimum for subsequent purchases of shares of either Fund.
Each Fund provides for telephone, mail or wire redemption of shares at net asset
value as next determined after receipt of a redemption request on each day the
New York Stock Exchange ("NYSE") is open for trading. Additional information
concerning purchases and redemptions of shares, including how each Fund's net
asset value is determined, is contained in the respective Prospectus for each
Fund. Each Fund may involuntarily redeem shareholders' accounts that have less
than $1,000 of invested funds. All funds invested in each Fund are invested in
full and fractional shares. The Funds reserve the right to reject any purchase
order.
EXCHANGE PRIVILEGES
Each Fund currently has identical exchange privileges. No sales charge is
imposed on an exchange. An exchange which represents an initial investment in
another fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in the
respective Prospectus and Statement of Additional Information for each Fund.
DIVIDEND POLICY
Each Fund distributes its investment company taxable income monthly and net
long-term capital gains at least annually. Keystone Strategic Income Fund
declares and pays its income and short-term gains daily. World Bond Fund
declares and pays such dividends monthly. Dividends and distributions are
reinvested in additional shares of the same Class of the respective Fund, or
paid in cash, as a shareholder has elected. See each Fund's respective
Prospectus for further information concerning dividends and distributions.
After the Reorganization, shareholders of World Bond Fund who have elected
to have their dividends and/or distributions reinvested will have dividends
and/or distributions received from Keystone Strategic Income Fund reinvested in
shares of Keystone Strategic Income Fund. Shareholders of World Bond Fund who
have elected to receive dividends and/or distributions in cash will receive
dividends and/or distributions from Keystone Strategic Income Fund in cash after
the Reorganization, although they may, after the Reorganization, elect to have
such dividends and/or distributions reinvested in additional shares of Keystone
Strategic Income Fund.
Each Fund has qualified and intends to continue to qualify to be treated as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). While so qualified, so long as each Fund distributes all
of its investment company taxable income and any net realized gains to
shareholders, it is expected that a Fund will not be required to pay any federal
income taxes on the amounts so distributed. A 4% nondeductible excise tax will
be imposed on amounts not distributed if a Fund does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
RISKS
Since the investment objectives and policies of each Fund are comparable,
the risks involved in investing in each Fund's shares are similar. There is no
assurance that investment performances will be positive or that the Funds will
meet their investment objectives.
Keystone Strategic Income Fund, unlike World Bond Fund, invests principally
in domestic high yield bonds and foreign government and corporate debt
securities. High yield bonds are rated Ba or lower by Moody's and BB or lower by
S&P and are considered predominantly speculative with respect to the ability of
the issuer to meet principal and interest payments. The lower ratings reflect a
greater possibility that real or perceived adverse changes in the financial
condition of the issuer or in general economic conditions or an unanticipated
rise in interest rates may impair the ability of the issuer to make payments of
principal and interest or to meet specific projected business forecasts or
obtain additional financing. The values of high yield bonds fluctuate in
response to changes in interest rates, and the secondary market for such
securities may be less liquid at certain times than the secondary market for
higher quality debt securities, thereby affecting the market price of the
security, the Fund's ability to dispose of a particular security and to obtain
accurate market quotations for purposes of valuing its assets. World Bond Fund's
investments in high yield bonds is limited to no more than 35% of the Fund's
assets.
Each of Keystone Strategic Income Fund and World Bond Fund may purchase
zero coupon and payment-in-kind bonds. Such investments may experience greater
fluctuations in value due to changes in interest rates than debt obligations
that pay interest currently. Each Fund is also required by tax laws to accrue
interest income on such investments (even though they do not pay interest
currently) and to distribute such amounts at least annually to shareholders.
Thus each Fund could be required at times to liquidate investments in order to
fulfill its distribution requirements and may not be able to purchase additional
income producing securities with cash used to make such distributions, and its
current income ultimately may be reduced as a result.
Both Keystone Strategic Income Fund and World Bond Fund may invest in
foreign securities. However, World Bond Fund's exposure to foreign securities
may be greater than that of Keystone Strategic Income Fund. World Bond Fund may
invest up to 35% of its assets in securities of issuers located in emerging or
developing markets countries. Keystone Strategic Income Fund may invest in debt
securities issued or guaranteed by foreign corporations, certain supranational
entities, foreign governments, their agencies and instrumentalities and debt
obligations issued by U.S. corporations denominated in non-U.S. currencies.
These debt obligations may include bonds, debentures, notes and short-term
obligations. Investment in foreign securities generally entails more risk than
investment in domestic issuers for the following reasons: publicly available
information on issuers and securities may be scarce; many foreign countries do
not follow the same accounting, auditing and financial reporting standards as
are used in the U.S.; market trading volumes may be smaller, resulting in less
liquidity and more price volatility compared to U.S. securities; securities
markets and trading may be less regulated; and the possibility of expropriation,
confiscatory taxation, nationalization, establishment of price controls,
political or social instability exists. Investing in securities of issuers in
emerging markets countries involves exposure to economic systems that are
generally less stable than those of developed countries. Investing in companies
in emerging markets countries may 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.
In addition, World Bond Fund's fundamental investment policy requires the
Fund to invest at least 65% of its assets in bonds denominated in at least three
currencies, one of which may be U.S. currency. Keystone Strategic Income Fund
has the option to invest in debt obligations denominated in non-U.S. currencies.
Thus World Bond Fund may at times be subject to greater currency exchange rate
risk than Keystone Strategic Income Fund.
REASONS FOR THE REORGANIZATION
At a regular meeting held on March 12, 1997 the Board of Trustees of World
Bond Fund considered and approved the Reorganization as in the best interests of
the Fund and its shareholders and determined that the interests of existing
shareholders of World Bond Fund will not be diluted as a result of the
transactins contemplated by the Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are similarities between Keystone
Strategic Income Fund and World Bond Fund. Specifically, Keystone Strategic
Income Fund and World Bond Fund have similar investment objectives and policies
and risk profiles which vary in terms of the types of securities in which each
Fund may invest, but are comparable in terms of overall risk. See "Comparison of
Investment Objectives and Policies." At the same time, the Board of Trustees
evaluated the potential economies of scale associated with larger mutual funds
and concluded that operational efficiencies may be achieved upon a
reorganization with another Keystone fund with a greater level of assets. As of
February 28, 1997, Keystone Strategic Income Fund's assets were approximately
$204 million, and World Bond Fund's assets were approximately $15 million.
In addition, assuming that an alternative to the Reorganization would be to
propose that World Bond Fund continue its existence, World Bond Fund would be
offered through common distribution channels with Keystone Strategic Income
Fund. World Bond Fund would also have to bear the cost of maintaining its
separate existence. Keystone believes that the prospect of dividing the
resources of the Evergreen Keystone mutual fund organization between two similar
funds could result in World Bond Fund being disadvantaged due to an inability to
achieve optimum size, performance levels and the greatest possible economies of
scale. Accordingly, for the reasons noted above and recognizing that there can
be no assurance that any economies of scale or other benefits will be realized,
Keystone believes that the proposed Reorganization would be in the best
interests of each Fund and its shareholders.
The Board of Trustees of World Bond Fund met and considered the
recommendation of Keystone, and, in addition, considered among other things, (i)
the terms and conditions of the Reorganization; (ii) whether the Reorganization
would result in the dilution of shareholder interests; (iii) expense ratios,
fees and expenses of Keystone Strategic Income Fund and World Bond Fund; (iv)
the comparative performance records of each of the Funds; (v) compatibility of
their investment objectives and policies; (vi) service features available to
shareholders in the respective funds; (vii) the fact that FUNB will bear the
costs incurred by World Bond Fund in connection with the Reorganization; (viii)
the fact that Keystone Strategic Income Fund will assume _______________
liabilities of World Bond Fund; (ix) the expected federal income tax
consequences of the Reorganization; and (x) the possible investment benefits to
be gained from a single, larger, diversified Fund.
The Trustees also considered the benefits to be derived by shareholders of
World Bond Fund from the sale of its assets to Keystone Strategic Income Fund.
In this regard, the Trustees considered the potential benefits of being
associated with a larger entity and the economies of scale that could be
realized by the participation by shareholders of World Bond Fund in the combined
fund. In addition, the Trustees considered that there are alternatives available
to shareholders of World Bond Fund, including the ability to redeem their
shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization, the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Keystone Strategic Income Fund also concluded at a
regular meeting on March 12, 1997 that the proposed Reorganization would be in
the best interests of shareholders of Keystone Strategic Income Fund and that
the interests of the shareholders of Keystone Strategic Income Fund will not be
diluted as a result of the transactions contemplated by the Reorganization.
THE TRUSTEES OF WORLD BOND FUND RECOMMEND THAT THE SHAREHOLDERS OF WORLD BOND
FUND APPROVE THE PROPOSED REORGANIZATION.
AGREEMENT AND PLAN OF REORGANIZATION
The following summary is qualified in its entirety by reference to the Plan
(Exhibit A hereto).
The Plan provides that Keystone Strategic Income Fund will acquire all of
the assets of World Bond Fund in exchange for shares of Keystone Strategic
Income Fund and the assumption by Keystone Strategic Income Fund of
________________ liabilities of World Bond Fund on or about July 31, 1997 or
such other date as may be agreed upon by the parties (the "Closing Date"). Prior
to the Closing Date, World Bond Fund will endeavor to discharge all of its known
liabilities and obligations. Keystone Strategic Income Fund will not assume any
liabilities or obligations of World Bond Fund other than those reflected in an
unaudited statement of assets and liabilities of World Bond Fund prepared as of
the close of regular trading on the NYSE, currently 4:00 p.m. Eastern time, on
the business day immediately prior to the Closing Date. The number of full and
fractional shares of each Class of Keystone Strategic Income Fund to be received
by the shareholders of World Bond Fund will be determined by dividing the value
of the assets of World Bond Fund to be acquired by the ratio of the net asset
value per share of each respective Class of Keystone Strategic Income Fund and
each Class of World Bond Fund, computed as of the close of regular trading on
the NYSE on the business day immediately prior to the Closing Date. The net
asset value per share of each Class will be determined by dividing assets, less
liabilities, in each case attributable to the respective Class, by the total
number of outstanding shares.
State Street Bank and Trust Company, the custodian for both Funds, will
compute the value of the Funds' respective portfolio securities. The method of
valuation employed will be consistent with the procedures set forth in the
Prospectus and Statement of Additional Information of Keystone Strategic Income
Fund, Rule 22c-1 under the 1940 Act, and with the interpretations of such Rule
by the SEC's Division of Investment Management.
At or prior to the Closing Date, World Bond Fund shall have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
World Bond Fund's shareholders (in shares of World Bond Fund, or in cash, as the
shareholder has previously elected) all of World Bond Fund's investment company
taxable income for the taxable year ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid) and all of its net
capital gains realized in all taxable years ending on or prior to the Closing
Date (after reductions for any capital loss carry forward).
As soon after the Closing Date as conveniently practicable, World Bond Fund
will liquidate and distribute pro rata to shareholders of record as of the close
of business on the Closing Date the full and fractional Corresponding Shares of
Keystone Strategic Income Fund received by World Bond Fund. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of World Bond Fund shareholders on the share records of Keystone Strategic
Income Fund's transfer agent. Each account will represent the respective pro
rata number of full and fractional Corresponding Shares of Keystone Strategic
Income Fund due to World Bond Fund's shareholders. All issued and outstanding
shares of World Bond Fund, including those represented by certificates, will be
canceled. Keystone Strategic Income Fund does not issue share certificates to
shareholders. The shares of Keystone Strategic Income Fund to be issued will
have no preemptive or conversion rights. After such distribution and the winding
up of its affairs, World Bond Fund will be terminated. In connection with such
termination, World Bond Fund will file with the SEC an application for
termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by World Bond Fund shareholders, accuracy
of various representations and warranties and receipt of opinions of counsel,
including opinions with respect to those matters referred to in "Federal Income
Tax Consequences" below. Notwithstanding approval of World Bond Fund
shareholders, the Plan may be terminated (a) by the mutual agreement of World
Bond Fund and Keystone Strategic Income Fund; or (b) at or prior to the Closing
Date by either party (i) because of a breach by the other party of any
representation, warranty, or agreement contained therein to be performed at or
prior to the Closing Date if not cured within 30 days, or (ii) because a
condition to the obligation of the terminating party has not been met and it
reasonably appears that it cannot be met.
The expenses of World Bond Fund in connection with the Reorganization
(including the cost of any proxy soliciting agents) and the expenses of Keystone
Strategic Income Fund will be borne by FUNB whether or not the Reorganization is
consummated.
If the Reorganization is not approved by shareholders of World Bond Fund,
the Board of Trustees of World Bond Fund will consider other possible courses of
action in the best interests of shareholders.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a) of the Code. As a condition to
the closing of the Reorganization, World Bond Fund will receive an opinion of
counsel to the effect that, on the basis of the existing provisions of the Code,
U.S. Treasury regulations issued thereunder, current administrative rules,
pronouncements and court decisions, for federal income tax purposes, upon
consummation of the Reorganization:
(1) The transfer of all of the assets of World Bond Fund solely in exchange
for shares of Keystone Strategic Income Fund and the assumption by Keystone
Strategic Income Fund of __________ liabilities of World Bond Fund, followed by
the distribution of Keystone Strategic Income Fund's shares by World Bond Fund
in dissolution and liquidation of World Bond Fund, will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) of the Code, and
Keystone Strategic Income Fund and World Bond Fund will each be a "party to a
reorganization" within the meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by World Bond Fund on the transfer
of all of its assets to Keystone Strategic Income Fund solely in exchange for
shares of Keystone Strategic Income Fund and the assumption by Keystone
Strategic Income Fund of ______________ liabilities of World Bond Fund or upon
the distribution of Keystone Strategic Income Fund's shares to World Bond Fund
shareholders in exchange for their shares of World Bond Fund;
(3) The tax basis of the assets transferred will be the same to Keystone
Strategic Income Fund as the tax basis of such assets to World Bond Fund
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Keystone Strategic Income Fund will include the period during
which the assets were held by World Bond Fund;
(4) No gain or loss will be recognized by Keystone Strategic Income Fund
upon the receipt of the assets from World Bond Fund solely in exchange for the
shares of Keystone Strategic Income Fund and the assumption by Keystone
Strategic Income Fund of _________ liabilities of World Bond Fund;
(5) No gain or loss will be recognized by World Bond Fund's shareholders
upon the issuance to them of shares of Keystone Strategic Income Fund, provided
they receive solely such shares (including fractional shares) in exchange for
their shares of World Bond Fund; and
(6) The aggregate tax basis of the shares of Keystone Strategic Income
Fund, including any fractional shares, received by each shareholder of World
Bond Fund pursuant to the Reorganization will be the same as the aggregate tax
basis of the shares of World Bond Fund held by such shareholder immediately
prior to the Reorganization, and the holding period of the shares of Keystone
Strategic Income Fund, including fractional shares, received by each such
shareholder will include the period during which the shares of World Bond Fund
exchanged therefor were held by such shareholder (provided that the shares of
World Bond Fund were held as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service or
the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, each World Bond Fund shareholder would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her World Bond Fund shares and the fair market value of Keystone
Strategic Income Fund shares he or she received. Shareholders of World Bond Fund
should consult their tax advisers regarding the effect, if any, of the proposed
Reorganization in light of their individual circumstances. Since the foregoing
discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of World Bond Fund should also consult their tax
advisers as to state and local tax consequences, if any, of the Reorganization.
It is not anticipated that the securities of the combined portfolios will
be sold in significant amounts in order to comply with the policies and
investment practices of Keystone Strategic Income Fund.
PRO-FORMA CAPITALIZATION
The following table sets forth the capitalization of Keystone Strategic
Income Fund and World Bond Fund as of February 28, 1997 and on a pro forma basis
as of that date, giving effect to the proposed acquisition of assets at net
asset value. The pro forma data reflects an exchange ratio of 1.27, 1.27 and
1.27 for each Class A, Class B and Class C share, respectively, of Keystone
Strategic Income Fund issued for each Class A, Class B and Class C share,
respectively, of World Bond Fund.
CAPITALIZATION OF KEYSTONE STRATEGIC INCOME FUND AND WORLD BOND FUND
<TABLE>
<CAPTION>
KEYSTONE STRATEGIC WORLD BOND FUND COMBINED AFTER
INCOME FUND REORGANIZATION
<S> <C> <C> <C>
NET ASSETS (IN 000'S)
CLASS A $ 63,092,293 $8,317,320 $ 71,409,613
CLASS B $114,632,869 $5,114,529 $119,747,398
CLASS C $ 26,287,349 $1,432,887 $ 27,720,236
NET ASSET VALUE PER
SHARE
CLASS A $6.96 $8.85 $6.96
CLASS B $6.99 $8.88 $6.99
CLASS C $6.98 $8.84 $6.98
SHARES OUTSTANDING
CLASS A 9,065,932 939,287 10,260,949
CLASS B 16,394,694 576,266 17,126,386
CLASS C 3,764,313 162,060 3,969,598
</TABLE>
The table set forth above should not be relied upon to reflect the number of
shares to be received by World Bond Fund shareholders in the Reorganization; the
actual number of shares to be received will depend upon the net asset value and
number of shares outstanding of each Fund at the time of the Reorganization.
SHAREHOLDER INFORMATION
As of May 16, 1997 (the "Record Date"), there were the following number of
each Class of shares of beneficial interest of Keystone Strategic Income Fund
and World Bond Fund outstanding:
Class of Shares Keystone Strategic Income Fund World Bond Fund
Class A
Class B
Class C
[Class Y]
All Classes
- --------
As of the Record Date, the officers and Trustees of Keystone Strategic Income
Fund beneficially owned as a group less than 1% of the outstanding shares of
Keystone Strategic Income Fund. To the knowledge of Keystone Strategic Income
Fund, the following persons owned beneficially or of record more than 5% of
Keystone Strategic Income Fund's total outstanding shares as of the Record Date:
<TABLE>
<CAPTION>
Percentage Percentage of Total
Number of Class Before Shares Outstanding
NAME AND ADDRESS CLASS OF SHARES REORGANIZATION AFTER REORGANIZATION
<S> <C> <C> <C> <C>
</TABLE>
As of the Record Date, the officers and Trustees of World Bond Fund
beneficially owned as a group less than 1% of the outstanding shares of World
Bond Fund. To the knowledge of World Bond Fund, the following persons owned
beneficially or of record more than 5% of World Bond Fund's total outstanding
shares as of the Record Date:
<TABLE>
<CAPTION>
Percentage Percentage of Total
Number of Class Before Shares Outstanding
NAME AND ADDRESS CLASS OF SHARES REORGANIZATION AFTER REORGANIZATION
<S> <C> <C> <C> <C>
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by the
descriptions of the respective investment objectives, policies and restrictions
set forth in the respective Prospectuses and Statements of Additional
Information of the Funds. The investment objectives, policies and restrictions
of Keystone Strategic Income Fund can be found in the Prospectus of Keystone
Strategic Income Fund under the caption "Investment Objectives and Policies."
The investment objectives, policies and restrictions of World Bond Fund can be
found in the Prospectus of World Bond Fund under the caption "Investment
Objective and Policies."
Keystone Strategic Income Fund is an open-end, diversified management
investment company which seeks high current income from interest on debt
securities and, secondarily, considers the potential for growth of capital in
selecting securities. The investment objective of Keystone Strategic Income Fund
is a fundamental policy which cannot be changed without shareholder approval.
Keystone Strategic Income Fund seeks to achieve its objectives by
allocating its assets principally between eligible domestic high yield, high
risk bonds and debt securities of foreign governments and foreign corporations.
In addition, Keystone Strategic Income Fund will, from time to time, allocate a
portion of its assets to U.S. government securities. This allocation will be
made on the basis of the investment adviser's assessment of global opportunities
for high income. Under normal circumstances, the Fund will invest principally in
domestic high yield bonds and foreign government and corporate debt securities.
From time to time the Fund may invest 100% of its assets in U.S. or foreign
securities.
World Bond Fund seeks current income by investing primarily in a
nondiversified portfolio consisting of debt securities denominated in U.S. and
foreign currencies. Secondarily, World Bond Fund seeks capital appreciation.
World Bond Fund's objectives are nonfundamental and may be changed without the
approval of a majority of World Bond Fund's outstanding shares. To achieve its
objectives, World Bond Fund invests at least 65% of its total assets in bonds
denominated in at least three currencies, one of which may be U.S. currency.
This policy is fundamental and may not be changed without the approval of the
shareholders of World Bond Fund. Under normal market conditions, World Bond Fund
expects that in excess of 80% of its total assets will be invested in debt
securities denominated in U.S. and foreign currencies. In addition, under normal
market conditions, at least 65% of World Bond Fund's total assets will be
invested in the securities of issuers located in three countries, one of which
may be the U.S.
In addition to investing in assets in various currencies, World Bond Fund
may, and the Fund's adviser intends to, invest up to 35% of its assets in
securities of issuers located in emerging or developing market countries which
involves additional risks. In addition, the Fund may incur costs when it shifts
assets from one country to another.
Both Funds may also invest in equity securities. Keystone Strategic Income
Fund's equity investments may include preferred stocks, common stocks and other
equity securities, including convertible securities and warrants, which may be
used to create other permissible investments which are consistent with the
Fund's primary objective of seeking a high level of current income or be
acquired as part of a unit combining income and equity securities. World Bond
Fund 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.
Keystone Strategic Income Fund invests principally in domestic high yield,
high risk bonds, including zero coupon bonds, payment-in-kind securities and
debentures. Such securities are rated BB or lower by S&P or Ba or lower by
Moody's and are considered predominantly speculative with respect to the ability
of the issuer to meet principal and interest payments. In contrast, at least 65%
of World Bond Fund's debt securities are rated Baa or higher by Moody's or BBB
or higher by S&P or, if unrated, are deemed to be of comparable quality by the
Fund's adviser. Bonds rated Baa or higher by Moody's or BBB or higher by S&P are
generally considered medium to high quality obligations of the issuer and
generally have protections for timely interest payments and repayments of
principal.
Each of Keystone Strategic Income Fund and World Bond Fund may not invest
more than 5% of its assets in securities of any one issuer or purchase more than
10% of the outstanding voting securities of any one issuer. However, since World
Bond Fund is a nondiversified portfolio for purposes of the 1940 Act, these
restrictions apply to 100% of the assets of World Bond Fund. As a diversified
portfolio under the 1940 Act, the same restrictions apply to 75% of the assets
of Keystone Strategic Income Fund. While World Bond Fund will attempt to vary
its investments among issuers located in different countries, World Bond Fund
may invest up to 25% of its assets in securities issued or guaranteed by any
single foreign government and up to 10% of its assets in securities issued or
guaranteed by any single multinational agency. Nondiversified may increase
investment risks.
The characteristics of each investment policy and the associated risks are
described in the respective Prospectus and Statement of Additional Information
of each Fund. Both Keystone Strategic Income Fund and World Bond Fund have other
investment policies and restrictions which are also set forth in the respective
Prospectus and Statement of Additional Information of each Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
FORM OF ORGANIZATION
Keystone Strategic Bond Fund and World Bond Fund are open-end management
investment companies registered with the SEC under the 1940 Act which
continuously offer shares to the public. Each is organized as a Massachusetts
business trust and is governed by a Declaration of Trust, By-Laws and Board of
Trustees. Both are also governed by applicable Massachusetts and federal law.
World Bond Fund is a portfolio of Keystone World Bond Fund.
CAPITALIZATION
The beneficial interests in each of Keystone Strategic Income Fund and
World Bond Fund are represented by an unlimited number of transferable shares of
beneficial interest with no par value, in the case of Keystone Strategic Income
Fund, and $0.01 par value per share in the case of World Bond Fund. The
respective Declarations of Trust under which each Fund has been established
permit the respective Trustees to allocate shares into an unlimited number of
series, and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued. Each Fund's shares have
equal voting rights with respect to matters affecting shareholders of all
classes of each Fund, and in the case of World Bond Fund, each portfolio of
Keystone World Bond Fund, and represent equal proportionate interests in the
assets belonging to the Funds. Shareholders of each Fund are entitled to receive
dividends and other amounts as determined by Keystone Strategic Income Fund's
Trustees or World Bond Fund's Trustees. Shareholders of each Fund vote
separately, by class, as to matters, such as approval or amendments of Rule
12b-1 plans, that affect only their particular class and, in the case of World
Bond Fund, by portfolio, as to matters, such as approval or amendments of
investment advisory agreements or proposed reorganizations, that affect only
their particular portfolio.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the respective Declarations of Trust under which the
Funds were established disclaim shareholder liability for acts or obligations of
the Funds and require that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Funds or the Trustees.
The Declarations of Trust provide for indemnification out of the property of the
trust, or of a particular series or class in question, for all losses and
expenses of any shareholder held personally liable for the obligations of the
Trust, series or class. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is considered remote since it is limited to
circumstances in which a disclaimer is inoperative and the trust, series or
class would be unable to meet its obligations. A substantial number of mutual
funds in the United States are organized as Massachusetts business trusts.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
Neither Keystone Strategic Income Fund nor World Bond Fund is required to
hold annual meetings of shareholders. However, a special meeting of shareholders
for the purpose of voting on the question of removal of a Trustee must be called
when the holders of at least 10% of the outstanding shares of a Fund request a
meeting for such purpose. In addition, each Fund is required to call a meeting
of shareholders for the purpose of electing Trustees if, at any time, less than
a majority of the Trustees then holding office were elected by shareholders.
Keystone Strategic Income Fund and World Bond Fund currently do not intend to
hold regular shareholder meetings. Neither permits cumulative voting. A majority
of the total number of shares outstanding and entitled to vote on a matter
constitutes a quorum for consideration of such matter. In either case, a
majority of the shares present and entitled to vote on a matter is sufficient to
act on a matter (unless otherwise specifically required by the applicable
governing documents or other law, including the 1940 Act).
LIQUIDATION OR DISSOLUTION
In the event of the liquidation of a Fund the shareholders are entitled to
receive, when and as declared by the Trustees, the excess of the assets
belonging to such Fund or attributable to the Class over the liabilities
belonging to the Fund or attributable to the Class. In either case, the assets
so distributable to shareholders of the Fund will be distributed among the
shareholders in proportion to the number of shares of the Fund held by them and
recorded on the books of the Fund.
LIABILITY AND INDEMNIFICATION OF TRUSTEES
The Declaration of Trust of each of Keystone Strategic Income Fund and
World Bond Fund provides that no Trustee shall be liable for errors of judgment
or mistakes of fact or law, nor shall a Trustee be liable for any neglect or
wrongdoing of any officer, agent, employee or adviser of the Fund or for the act
or omission of any other Trustee. No Trustee shall be subject to liability
unless such Trustee is found to have acted in bad faith, with wilful
misfeasance, gross negligence or reckless disregard of the duties involved in
the conduct of his or her office. The Declaration of Trust of each of Keystone
Strategic Income Fund and World Bond Fund further provides that present and
former Trustees, officers and employees are generally entitled to
indemnification against liabilities and expenses with respect to claims related
to their positions with a Fund unless, in the case of any liability to the Fund
or its shareholders, it shall have been determined that such Trustee or officer
is liable by reason of his or her willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties involved in the conduct of
his or her office.
RIGHTS OF INSPECTION
Shareholders of the respective Funds have the same right to inspect in
Massachusetts the governing documents, records of meetings of shareholders,
shareholder lists, share transfer records, accounts and books of the Fund as are
permitted shareholders of a corporation under Massachusetts corporation law. The
purpose of inspection must be for interests of shareholders relative to the
affairs of the Fund.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, by-laws and Massachusetts law and is
not a complete description of those documents or law. Shareholders should refer
to the provisions of such respective Declarations of Trust, by-laws, and
Massachusetts law directly for more complete information.
ADDITIONAL INFORMATION
KEYSTONE STRATEGIC INCOME FUND. Information concerning the operation and
management of Keystone Strategic Income Fund is incorporated herein by reference
from the Prospectus dated November 29, 1996, as supplemented January 1, 1997, a
copy of which is enclosed, and the Statement of Additional Information dated
December 10, 1996, as supplemented January 1, 1997. A copy of such Statement of
Additional Information is available upon request and without charge by writing
to Keystone Strategic Income Fund at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
WORLD BOND FUND. Information about World Bond Fund is included in its
Prospectus dated February 28, 1997, and in the Statement of Additional
Information of the same date that have been filed with the SEC, all of which are
incorporated herein by reference. Copies of the Prospectus, Statement of
Additional Information and the Fund's Annual Report dated October 31, 1996 are
available upon request and without charge by writing to the address listed on
the cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-343-2898.
Keystone Strategic Income Fund and World Bond Fund are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information, including
proxy material and charter documents, with the SEC. These items can be inspected
and copies obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, D. C.
20549 at prescribed rates, and at the SEC's Regional Offices located at
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511,
and Seven World Trade Center, Suite 1300, New York, New York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of World Bond Fund to be used
at the Special Meeting of Shareholders to be held at 3:00 p.m. on July 14, 1997
at the offices of World Bond Fund, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournment thereof. This Prospectus/Proxy Statement, along
with a Notice of the Meeting and a proxy card, is first being mailed to
shareholders on or about May 22, 1997. Only shareholders of record as of the
close of business on the Record Date will be entitled to notice of, and to vote
at, the Meeting or any adjournment thereof. The holders of a majority of the
shares outstanding at the close of business on the Record Date present in person
or represented by proxy will constitute a quorum for the Meeting. If the
enclosed form of proxy is properly executed and returned in time to be voted at
the Meeting, the proxies named therein will vote the shares represented by the
proxy in accordance with the instructions marked thereon. Unmarked proxies will
be voted FOR the proposed Reorganization and FOR any other matters deemed
appropriate. Proxies that reflect abstentions and "broker non-votes" (i.e.,
shares held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or the persons entitled to vote or (ii) the
broker or nominee does not have discretionary voting power on a particular
matter) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but will have no effect on the
outcome of the vote to approve the Plan. A proxy may be revoked at any time on
or before the Meeting by written notice to the Secretary of World Bond Fund, 200
Berkeley Street, Boston, Massachusetts 02116. Unless revoked, all valid proxies
will be voted in accordance with the specifications thereon or, in the absence
of such specifications, FOR approval of the Plan and the Reorganization
contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority of the
shares present and entitled to vote, with all Classes voting together as a
single class, at a meeting at which a quorum is present. A majority of the
outstanding shares of the Fund, represented in person or by proxy, is required
to constitute a quorum at the Meeting. Each full share outstanding is entitled
to one vote and each fractional share outstanding is entitled to a proportionate
share of one vote.
Proxy solicitations will be made primarily by mail, but proxy solicitations
may also be made by telephone, telegraph or personal solicitations conducted by
officers and employees of FUNB or Keystone, their affiliates or other
representatives of World Bond Fund (who will not be paid for their solicitation
activities). Corporate Investors Communications ("CIC") has been engaged by
World Bond Fund to assist in soliciting proxies, and may contact certain
shareholders of World Bond Fund over the telephone. Shareholders who are
contacted by telephone may be asked to cast their votes by telephonic proxy.
Such proxies will be recorded in accordance with the procedures set forth below.
World Bond Fund believes these procedures are reasonably designed to ensure that
the identity of the shareholder casting the vote is accurately determined and
that the voting instructions of the shareholder are accurately reflected. World
Bond Fund has received an opinion of Sullivan & Worcester LLP that addresses the
validity, under the applicable law of the Commonwealth of Massachusetts, of a
proxy given orally. The opinion concludes that a Massachusetts court would find
that there is no Massachusetts law or Massachusetts public policy against the
acceptance of proxies signed by an orally-authorized agent.
In all cases where a telephonic proxy is solicited, the CIC representative
will ask you for your full name, address, social security or employer
identification number, title (if you are authorized to act on behalf of an
entity, such as a corporation), and number of shares owned. If the information
solicited agrees with the information provided to CIC by the transfer agent to
World Bond Fund, then the CIC representative will explain the process, read the
proposals listed on the proxy card and ask for your instructions on each
proposal. The CIC representative will not recommend to the shareholder how he or
she should vote, other than to read any recommendations set forth in the proxy
statement, although he or she will answer questions about the process. Within 72
hours, CIC will send you a letter or mailgram to confirm your vote and ask you
to call immediately if your instructions are not correctly reflected in the
confirmation.
It is expected that the cost of retaining CIC to assist in the proxy
solicitation process will not exceed [$ ], which cost will be borne by FUNB.
If you wish to participate in the Meeting, but do not wish to give your
proxy by telephone, you may still submit the proxy card included with this
Prospectus/Proxy Statement or attend in person. Any proxy given by you, whether
in writing or by telephone, is revocable.
In the event that sufficient votes to approve the Reorganization are not
received by July 14, 1997, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of World
Bond Fund to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not expected
to result in recognition of gain or loss to shareholders for federal income tax
purposes and that if the Reorganization is consummated, shareholders will be
free to redeem the shares of Keystone Strategic Income Fund which they receive
in the transaction at their then-current net asset value, subject to any
applicable CDSC. Shares of World Bond Fund may be redeemed at any time prior to
the consummation of the Reorganization. World Bond Fund shareholders may wish to
consult their tax advisers as to any differing consequences of redeeming World
Bond Fund shares prior to the Reorganization or exchanging such shares in the
Reorganization.
World Bond Fund does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of World Bond Fund
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by World Bond Fund in a reasonable period of time
prior to any such meeting.
The votes of the shareholders of Keystone Strategic Income Fund are not
being solicited by this Prospectus/Proxy Statement and are not required to carry
out the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise World Bond Fund whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The audited financial statements of Keystone Strategic Income Fund as of
July 31, 1996 and the unaudited financial statements as of January 31, 1997 and
the financial highlights for the periods indicated therein have been
incorporated by reference into this Prospectus/Proxy Statement. The financial
statements of Keystone Strategic Income Fund as of July 31, 1996 and the
financial highlights for the periods indicated therein have been incorporated by
reference into this Prospectus/Proxy Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of such firm as experts in accounting
and auditing.
The financial statements of World Bond Fund as of October 31, 1996 and the
financial highlights for the periods indicated therein have been incorporated by
reference into this Prospectus/Proxy Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of such firm as experts in accounting
and auditing.
19176
<PAGE>
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Keystone
Strategic Income Fund will be passed upon by Sullivan & Worcester LLP,
Washington, D.C.
OTHER BUSINESS
The Trustees of World Bond Fund do not intend to present any other business
at the Meeting. If, however, any other matters are properly brought before the
Meeting, the persons named in the accompanying form of proxy will vote thereon
in accordance with their judgment.
THE BOARD OF TRUSTEES OF WORLD BOND FUND, INCLUDING THE INDEPENDENT
TRUSTEES, RECOMMENDS APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
May [ __ ] , 1997
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this
day of , 1997, by and between KEYSTONE STRATEGIC INCOME FUND, a Massachusetts
business trust, with its principal place of business at 200 Berkeley Street,
Boston, Massachusetts 02116,(the "Acquiring Fund"), and KEYSTONE WORLD BOND
FUND, a Massachusetts business trust, with its principal place of business at
200 Berkeley Street, Boston, Massachusetts 02116, with respect to its WORLD BOND
PORTFOLIO (the "Selling Fund").
This Agreement is intended to be, and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a)1)C) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of (i) the transfer of all of the assets of the
Selling Fund in exchange solely for Class A, Class B and Class C shares of
beneficial interest, no par value, of the Acquiring Fund (the "Acquiring Fund
Shares"); (ii) the assumption by the Acquiring Fund of _______________
liabilities of the Selling Fund; (iii) and the distribution, after the Closing
Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders
of the Selling Fund in liquidation of the Selling Fund as provided herein, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquiring Fund and the Selling Fund are an open-end, registered
investment company of the management type and a separate investment series of an
open-end, registered investment company of the management type, respectively,
and the Selling Fund owns securities that generally are assets of the character
in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial interest;
WHEREAS, the Trustees of Keystone Strategic Income Fund have determined that the
exchange of all of the assets of the Selling Fund for Acquiring Fund Shares and
the assumption of _____________ liabilities of the Selling Fund by the Acquiring
Fund on the terms and conditions hereinafter set forth are in the best interests
of the Acquiring Fund's shareholders and that the interests of the existing
shareholders of the Acquiring Fund will not be diluted as a result of the
transactions contemplated herein;
WHEREAS, the Trustees of the Keystone World Bond Fund have determined that the
Selling Fund should exchange all of its assets and___________________________
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth and on
the basis of the representations and warranties contained herein, the Selling
Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume __________ liabilities of the Selling Fund, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for in
paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be acquired by the
Acquiring Fund shall consist of all property, including, without limitation, all
cash, securities, commodities, and futures interests and dividends or interest
receivables, that is owned by the Selling Fund and any deferred or prepaid
expenses shown as an asset on the books of the Selling Fund on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent audited
financial statements, which contain a list of all of Selling Fund's assets as of
the date thereof. The Selling Fund hereby represents that as of the date of the
execution of this Agreement there have been no changes in its financial position
as reflected in said financial statements other than those occurring in the
ordinary course of its business in connection with the purchase and sale of
securities and the payment of its normal operating expenses. The Selling Fund
reserves the right to sell any of such securities, but will not, without the
prior written approval of the Acquiring Fund, acquire any additional securities
other than securities of the type in which the Acquiring Fund is permitted to
invest.
The Acquiring Fund will, within a reasonable time prior to the Closing Date,
furnish the Selling Fund with a statement of the Acquiring Fund's investment
objectives, policies, and restrictions and a list of the securities, if any, on
the Selling Fund's list referred to in the second sentence of this paragraph
that do not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. In the event that the Selling Fund holds any investments that the
Acquiring Fund may not hold, the Selling Fund will dispose of such securities
prior to the Closing Date. In addition, if it is determined that the Selling
Fund and the Acquiring Fund portfolios, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Selling Fund if requested by the
Acquiring Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to discharge all
of its known liabilities and obligations prior to the Closing Date. [The
Acquiring Fund shall assume only those liabilities, expenses, costs, charges and
reserves reflected on a Statement of Assets and Liabilities of the Selling Fund
prepared on behalf of the Selling Fund, as of the Valuation Date (as defined in
paragraph 2.1), in accordance with generally accepted accounting principles
consistently applied from the prior audited period. The Acquiring Fund shall
assume only those liabilities of the Selling Fund reflected in such Statement of
Assets and Liabilities and shall not assume any other liabilities, whether
absolute or contingent, known or unknown, accrued or unaccrued, all of which
shall remain the obligation of the Selling Fund.]
In addition, upon completion of the Reorganization for purposes of calculating
the maximum amount permitted to be charged to the Acquiring Fund under the
National Association of Securities Dealers, Inc. Conduct Rule 2830 minus the
amount of the sales charges paid or accrued (including asset based sales
charges), plus permitted interest ("Aggregate NASD Cap"), the Acquiring Fund
will add to its Aggregate NASD Cap existing immediately prior to the
Reorganization the Aggregate NASD Cap of the Selling Fund immediately prior to
the Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be cancelled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be shown on the
books of the Acquiring Fund's transfer agent. Shares of the Acquiring Fund will
be issued in the manner described in the combined Prospectus and Proxy Statement
on Form N-14 to be distributed to shareholders of the Selling Fund as described
in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the Acquiring
Fund Shares in a name other than the registered holder of the Selling Fund
shares on the books of the Selling Fund as of that time shall, as a condition of
such issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the Selling Fund
is and shall remain the responsibility of the Selling Fund up to and including
the Closing Date and such later date on which the Selling Fund is terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly following the
Closing Date and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be acquired
by the Acquiring Fund hereunder shall be the value of such assets computed as of
the close of business on the New York Stock Exchange on the business day next
preceding the Closing Date (such time and date being hereinafter called the
"Valuation Date"), using the valuation procedures set forth in Keystone
Strategic Income Fund's Declaration of Trust and the Acquiring Fund's then
current prospectus and statement of additional information or such other
valuation procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring Fund
Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in Keystone Strategic Income Fund's Declaration
of Trust and the Acquiring Fund's then current prospectus and statement of
additional information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of each class
to be issued (including fractional shares, if any) in exchange for the Selling
Fund's assets shall be determined by multiplying the shares outstanding of each
class of the Selling Fund by the ratio computed by dividing the net asset value
per share of the Selling Fund attributable to each of its classes by the net
asset value per share of the respective classes of the Acquiring Fund determined
in accordance with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by State
Street Bank and Trust Company in accordance with its regular practice in pricing
the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or such other
date as the parties may agree to in writing (the "Closing Date"). All acts
taking place at the Closing shall be deemed to take place simultaneously
immediately prior to the opening of business on the Closing Date unless
otherwise provided. The Closing shall be held as of 9:00 a.m. at the offices of
Keystone Investment Management Company, 200 Berkeley Street, Boston, MA 02116,
or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as custodian
for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable Federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation Date (a)
the New York Stock Exchange or another primary trading market for portfolio
securities of the Acquiring Fund or the Selling Fund shall be closed to trading
or trading thereon shall be restricted; or (b) trading or the reporting of
trading on said Exchange or elsewhere shall be disrupted so that accurate
appraisal of the value of the net assets of the Acquiring Fund or the Selling
Fund is impracticable, the Valuation Date shall be postponed until the first
business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Keystone Service Company, as
transfer agent for the Selling Fund as of the Closing Date ("EKSC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause EKSC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of Keystone World Bond Fund, or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is the sole investment series of a Massachusetts
business trust duly organized, validly existing, and in good standing
under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a registered
investment company classified as a management company of the open-end
type, and its registration with the Securities and Exchange Commission
(the "Commission") as an investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), is in full force and
effect.
(c) The current prospectus and statement of additional information of the
Selling Fund conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(d) The Selling Fund is not, and the execution, delivery, and performance
of this Agreement (subject to shareholder approval) will not, result in
a violation of any provision of its Declaration of Trust or By-Laws or
of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it
is bound.
(e) The Selling Fund has no material contracts or other commitments (other
than this Agreement) that will be terminated with liability to it prior
to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Selling Fund or any
of its properties or assets, which, if adversely determined, would
materially and adversely affect its financial condition, the conduct of
its business, or the ability of the Selling Fund to carry out the
transactions contemplated by this Agreement. The Selling Fund knows of
no facts that might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
(g) The financial statements of the Selling Fund at October 31, 1996 are in
accordance with generally accepted accounting principles consistently
applied, and such statements (copies of which have been furnished to
the Acquiring Fund) fairly reflect the financial condition of the
Selling Fund as of such date, and there are no known contingent
liabilities of the Selling Fund as of such date not disclosed therein.
(h) Since July 31, 1996, there has not been any material adverse change in
the Selling Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Selling Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund. For the purposes of this subparagraph (h), a decline in
the net asset value of the Selling Fund shall not constitute a material
adverse change.
(i) At the Closing Date, all Federal and other tax returns and reports of
the Selling Fund required by law to have been filed by such dates shall
have been filed, and all Federal and other taxes shown due on said
returns and reports shall have been paid, or provision shall have been
made for the payment thereof. To the best of the Selling Fund's
knowledge, no such return is currently under audit, and no assessment
has been asserted with respect to such returns.
(j) For each fiscal year of its operation, the Selling Fund has met the
requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each
such year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are, and at the
Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under
Massachusetts law, Selling Fund Shareholders could under certain
circumstances be held personally liable for obligations of the Selling
Fund). All of the issued and outstanding shares of the Selling Fund
will, at the time of the Closing Date, be held by the persons and in
the amounts set forth in the records of the transfer agent as provided
in paragraph 3.4. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of
the Selling Fund shares, nor is there outstanding any security
convertible into any of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and marketable
title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to
sell, assign, transfer, and deliver such assets hereunder, and, upon
delivery and payment for such assets, the Acquiring Fund will acquire
good and marketable title thereto, subject to no restrictions on the
full transfer thereof, including such restrictions as might arise under
the 1933 Act, other than as disclosed to the Acquiring Fund and
accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement have been
duly authorized by all necessary action on the part of the Selling Fund
and, subject to approval by the Selling Fund Shareholders, this
Agreement constitutes a valid and binding obligation of the Selling
Fund, enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights and to general
equity principles.
(n) The information to be furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in
connection with the transactions contemplated hereby shall be accurate
and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations
thereunder applicable thereto.
(o) The proxy statement of the Selling Fund to be included in the
Registration Statement (as defined in paragraph 5.7)(other than
information therein that relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date,
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents and
warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate series of a Massachusetts business
trust duly organized, validly existing and in good standing under the
laws of The Commonwealth of Massachusetts.
(b) The Acquiring Fund is a separate investment series of a Massachusetts
business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with
the Commission as an investment company under the 1940 Act is in full
force and effect.
(c) The current prospectus and statement of additional information of the
Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(d) The Acquiring Fund is not, and the execution, delivery and performance
of this Agreement will not, result in a violation of its Declaration of
Trust or By-Laws or of any material agreement, indenture, instrument,
contract, lease, or other undertaking to which the Acquiring Fund is a
party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling Fund and
accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is
presently pending or to its knowledge threatened against the Acquiring
Fund or any of its properties or assets, which, if adversely
determined, would materially and adversely affect its financial
condition and the conduct of its business or the ability of the
Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the
basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions contemplated
herein.
(f) The financial statements of the Acquiring Fund at July 31, 1996 have
been audited by KPMG Peat Marwick LLP, certified public accountants,
and are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been
furnished to the Selling Fund) fairly reflect the financial condition
of the Acquiring Fund as of such date, and there are no known
contingent liabilities of the Acquiring Fund as of such date not
disclosed therein.
(g) Since July 31, 1996, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquiring Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the Selling
Fund. For the purposes of this subparagraph (g), a decline in the net
asset value of the Acquiring Fund shall not constitute a material
adverse change.
(h) At the Closing Date, all Federal and other tax returns and reports of
the Acquiring Fund required by law then to be filed by such dates shall
have been filed, and all Federal and other taxes shown due on said
returns and reports shall have been paid or provision shall have been
made for the payment thereof. To the best of the Acquiring Fund's
knowledge, no such return is currently under audit, and no assessment
has been asserted with respect to such returns.
(i) For each fiscal year of its operation the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each
such year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable (except that, under Massachusetts law,
shareholders of the Acquiring Fund could, under certain circumstances,
be held personally liable for obligations of the Acquiring Fund). The
Acquiring Fund does not have outstanding any options, warrants, or
other rights to subscribe for or purchase any Acquiring Fund Shares,
nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement have been
duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of
the Acquiring Fund enforceable in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium,
and other laws relating to or affecting creditors' rights and to
general equity principles.
(l) The Acquiring Fund Shares to be issued and delivered to the Selling
Fund, for the account of the Selling Fund Shareholders, pursuant to the
terms of this Agreement will, at the Closing Date, have been duly
authorized and, when so issued and delivered, will be duly and validly
issued Acquiring Fund Shares, and will be fully paid and non-assessable
(except that, under Massachusetts law, shareholders of the Acquiring
Fund could, under certain circumstances, be held personally liable for
obligations of the Acquiring Fund).
(m) The information to be furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in
connection with the transactions contemplated hereby shall be accurate
and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations
applicable thereto.
(n) The Prospectus and Proxy Statement (as defined in paragraph 5.7) to be
included in the Registration Statement (only insofar as it relates to
the Acquiring Fund ) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem
appropriate in order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5. 1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling Fund each
will operate its business in the ordinary course between the date hereof and the
Closing Date. It being understood that such ordinary course of business will
include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Keystone World Bond Fund will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the Acquiring
Fund Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof other than in accordance with the terms of this
Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the Acquiring
Fund and the Selling Fund will each take, or cause to be taken, all action, and
do or cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement,
including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but in any
case within sixty days after the Closing Date, the Selling Fund shall furnish
the Acquiring Fund, in such form as is reasonably satisfactory to the Acquiring
Fund, a statement of the earnings and profits of the Selling Fund for Federal
income tax purposes that will be carried over by the Acquiring Fund as a result
of Section 381 of the Code, and which will be certified by Keystone World Bond
Fund's President, its Treasurer, and its independent auditors.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by Keystone Strategic Income Fund's
President or Vice President and its Treasurer or Assistant Treasurer, in form
and substance reasonably satisfactory to the Selling Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Selling Fund
shall reasonably request.
6.2 The Selling Fund shall have received on the Closing Date an opinion from
Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the Closing
Date, in a form reasonably satisfactory to the Selling Fund, covering the
following points:
(a) The Acquiring Fund is a separate investment series of a Massachusetts
business trust duly organized, validly existing and in good standing
under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Acquiring Fund is a separate investment series of a Massachusetts
business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission
as an investment company under the 1940 Act is in full force and
effect.
(c) This Agreement has been duly authorized, executed, and delivered by the
Acquiring Fund, and, assuming that the Prospectus and Proxy Statement,
and Registration Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling
Fund, is a valid and binding obligation of the Acquiring Fund
enforceable against the Acquiring Fund in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights
generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the net asset
value thereof has been paid, the Acquiring Fund Shares to be issued and
delivered to the Selling Fund on behalf of the Selling Fund
Shareholders as provided by this Agreement are duly authorized and upon
such delivery will be legally issued and outstanding and fully paid and
non-assessable (except that, under Massachusetts law, shareholders of
the Acquiring Fund could, under certain circumstances, be held
personally liable for obligations of the Acquiring Fund), and no
shareholder of the Acquiring Fund has any preemptive rights in respect
thereof.
(e) The Registration Statement, to such counsel's knowledge, has been
declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States or The Commonwealth of
Massachusetts is required for consummation by the Acquiring Fund of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund contained
in this Agreement shall be true and correct as of the date hereof and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date, and the Selling Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by the Keystone World Bond
Fund's President or Vice President and its Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a statement of
the Selling Fund's assets and liabilities, together with a list of the Selling
Fund's portfolio securities showing the tax costs of such securities by lot and
the holding periods of such securities, as of the Closing Date, certified by the
Treasurer of the Keystone World Bond Fund.
7.3 The Acquiring Fund shall have received on the Closing Date an opinion of
Sullivan & Worcester LLP, counsel to the Selling Fund, in a form satisfactory to
the Acquiring Fund covering the following points:
(a) The Selling Fund is the sole investment series of a Massachusetts
business trust duly organized, validly existing and in good standing
under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is the sole investment series of a Massachusetts
business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission
as an investment company under the 1940 Act is in full force and
effect.
(c) This Agreement has been duly authorized, executed and delivered by the
Selling Fund, and, assuming that the Prospectus and Proxy Statement,
and Registration Statement comply with the 1933 Act, the 1934 Act, and
the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution, and delivery of this Agreement by the
Acquiring Fund, is a valid and binding obligation of the Selling Fund
enforceable against the Selling Fund in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights
generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval, authorization
or order of any court or governmental authority of the United States or
The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as
have been obtained under the 1933 Act, the 1934 Act and the 1940 Act,
and as may be required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Selling Fund in accordance with the provisions of Keystone World Bond Fund's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an unfavorable
report under Section 25(b) of the 1940 Act, nor instituted any proceeding
seeking to enjoin the consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act and no action, suit or other
proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents, orders, and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky securities authorities, including any
necessary "no-action" positions of and exemptive orders from such Federal and
state authorities) to permit consummation of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order, or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Selling Fund, provided
that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which, together
with all previous such dividends, shall have the effect of distributing to the
Selling Fund Shareholders all of the Selling Fund's investment company taxable
income for all taxable years ending on or prior to the Closing Date (computed
without regard to any deduction for dividends paid) and all of its net capital
gain realized in all taxable years ending on or prior to the Closing Date (after
reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan & Worcester
LLP, addressed to the Acquiring Fund and the Selling Fund substantially to the
effect that for Federal income tax purposes:
(a) The transfer of substantially all of the Selling Fund assets in
exchange for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Selling Fund
followed by the distribution of the Acquiring Fund Shares to the
Selling Fund in dissolution and liquidation of the Selling Fund will
constitute a "reorganization" within the meaning of Section
368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain identified liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund upon the
transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund
of certain identified liabilities of the Selling Fund or upon the
distribution (whether actual or constructive) of the Acquiring Fund
Shares to Selling Fund Shareholders in exchange for their shares of the
Selling Fund.
(d) No gain or loss will be recognized by Selling Fund Shareholders upon
the exchange of their Selling Fund shares for the Acquiring Fund Shares
in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares received by each
Selling Fund Shareholder pursuant to the Reorganization will be the
same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding
period of the Acquiring Fund Shares to be received by each Selling Fund
Shareholder will include the period during which the Selling Fund
shares exchanged therefor were held by such shareholder (provided the
Selling Fund shares were held as capital assets on the date of the
Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the Acquiring Fund
will be the same as the tax basis of such assets to the Selling Fund
immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will
include the period during which those assets were held by the Selling
Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a letter
addressed to the Acquiring Fund, in form and substance satisfactory to the
Acquiring Fund, to the effect that
(a) they are independent certified public accountants with respect to the
Selling Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of
appropriate officials of Keystone World Bond Fund responsible for
financial and accounting matters, nothing came to their attention that
caused them to believe that such unaudited pro forma financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy
Statement has been obtained from and is consistent with the accounting
records of the Selling Fund;
(d) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and
Prospectus and Proxy Statement were prepared based on the valuation of
the Selling Fund's assets in accordance with Keystone Strategic Income
Fund's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information pursuant to
procedures customarily utilized by the Acquiring Fund in valuing its
own assets; and
(e) on the basis of limited procedures agreed upon by the Acquiring Fund
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratio appearing in the
Registration Statement and Prospectus and Proxy Statement agree with
underlying accounting records of the Selling Fund or to written
estimates by Selling Fund's management and were found to be
mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a letter
addressed to the Selling Fund, in form and substance satisfactory to the Selling
Fund, to the effect that
(a) they are independent certified public accountants with respect to the
Acquiring Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the Selling Fund and
described in such letter (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of
appropriate officials of Keystone Strategic Income Fund responsible for
financial and accounting matters, nothing came to their attention that
caused them to believe that such unaudited pro forma financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the Selling Fund and
described in such letter (but not an examination in accordance with
generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy
Statement has been obtained from and is consistent with the accounting
records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the Selling Fund (but
not an examination in accordance with generally accepted auditing
standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus
and Proxy Statement agree with underlying accounting records of the
Acquiring Fund or to written estimates by each Fund's management and
were found to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received from KPMG
Peat Marwick LLP a letter addressed to the Acquiring Fund and the Selling Fund,
dated on the Closing Date in form and substance satisfactory to the Funds,
setting forth the Federal income tax implications relating to capital loss
carryforwards (if any) of the Selling Fund and the related impact, if any, of
the proposed transfer of substantially all of the assets of the Selling Fund to
the Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the transactions
contemplated by this Agreement incurred by the Selling Fund and the Acquiring
Fund will be borne by First Union National Bank of North Carolina. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation cost of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own Federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party has made
any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Acquiring
Fund and the Selling Fund. In addition, either the Acquiring Fund or the Selling
Fund may at its option terminate this Agreement at or prior to the Closing Date
because
(a) of a breach by the other of any representation, warranty, or agreement
contained herein to be performed at or prior to the Closing Date, if
not cured within 30 days; or
(b) a condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it
will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful default,
there shall be no liability for damages on the part of either the Acquiring
Fund, the Selling Fund, Keystone Strategic Income Fund, Keystone World Bond
Fund, or their respective Trustees or officers, to the other party or its
Trustees or officers.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the Selling
Fund and the Acquiring Fund; provided, however, that following the meeting of
the Selling Fund Shareholders called by Keystone World Bond Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts, without giving effect to the
conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any party
without the written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund and the
Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of Keystone Strategic
Income Fund or Keystone World Bond Fund, personally, but bind only the trust
property of the Selling Fund and the Acquiring Fund, as provided in the
Declarations of Trust of Keystone Strategic Income Fund and Keystone World Bond
Fund. The execution and delivery of this Agreement have been authorized by the
Trustees of Keystone World Bond Fund on behalf of the Selling Fund, and Keystone
Strategic Income Fund on behalf of the Acquiring Fund and signed by authorized
officers of Keystone World Bond Fund and Keystone Strategic Income Fund, acting
as such, and neither such authorization by such Trustees nor such execution and
delivery by such officers shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of Keystone World Bond Fund and Keystone Strategic
Income Fund as provided in their respective Declarations of Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
KEYSTONE STRATEGIC INCOME FUND
By:
Name:
Title:
KEYSTONE WORLD BOND FUND
on behalf of World Bond Portfolio
By:
Name:
Title:
<PAGE>
EXHIBIT B
Keystone Strategic Income Fund
Seeks generous income from a diversified portfolio of high yield,
foreign, and U.S. government or agency obligations.
Dear Shareholder:
We are pleased to report on the performance of Keystone Strategic Income Fund
for the twelve-month period which ended July 31, 1996. Following our letter
to you we have included a discussion with your Fund's manager.
Performance
Your Fund provided the following returns including price changes and
reinvested dividends for the twelve-month period ended July 31, 1996:
Class A shares returned 6.84%.
Class B shares returned 6.21%.
Class C shares returned 6.07%.
For the same twelve-month period, the Lehman Aggregate Bond Index--a broad
index of U.S. corporate, government and mortgage-backed securities--returned
5.53% and the Salomon World Government Bond Index--a U.S. dollar index of
foreign government bonds--returned 2.05%.
We were pleased with your Fund's improved results. They were achieved during
a period of generally declining bond prices which had an adverse impact on
the performance of many fixed income investments. While your Fund experienced
a slight price decline, shareholders benefitted from the Fund's diversified
asset strategy. This strategy is intended to provide attractive income and
returns with lower price volatility. Strength in the foreign markets and
demand for high yield bonds helped to offset price declines among U.S.
government and agency securities. We believe the differing performances of
the markets underscored the value of this type of asset allocation strategy.
The U.S. bond market experienced two different types of climates over the
past twelve months. Interest rates declined through much of 1995 resulting in
bond price increases. This was prompted by slower economic growth and
relatively low inflation. However, in early 1996 interest rates began to
rise. Reports of a strengthening economy stimulated concerns about higher
inflation rates. This news had a particularly negative effect on the prices
of U.S. government bonds whose performance is influenced to a great extent by
changes in interest rates.
Asset allocation
For much of the year, approximately 45% of net assets were invested in high
yield bonds, 35% in foreign bonds and 20% in U.S. government and agency
securities. The foreign sector primarily consisted of investments in Latin
America and Denmark, Sweden, Italy and Canada. Your Fund's Latin American
holdings were U.S. dollar-denominated and invested in large, well-established
corporations with solid cash flows. During the year, we recognized value in
the so-called "high yield" European countries of Denmark, Sweden and Italy.
We established positions in European bonds by shifting assets from Latin
America. The move also served to broaden the portfolio's diversification.
An increased emphasis on foreign bonds
Recently, we reduced the high yield portion by 10% and increased the foreign
bond and U.S. government and agency holdings each by 5%. As of July 31, 1996,
Strategic Income Fund was structured as follows: 25% in high grade bonds, 33%
in high yield bonds and 42% in foreign bonds. Approximately half of the
foreign investments were Latin American and half were in the government bonds
of Denmark, Sweden and Italy at the end of the period. We attempted to limit
our exposure to currency fluctuations by hedging approximately 25% of the
Fund's non-dollar foreign holdings into U.S. dollars.
-continued-
1
<PAGE>
Strategic Income Fund's flexibility enabled your management to find value in
the high yield sector and foreign bond markets. Lower interest rates over the
past year prompted many investors to attempt to maximize yield by investing
in high yield bonds. Demand for this sector supported high yield bond prices
when the U.S. government bond prices declined in the first half of 1996.
Attractive returns were also found in the foreign bond markets. We invested
in bonds issued by well-established Latin American corporations which
generated attractive income. Latin America's investment environment has
improved dramatically from the devaluation of the Mexican peso in 1994.
Industry privatization, dramatically lower inflation and improved fiscal
policies have resulted in a rebound in investor confidence and bond prices.
Our outlook
Looking ahead, we expect that the stronger economic growth we have seen over
the past few months should moderate in the fourth quarter. We anticipate a
slower economy in early 1997 with few inflationary pressures. This should
provide a stable backdrop for the fixed-income markets.
We will continue to seek value through careful research, analysis and sector
diversification. We are confident that this philosophy can build attractive
returns and above average income for the long-term fixed income investor.
We are pleased to inform you that Keystone has agreed to be acquired by
First Union Corporation. The acquisition is subject to a number of
conditions, including approvals of investment advisory agreements with
Keystone by fund shareholders. First Union is a financial services firm based
in Charlotte, North Carolina. It is the nation's sixth largest bank holding
company with assets of approximately $140 billion. First Union, through its
wholly-owned subsidiary Evergreen Asset Management Corp., manages more than
$16 billion in 36 mutual funds. Keystone will remain a separate entity after
its acquisition and will continue to provide investment advisory and
management services to the Fund. We believe First Union's acquisition of
Keystone should strengthen the investment management services we provide to
you.
Thank you for your continued support of Keystone Strategic Income Fund. We
encourage you to write to us with questions or comments about your
investment.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[PHOTO - ALBERT H. ELFNER, III]
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
[PHOTO - GEORGE S. BISSELL]
September 1996
2
<PAGE>
A Discussion With
Your Fund's Manager
[PHOTO - RICHARD CRYAN]
Richard Cryan is portfolio manager of the Fund and
heads Keystone's high yield bond team. Mr. Cryan has
more than 16 years of investment experience, and served
as president of Wasserstein Perella Asset Management
and also as a portfolio manager at Fidelity Investments.
Dick received his BS from the University of Colorado
and his MBA from Columbia University. In managing
the Fund, he is supported by Gilman Gunn, head of
Keystone's international bond group and Chris Conkey,
head of Keystone's domestic high grade bond group.
Q How do you manage the Fund?
A Our ongoing strategy in managing the Fund is to provide a premium yield
and consistent performance, with reduced price fluctuations. We seek this by
diversifying the portfolio into three asset classes: high yield corporate
bonds, foreign bonds, and U.S. government securities. Our own analysis has
shown that historically a blend of these asset classes can provide most of
the returns of a single asset class, with lower price volatility.
Q How do you determine the Fund's asset allocation?
A Asset allocation decisions are driven by our outlook for the risk and
reward potential in each market sector. This includes evaluation of the
current economic and business cycle and its effects on the asset class.
Within a sector, we seek investments that will limit volatility and maximize
the Fund's income. The Fund's asset allocations are actively managed and
reviewed on a regular basis. We attempt to maintain a high degree of
liquidity to accommodate asset shifts in the event there is a change in a
sector's risk/reward profile. Our allocations as of July 31, 1996 appear on
page four.
Q What was the environment like for bonds over the last twelve months?
A The U.S. bond market experienced two different kinds of climates during
the fiscal year. Interest rates declined as bond prices rose during the last
half of 1995. However, early in 1996 interest rates rose and bond prices fell
(see yield chart on page four). Reports showed the economy gaining strength
and investors becoming concerned about higher inflation rates. This news had
the greatest effect on long-term U.S. government and agency securities, but
also influenced the performance of the high yield and foreign bond markets.
Fund Profile
Objective: Seeks generous income from high yield, foreign, and
U.S. government or agency obligations.
Commencement of investment operations: April 14, 1987
Average maturity: 10 years
Net assets: $223 million
Newspaper listing: "StrInc"
3
<PAGE>
****************************[line chart]**************************************
The Benchmark 30-Year
U.S. Treasury Bond Yield
Date Yield
91 7.930
7.880
7.820
7.770
7.880
7.960
8.040
7.930
7.870
7.820
7.980
7.930
7.800
7.770
7.570
7.510
92 7.480
7.460
7.600
7.700
7.770
7.760
7.900
7.940
7.800
7.920
8.060
8.040
7.940
7.870
7.880
7.930
8.040
8.010
7.900
7.800
7.820
7.830
7.850
7.820
7.780
7.620
7.630
7.680
7.560
7.440
7.390
7.320
7.350
7.410
7.280
7.290
7.320
7.340
7.320
7.520
7.530
7.630
7.630
7.750
7.570
7.530
7.590
7.500
7.440
7.430
7.360
7.390
93 7.460
7.340
7.300
7.210
7.160
7.120
7.010
6.890
6.750
6.850
6.800
6.930
7.050
6.840
6.750
6.790
6.940
6.840
6.940
7.030
6.980
6.900
6.790
6.810
6.710
6.660
6.640
6.540
6.700
6.560
6.530
6.350
6.210
6.120
5.950
5.880
6.030
6.050
5.980
5.910
5.780
5.980
5.960
6.210
6.150
6.330
6.250
6.250
6.180
6.280
6.210
6.350
94 6.230
6.300
6.280
6.210
6.360
6.410
6.630
6.720
6.840
6.910
6.900
6.990
7.110
7.260
7.290
7.210
7.300
7.530
7.500
7.300
7.390
7.260
7.310
7.450
7.510
7.610
7.690
7.540
7.550
7.380
7.530
7.480
7.490
7.490
7.490
7.700
7.780
7.790
7.820
7.900
7.830
7.980
7.960
8.150
8.140
8.130
7.940
7.910
7.850
7.850
7.850
7.880
95 7.860
7.790
7.890
7.740
7.600
7.680
7.580
7.540
7.550
7.460
7.370
7.370
7.430
7.380
7.330
7.330
7.340
7.010
7.000
6.900
6.740
6.520
6.710
6.620
6.500
6.620
6.520
6.590
6.960
6.900
6.900
6.970
6.900
6.720
6.600
6.590
6.460
6.590
6.480
6.420
6.300
6.350
6.340
6.270
6.320
6.230
6.250
6.090
6.050
6.090
6.050
5.950
96 6.040
6.160
5.970
6.040
6.140
6.100
6.220
6.410
6.380
6.690
6.740
6.640
6.670
6.660
6.810
6.790
6.780
7.110
6.920
6.830
6.830
6.990
7.040
7.090
7.100
6.900
7.180
7.020
6.960
7.010
The release of stronger than expected U.S. growth statistics during the first
quarter of 1996 caused yields to rise and bond prices to fall.
Source: Fact Set
******************************************************************************
High yield bonds held their value better than any other domestic bond sector
during that time. The lower interest rates we have seen over the past year
caused many investors to "stretch for yield", creating strong demand for high
yield bonds. This demand supported the prices of high yield bonds when the
higher quality sectors incurred losses.
Q How about the foreign markets?
A Selected foreign markets performed well. The investment climate in Latin
America has turned around from what it had been several years ago. Valuations
have rebounded due to a number of positive trends that have taken place.
These included a reduced role of the government in managing the economy,
industry privatization and aggressive inflation-fighting policies. The Fund's
Latin American holdings provided the portfolio with attractive current
income.
In Europe, our holdings of Danish, Swedish and Italian bonds also were
strong performers, due to a favorable environment in these particular
countries. The economic environment in these countries has been relatively
stable, inflation has been low and deficit reduction policies have been in
place, despite a sluggish economic environment in many other European
countries. These government bonds appeared undervalued to us at the time of
purchase.
Asset Allocation
as of July 31, 1996
*********************[pie chart]***********************
High grade (includes U.S. government, agency
and mortgage-backed securities) 24.7%
Foreign bonds (non-U.S.$) 19.6%
Foreign bonds (U.S.$) 22.3%
High yield 31.6%
Other(1) 1.8%
*******************************************************
- -----------------------
1 Includes common and preferred stocks and warrants, repurchase agreements,
and other assets and liabilities.
4
<PAGE>
Top 10 Holdings
as of July 31, 1996
<TABLE>
<CAPTION>
<S> <C>
as of July 31, 1996 Percentage of
net assets
Kingdom of Sweden, 10.25%, 2003 6.9
Kingdom of Denmark, 8%, 2003 5.9
Federal Home Loan Mortgage Corp., 7.69%, 2022 5.4
Government National Mortgage Assoc., 6.5%, 2023 4.4
Republic of Italy, 9.5%, 2006 3.9
U.S. Treasury Bonds, 7.875%, 2021 3.9
Telecom Argentina, 8.375%, 2000 3.8
Government National Mortgage Assoc.,
6.50%, 2009 3.8
New Zealand Government, 8%, 2001 2.9
Telefonica de Argentina, 11.875%, 2004 2.8
</TABLE>
In New Zealand, conservative fiscal and monetary policies have resulted in
strong performance for government bonds. The government has been running
budget surpluses and paying down its debt. Further, the central bank's strict
monetary policy has kept inflation to a minimum.
Q How did Strategic Income Fund perform during the past year?
A We believe the Fund performed as it was designed. The last six months were
an unusually volatile period for U.S. interest rates, but the Fund
demonstrated good stability. The Fund's ability to diversify enabled it to
benefit from the positive performances in the foreign and high yield markets.
Further, the blend of assets helped to provide insulation from the decline
experienced by U.S. Treasury and agency securities.
Q You recently re-allocated 10% of the Fund's assets from high yield to
foreign and high grade bonds. Why?
A The risk/reward profile for high yield bonds has changed over the past few
months. Strength in that sector has driven yields to historically low levels
relative to U.S. Treasuries. We believed that the high yield market had had
good performance, with little further improvement expected over the short
term. Increasing the U.S. Treasury holdings in the high grade sector also
enhanced the Fund's liquidity. We built a larger position in the foreign
sector because we believed that selected markets were attractively valued. We
expected that a larger commitment to that sector would both improve
diversification and enhance overall performance.
Q What is your outlook for these market sectors over the next six months?
A We see positive factors in each of the sectors. Together, we look for them
to provide investors with above average income and attractive returns. We
share Federal Reserve Board Chairman Alan Greenspan's view that the economy
will grow slowly through the beginning of 1997 and that inflation will remain
low. That should provide a healthy climate for domestic fixed-income
securities.
Our outlook for high yield bonds is neutral. We expect to see their strength
relative to U.S. Treasuries subside, with those sectors resuming a
relationship that is closer to historical performance. We also anticipate a
solid performance from the foreign sector. Trends are in place that should
continue to strengthen the economic fundamentals of the respective countries.
We expect that the foreign sector will provide the portfolio with attractive
investment value and high current yield.
[DIAMOND-(filled in)]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
5
<PAGE>
Your Fund's Performance
Growth of an investment in
Keystone Strategic Income Fund Class A
**************************[mountain chart]***********************************
In Thousands
Reinvested Distributions Initial Investment
4/87 9534 9534
9649 9735
7/88 9001 10172
8677 11084
7/90 6905 10131
5867 10195
7/92 6744 13118
7486 16290
7/94 7001 16593
6563 17090
7/96 6448 18259
Total Value: $18,259
*****************************************************************************
Twelve-Month Performance as of July 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class A Class B Class C
Total returns* 6.84% 6.21% 6.07%
Net asset value 7/31/95 $6.89 $6.92 $6.92
7/31/96 $6.77 $6.81 $6.80
Dividends $0.57 $0.52 $0.52
Capital gains None None None
</TABLE>
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of July 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 6.84% 6.21% 6.07%
1-year 1.76% 2.28% 6.07%
5-year 70.60% -- --
Life of Class 82.59% 25.14% 27.87%
Average Annual Returns
1-year w/o sales charge 6.84% 6.21% 6.07%
1-year 1.76% 2.28% 6.07%
5-year 11.27% -- --
Life of Class 6.69% 6.62% 7.28%
</TABLE>
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received for holding shares for one year and redeeming
after the end of the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares to another Keystone fund for a $10 fee by
contacting Keystone directly. The exchange fee is waived for individual
investors who make an exchange using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
6
<PAGE>
Growth of an Investment
*****************************[line chart]*************************************
Comparison of change in value of a $10,000 investment in Keystone Strategic
Income Fund Class A, the Lehman Aggregate Bond Index, and the Consumer Price
Index.
In Thousands April 14, 1987 through July 31, 1996
Class A Lehman Aggregate Consumer Price Index
Bond Index (LABI) (CPI)
4/87 9534 10000 10000
9735 9802 10152
7/88 10172 10544 10571
11084 12147 11097
7/90 10131 13004 11632
10195 14392 12150
7/92 13118 16520 12533
16290 18202 12881
7/94 16593 18219 13238
17090 20058 13604
7/96 18259 21166 14005
Average Annual Total Return
---------------------------
1 Year 5 Year Life of Class
Class A 1.76% 11.27% 6.69%
Class B 2.28% -- 6.62%
Class C 6.07% -- 7.28%
Past performance is no guarantee of future results. The performance of Class B
or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the different
classes. Class B and Class C shares were introduced February 1, 1993. The
Consumer Price Index and Lehman Aggregate Bond Index are from March 31, 1987.
******************************************************************************
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Strategic Income Fund
The Fund seeks generous income from high yield, foreign, and U.S. government
or agency obligations. The return is quoted after deducting sales charges (if
applicable), fund expenses, and transaction costs and assumes reinvestment of
all distributions.
2. Lehman Aggregate Bond Index (LABI)
The LABI is a broad-based, unmanaged fixed-income market index of U.S.
government, corporate, and mortgage-backed securities. It represents the
price change and coupon income of several thousand securities with various
maturities and qualities. Securities are selected and compiled by Lehman
Brothers, Inc. according to criteria that may be unrelated to your Fund's
investment objective. It would be difficult for most individual investors to
duplicate this index.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding what the chart means
The chart demonstrates your Fund's performance in relation to a well known
investment index and to increases in the cost of living. It is important to
understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other important
financial considerations such as safety, stability and consistency.
7
<PAGE>
Limitations of the chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance can be distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes do not include the costs of investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of several measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future returns may be different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
8
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating 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 incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994(c) 1993 1992
- --------------------------------- -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of year $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10
- ----------------------------- ------- ------ ------- ------ --------
Income from investment
operations:
Net investment income 0.54 0.64 0.61 0.69 0.78
Net realized and unrealized
gain (loss) on investments,
closed futures contracts and
forward foreign currency
related transactions (0.09) (0.45) (0.44) 0.89 0.89
- ----------------------------- ------- ------ ------- ------ --------
Total from investment
operations 0.45 0.19 0.17 1.58 1.67
- ----------------------------- ------- ------ ------- ------ --------
Less distributions from:
Net investment income (0.52) (0.60) (0.61) (0.72) (0.75)
In excess of investment
income 0 (0.03) (0.03) (0.02) 0
Tax basis return of capital (0.05) (0.02) (0.04) 0 0
Net realized gains on
investments 0 0 0 0 0
- ----------------------------- ------- ------ ------- ------ --------
Total distributions (0.57) (0.65) (0.68) (0.74) (0.75)
- ----------------------------- ------- ------ ------- ------ --------
Net asset value end
of year $6.77 $6.89 $7.35 $7.86 $7.02
- ----------------------------- ------- ------ ------- ------ --------
Total return (a) 6.84% 3.00% 1.86% 24.13% 28.73%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.30%(d) 1.33% 1.32% 1.80% 2.09%
Total expenses excluding
reimbursement 1.30%(d) 1.33% 1.32% 1.80% 2.12%
Net investment income 8.05% 9.31% 7.79% 9.50% 11.73%
Portfolio turnover rate 101% 95% 92% 151% 95%
- ----------------------------- ------- ------ ------- ------ --------
Net assets end of year
(thousands) $68,118 $85,970 $105,181 $85,793 $70,459
- ----------------------------- ------- ------ ------- ------ --------
</TABLE>
<TABLE>
<CAPTION>
February 13,
1987
(Commencement
of Operations)
to
1991 1990 1989 1988 July 31, 1987
- ----------------------------- ------ ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
year $ 7.17 $ 9.02 $ 9.36 $ 10.04 $10.00
- ----------------------------- ------ ------ ------- ------- ---------------
Income from investment
operations:
Net investment income 0.89 1.03 1.10 1.05 0.22
Net realized and unrealized
gain (loss) on investments,
closed futures contracts and
forward foreign currency
related transactions (1.01) (1.79) (0.31) (0.65) 0.00
- ----------------------------- ------ ------ ------- ------- ---------------
Total from investment
operations (0.12) (0.76) 0.79 0.40 0.22
- ----------------------------- ------ ------ ------- ------- ---------------
Less distributions from:
Net investment income (0.89) (1.04) (1.11) (1.08) (0.18)
In excess of investment
income (0.06) (0.05) 0 0 0
Tax basis return of capital 0 0 0 0 0
Net realized gains on
investments 0 0 (0.02) 0 0
- ----------------------------- ------ ------ ------- ------- ---------------
Total distributions (0.95) (1.09) (1.13) (1.08) (0.18)
- ----------------------------- ------ ------ ------- ------- ---------------
Net asset value end
of year $ 6.10 $ 7.17 $ 9.02 $ 9.36 $10.04
- ----------------------------- ------ ------ ------- ------- ---------------
Total return (a) 0.54% (8.55%) 9.00% 4.49% 2.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.00% 2.00% 1.81% 1.28% 1.00%(b)
Total expenses excluding
reimbursement 2.25% 2.01% 1.90% 2.08% 6.08%(b)
Net investment income 15.23% 12.91% 12.06% 10.98% 10.12%(b)
Portfolio turnover rate 82% 36% 73% 46% 13%
- ----------------------------- ------ ------ ------- ------- ---------------
Net assets end of year
(thousands) $70,246 $83,106 $138,499 $114,310 $8,191
- ----------------------------- ------ ------ ------- ------- ---------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized for the period from April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.28%.
See Notes to Financial Statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating 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 incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
Year Ended July 31,
February 1, 1993
(Date of Initial
Public Offering)
1996 1995 1994(c) to July 31, 1993
- ------------------------------------------------------ -------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 6.92 $ 7.38 $ 7.89 $ 7.07
- ------------------------------------------------ ------- ------- ------- ---------------
Income from investment operations:
Net investment income 0.50 0.60 0.55 0.24
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
forward foreign currency related transactions (0.09) (0.47) (0.44) 0.92
- ------------------------------------------------ ------- ------- ------- ---------------
Total from investment operations 0.41 0.13 0.11 1.16
- ------------------------------------------------ ------- ------- ------- ---------------
Less distributions from:
Net investment income (0.47) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital (0.05) (0.01) (0.04) 0
- ------------------------------------------------ ------- ------- ------- ---------------
Total distributions (0.52) (0.59) (0.62) (0.34)
- ------------------------------------------------ ------- ------- ------- ---------------
Net asset value end of year $ 6.81 $ 6.92 $ 7.38 $ 7.89
- ------------------------------------------------ ------- ------- ------- ---------------
Total return (a) 6.21% 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.07%(d) 2.06% 2.07% 2.37%(b)
Net investment income 7.28% 8.58% 7.11% 7.18%(b)
Portfolio turnover rate 101% 95% 92% 151%
- ------------------------------------------------ ------- ------- ------- ---------------
Net assets end of year (thousands) $123,389 $149,091 $162,866 $35,415
- ------------------------------------------------------------------------------- --------------------
</TABLE>
(a) Excluding applicable sales charges
(b) Annualized
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.05%.
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Fund and has been auditied 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 incorporated by reference into 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>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering)
1996 1995 1994(c) to July 31, 1993
- ------------------------------------------------ ------- ------ ------ ---------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $6.92 $7.37 $7.88 $7.07
- ------------------------------------------------ ------- ------ ------ ---------------
Income from investment operations:
Net investment income 0.49 0.59 0.55 0.24
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
forward foreign currency related transactions (0.09) (0.45) (0.44) 0.91
- ------------------------------------------------ ------- ------ ------ ---------------
Total from investment operations 0.40 0.14 0.11 1.15
- ------------------------------------------------ ------- ------ ------ ---------------
Less distributions from:
Net investment income (0.47) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital (0.05) (0.01) (0.04) 0
- ------------------------------------------------ ------- ------ ------ ---------------
Total distributions (0.52) (0.59) (0.62) (0.34)
- ------------------------------------------------ ------- ------ ------ ---------------
Net asset value end of year $6.80 $6.92 $7.37 $7.88
- ------------------------------------------------ ------- ------ ------ ---------------
Total return (a) 6.07% 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.07%(d) 2.08% 2.07% 2.25%(b)
Net investment income 7.29% 8.56% 7.09% 7.35%(b)
Portfolio turnover rate 101% 95% 92% 151%
- ------------------------------------------------ ------- ------ ------ ---------------
Net assets end of year (thousands) $31,816 $46,221 $59,228 $19,706
- ------------------------------------------------ ------- ------ ------ ---------------
</TABLE>
(a) Excluding applicable sales charges
(b) Annualized
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.05%.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
WORLD BOND FUND PORTFOLIO
A Portfolio of
KEYSTONE WORLD BOND FUND
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
By and In Exchange For Shares of
KEYSTONE STRATEGIC INCOME FUND
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Keystone World Bond Fund
("World Bond Fund") to Keystone Strategic Income Fund ("Strategic Income
Fund"), in exchange for Class A, Class B and Class C shares of beneficial
interest without par value, of Strategic Income Fund, consists of this cover
page and the following described documents, each of which is attached hereto
and incorporated by reference herein:
(1) The Statement of Additional Information of Strategic Income Fund
dated December 10, 1996, as supplemented January 1, 1997;
(2) The Statement of Additional Information of Keystone World Bond Fund
dated February 28, 1997;
(3) Annual Report of Keystone Strategic Income Fund for the year ended
July 31, 1996;
(4) Semi-Annual Report of Keystone Strategic Income Fund for the period
ended January 31, 1997; and
(5) Annual Report of Keystone World Bond Fund for the year ended
October 31, 1996.
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the Proxy
Statement/Prospectus of Keystone Strategic Income Fund dated May __, 1997. A
copy of the Proxy Statement/Prospectus may by obtained without charge by
calling or writing to Keystone Strategic Income Fund at the telephone number
or address set forth above.
The date of this Statement of Additional Information is May __, 1997.
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 10, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information pertains to all classes of
shares of Keystone Strategic Income Fund (the "Fund"). It is not a prospectus,
but relates to, and should be read in conjunction with, either the prospectus
offering Class A, B and C shares, dated November 29, 1996, as supplemented, or
the separate prospectus offering Class Y shares, dated December 10, 1996, as
supplemented. You may obtain a copy of either prospectus from the Fund's
principal underwriter, Evergreen Keystone Distributor, Inc., or your
broker-dealer. Evergreen Keystone Distributor, Inc. is located at 230 Park
Avenue, New York, New York 10169.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
The Fund .................................................................2
Investment Policies.......................................................2
Investment Restrictions...................................................2
Distributions and Taxes...................................................4
Valuation of Securities...................................................5
Brokerage.................................................................5
Sales Charges.............................................................7
Distribution Plans.......................................................10
Trustees and Officers....................................................12
Investment Adviser.......................................................16
Principal Underwriter....................................................18
Sub-administrator........................................................19
Declaration of Trust.....................................................20
Standardized Total Return and Yield Quotations...........................21
Additional Information...................................................22
Financial Statements.....................................................24
Appendix ...............................................................A-1
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund was formed as a Massachusetts business
trust on October 24, 1986.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
Certain information about the Fund is contained in its prospectuses.
This statement of additional information provides additional information about
the Fund that may be of interest to some investors.
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
The Fund intends to allocate its assets principally between eligible
domestic high yield, high risk debt securities and foreign debt securities. From
time to time, the Fund will allocate a portion of its assets to United States
("U.S.") government securities. The total return on such securities is expected
to include some capital gain. The Fund does not intend to hold securities for
capital gain unless the current yield on such securities remains attractive.
Certain investments, investment techniques and ratings criteria applicable to
the Fund are more fully explained in the Appendix to this statement of
additional information.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares (as defined in the Investment Company Act of 1940, as
amended, (the "1940 Act")). Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
The Fund may not do the following:
(1) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(2) purchase securities on margin except that it may obtain such short
term credit as may be necessary for the clearance of purchases and sales of
securities;
(3) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short, and unless not more than 10% of
its net assets are held as collateral for such sales at any one time;
(4) borrow money or enter into reverse repurchase agreements, except
that the Fund may (a) enter into reverse repurchase agreements or (b) borrow
money from banks for temporary or emergency purposes in aggregate amounts up to
one-third of the value of the Fund's net assets; provided that while borrowings
from banks exceed 5% of the Fund's net assets, any such borrowings will be
repaid before additional investments are made;
(5) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis or collateral
arrangement with respect to the writing of options on securities are not deemed
to be a pledge of assets;
(6) issue senior securities; the purchase or sale of securities on a
"when issued" basis or collateral arrangement with respect to the writing of
options on securities are not deemed to be the issuance of a senior security;
(7) make loans, except that the Fund may make, purchase or hold debt
securities and other debt investments, including loans, consistent with its
investment objective, lend portfolio securities valued at not more than 15% of
its total assets to broker-dealers, and enter into repurchase agreements;
(8) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 25% of its total assets would be invested in
a single industry; except that (a) there is no restriction with respect to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (b) wholly owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of the parents; (c) the industry classification of
utilities will be determined according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (d) the industry classification of medically related industries
will be determined according to their services (for example, management,
hospital supply, medical equipment and pharmaceuticals will each be considered a
separate industry);
(9) invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation;
(10) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(11) purchase or sell commodities or commodity contracts or real
estate, except that the Fund may purchase and sell securities secured by real
estate and securities of companies which invest in real estate and may engage in
currency or other financial futures contracts and related options transactions;
and
(12) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The Fund intends to follow the policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including at this time, (1) treating as illiquid, securities that
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investment on
its books and (2) limiting its holdings of such securities to 15% of its net
assets.
Portfolio securities of the Fund may not be purchased from or sold or
loaned to Keystone or any affiliate thereof or any of their Directors, officers
or employees.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund will make distributions from net investment income monthly and
capital gains, if any, annually in shares, or, at the option of the shareholder,
in cash. Distributions are taxable whether received in cash or in additional
shares. Shareholders who have not opted, prior to the record date for any
distribution, to receive cash will receive a number of distributed shares
determined on the basis of the amount of the distribution and the Fund's net
asset value per share computed at the end of the ex-dividend date after
adjustment for the distribution. Net asset value is used in computing the number
of shares in both gains and income distribution reinvestments. Account
statements and/or checks as appropriate will be mailed to shareholders within
seven days after the Fund pays the distribution. Unless the Fund receives
instructions to the contrary from a shareholder before the record date, it will
assume that the shareholder wishes to receive that distribution and future gains
and income distributions in shares. Instructions continue in effect until
changed in writing.
It is not expected that the Fund's income dividends will be eligible
for the corporate 70% dividends received deduction. Distributed long-term
capital gains are taxable as such to the shareholder, regardless of how long the
shareholder has held the Fund's shares. If such shares are held less than six
months and redeemed at a loss, however, the shareholder will recognize a
long-term capital loss on such shares to the extent of the long-term capital
gain distribution received in connection with such shares. If the net asset
value of the Fund's shares is reduced below a shareholder's cost by a capital
gains distribution, such distribution, to the extent of the reduction, would be
a return of investment, though taxable as stated above. Since distributions of
capital gains depend upon profits actually realized from the sale of securities
by the Fund, they may or may not occur. The foregoing comments relating to the
taxation of dividends and distributions paid on the Fund's shares relate solely
to federal income taxation. Such dividends and distributions may also be subject
to state and local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market;
(2) all other securities for which market quotations are readily
available are valued at the mean of the bid and asked prices at the time of
valuation; and
(3) securities, including restricted securities, for which complete
quotations are not readily available, and other assets are valued at prices
deemed in good faith to be fair under procedures established by the Fund's Board
of Trustees.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing fixed income securities. As a result,
it is likely that most of the valuations for such securities will be based upon
their fair value determined under procedures that have been approved by the
Fund's Board of Trustees. The Fund's Board of Trustees has authorized the use of
a pricing service to determine the fair value of its fixed income securities and
certain other securities.
- --------------------------------------------------------------------------------
BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between the Fund and its other clients 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 Keystone's other clients. Under the Advisory
Agreement, 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 follows such a practice,
it will do so on a basis that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
in the selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects that purchases and sales of income securities 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.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
For the fiscal year ended July 31, 1994, the Fund paid no brokerage
commissions. For the fiscal years end ed July 31, 1995 and 1996, the Fund paid
$30,894 and $35,599, respectively, in brokerage commissions.
- --------------------------------------------------------------------------------
SALES CHARGES
- --------------------------------------------------------------------------------
The Fund offers four classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to the Principal Underwriter or its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
CLASS A SHARES
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS B SHARES
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase...................5.00%
Second twelve-month
period following the month of purchase...................4.00%
Third twelve-month
period following the month of purchase...................3.00%
Fourth twelve-month
period following the month of purchase...................3.00%
Fifth twelve-month
period following the month of purchase...................2.00%
Sixth twelve-month
period following the month of purchase...................1.00%
Thereafter....................................................0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's
transfer and dividend disbursing agent.)
CLASS C SHARES
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CLASS Y SHARES
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 31, 1994 owned shares in a
mutual fund advised by Evergreen Asset Management Corp. ("Evergreen Asset"),
(ii) certain institutional investors and (iii) investment advisory clients of
Capital Management Group of First Union National Bank of North Carolina
("FUNB"), Evergreen Asset or their affiliates. Class Y shares are offered at net
asset value without a front-end or back-end sales charge and do not bear any
Rule 12b-1 distribution expenses.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
EXCHANGES
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
WAIVER OF SALES CHARGES
Purchases of the Fund's Class A shares made after January 1, 1997, (i)
in the amount of $1 million or more; (ii) by a corporate or certain other
qualified retirement plan or a non-qualified deferred compensation plan or a
Title 1 tax sheltered annuity or TSA plan sponsored by an organization having
100 or more eligible employees (a "Qualifying Plan") or a TSA plan sponsored by
a public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan"); or (iii) by (a) institutional investors, which may
include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of FUNB and its affiliates, EKD and any broker-dealer with
whom EKD has entered into an agreement to sell shares of the Fund, and members
of the immediate families of such employees, will be at net asset value without
the imposition of a front-end sales charge. Certain broker-dealers or other
financial institutions may impose a fee on transactions in shares of the Funds.
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of the Fund by a bank or trust company in a single account in the name
of such bank or trust company as trustee, if the initial investment in shares of
the Fund or any fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
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DISTRIBUTION 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 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees"). The Fund's Class Y shares have not
adopted a Distribution Plan and incur no Distribution Plan expenses.
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans 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 and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (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 recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also 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 and outstanding on the books of the Fund for
specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. 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 Plans, the Fund
may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
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 and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (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 recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
For the fiscal period ended July 31, 1996, the Fund paid the Principal
Underwriter $181,536, $1,399,711 ($1,279,839 with respect to Class B shares sold
prior to June 1, 1995 and $119,872 with respect to Class B shares sold on or
after June 1, 1995), and $390,758, respectively, pursuant to the Fund's Class A,
Class B and Class C Distribution Plans.
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TRUSTEES AND OFFICERS
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The Trustees and officers of the Fund, their principal occupations and
some of their affiliations over the last five years are as follows:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Professor, Finance Department, George
Washington University; President, Amling & Company
(invest ment advice); and former Member, Board of
Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of all the Evergreen funds other than
Evergreen Investment Trust; real estate developer
and construction consultant; and President of
Centrum Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward
Management Corporation (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of all the Evergreen funds other than
Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition
Corporation and Rehabilitation Corporation of
America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and
Chairman of its Investment Committee); former
Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential
Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; and former Director, Peoples Bank (Charlotte,
NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee, Treasurer and Chairman of the
Finance Committee, Cambridge College; Chairman
Emeritus and Director, American Institute of Food
and Wine; Chairman and President, Oldways
Preservation and Exchange Trust (education); former
Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; former
Managing Partner, Roscommon Capital Corp.; former
Chief Executive Officer, Gifford Gifts of Fine
Foods; former Chairman, Gifford, Drescher &
Associates (environmental consulting); and former
Director, Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Chairman and Trustee of the Evergreen funds;
former Chairman of the Distribution Foundation for
the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Chairman of the Board and Chief Executive
Officer, Carson Products Company; Director of
Phoenix Total Return Fund and Equifax, Inc.; Trustee
of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund, and The Phoenix Big Edge Series Fund; and
former President, Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Chairman and Of Counsel, Keyser, Crowley &
Meub, P.C.; Member, Governor's (VT) Council of Eco
nomic Advisers; Chairman of the Board and Director,
Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of the Evergreen funds; former Vice
President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal
Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of the Evergreen funds; and Partner
in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Vice Chair and former Executive Vice
President, DHR International, Inc. (executive
recruitment); former Senior Vice President, Boyden
International Inc. (executive recruit ment); and
Director, Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of the Evergreen funds; Medical
Director, U.S. Health Care/Aetna Health Services;
and former Managed Health Care Consultant; former
President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Trustee of the Evergreen funds; and Attorney,
Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Chairman, Environmental Warranty, Inc.
(Insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation;
former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller,
Inc.
*ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all
other funds in the Key stone Investments Families of
Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; Adjunct Professor of Law
and former Associate Dean, St. John's University
School of Law; Adjunct Professor of Law, Touro
College School of Law; and former President, Nassau
County Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Investments Families of Funds;
Senior Vice President and Director of Administration
and Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS.
See "Sub-administrator."
During the fiscal year ended July 31, 1996, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. During
the same period, the unaffiliated Trustees received $30,556 in retainers and
fees. Annual retainers and meeting fees paid by all funds in the Keystone
Investments Families of Funds (which includes more than thirty mutual funds) for
the calendar year ended December 31, 1995 totaled approximately $450,716. As of
November 30, 1996, the Trustees and officers beneficially owned less than 1% of
the Fund's then outstanding Class A, Class B and Class C shares, respectively.
Except as set forth above, the address of all 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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INVESTMENT ADVISER
- -------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, the Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of the Fund on December 9, 1996,
and became effective on December 11, 1996. As a result of the above
transactions, Keystone Management, Inc. ("Keystone Management"), which prior to
the Acquisition acted as investment manager to the Fund, no longer acts as such
to the Fund. Keystone currently provides the Fund with all the services that may
previously have been provided by Keystone Management. The fee rate paid by the
Fund for the services provided by Keystone and its affiliates has not changed as
a result of the Acquisition.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate of:
Aggregate Net
Management Asset Value of the
FEE INCOME Shares of the Fund
2.0% of Gross Dividend
and Interest Income Plus
0.50% of the first $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000;
Keystone's fee is computed as of the close of business each business day and
payable daily.
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 for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
During the year ended July 31, 1994, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,721,793 (0.64% of the Fund's average net assets). Of such amount paid to
Keystone Management, $1,463,524 was paid to Keystone for its services to the
Fund.
During the year ended July 31, 1995, the Fund paid or accrued to
Keystone Management investment and administrative services fees of $1,954,412
(0.66% of the Fund's average net assets). Of such amount paid to Keystone
Management, $1,661,250 was paid to Keystone for its services to the Fund.
During the year ended July 31, 1996, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$1,663,669 (0.65% of the Fund's average net assets). Of such amount paid to
Keystone Management, $1,414,119 was paid to Keystone for its services to the
Fund.
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PRINCIPAL UNDERWRITER
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The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, 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 public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses and statement of additional information. All orders are subject to
acceptance by the Fund and the Fund reserves the right, in its sole discretion,
to reject any order received. Under the Underwriting Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
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. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the Fund and each person who has been, is, or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
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SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund.
Furman Selz is located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated October 24, 1986, as amended (the "Declaration of
Trust"). The Fund is similar in most respects to a business corporation. The
principal distinction between the Fund and a corporation relates to the
shareholder liability described below. A copy of the Declaration of Trust is on
file as an exhibit to the Registration Statement of which this statement of
additional information is a part. This summary is qualified in its entirety by
reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund currently
offers Class A, B, C and Y shares, but may issue additional classes or series of
shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Fund's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Fund; (2) requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees; and (3) provides for indemnification out
of the Fund's property for any shareholder held personally liable for the
obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. Classes of shares of the
Fund have equal voting rights except that each class of shares has exclusive
voting rights with respect to its respective Distribution Plan. No amendment may
be made to the Declaration of Trust 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 an initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law or until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the Fund's 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 involved in the conduct of his office.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten years periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, 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 annual rate of return for Class A for the year ended July 31, 1996
was 1.76%. The compounded average annual rates of return for Class A for the
five years ended July 31, 1996 and the period February 13, 1987 (commencement of
operations) through July 31, 1996 were 11.27% and 6.69%, respectively.
The annual rates of return on Class B and Class C shares for the one
year period ended July 31, 1996 were 2.28% and 6.07%, respectively. The
compounded average annual rates of return for the Fund's Class B and Class C
shares annualized for the period from February 1, 1993 (commencement of
operations) through July 31, 1996 were 6.62% and 7.28%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The current yields of Class
A, Class B and Class C shares for the 30-day period ended July 31, 1996 were
7,18%, 6.77%, and 6.77%, respectively.
Information on Class Y shares is not yet available.
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ADDITIONAL INFORMATION
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REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
State Street Bank and Trust Company, located at 225 Franklin Street,
Boston, Massachusetts 02110, is custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian, in addition to its custodial services, is
responsible for accounting and related record keeping on behalf of the Fund.
KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the Fund's independent auditors.
EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
is a wholly-owned subsidiary of Keystone and is the Fund's transfer agent and
dividend disbursing agent.
Except as otherwise stated in its prospectuses or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectuses without shareholder approval, including the right to impose or
change fees for services provided.
As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 18.46% of the outstanding Class
A shares.
As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 14.94% of the outstanding Class
B shares.
As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 25.77% of the outstanding Class
C shares.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectuses, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectuses and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Securities and Exchange Commission's
principal office in Washington, D.C. upon payment of the fee prescribed by the
rules and regulations promulgated by the Securities and Exchange Commission.
The Fund is one of 16 investment companies in the Keystone America Fund
Family, which offers a range of choices to serve shareholder needs. In addition
to the Fund, the Keystone America Fund Family includes the following 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 BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and South and Central America).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND - (Formerly Keystone Strategic
Development Fund.) Seeks long term capital growth by investing primarily in
equity securities of foreign and domestic companies involved in the natural
resources and energy industries.
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 OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term growth of capital by
investing primarily in equity securities with small market capitalizations.
KEYSTONE STATE TAX FREE FUND - A mutual fund currently offering four separate
series of shares investing in different portfolio securities which seeks the
highest possible current income, exempt from federal income taxes and applicable
state taxes.
KEYSTONE STATE TAX FREE FUND-SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investments in debt
securities denominated in U.S. and foreign currencies.
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FINANCIAL STATEMENTS
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The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission:
Schedule of Investments as of July 31, 1996;
Financial Highlights -- Class A shares for each of the years in the
nine-year period ended July 31, 1996 and the period from February 13,
1987 (Commencement of Operations) to July 31, 1987;
Financial Highlights -- Class B shares for each of the years in the
three-year period ended July 31, 1996 and the period from February 1,
1993 (Date of Initial Public Offering) to July 31, 1993;
Financial Highlights -- Class C shares for each of the years in the
three-year period ended July 31, 1996 and the period from February 1,
1993 (Date of Initial Public Offering) to July 31, 1993;
Statement of Assets and Liabilities as of July 31, 1996;
Statement of Operations for the year ended July 31, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated September 6, 1996.
A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
<PAGE>
A-1
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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 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 which
have an outstanding debt issue rated at the time of purchase AAA, AA or A by
Moody's, or AAA, AA or A by S&P, or will be determined by Keystone to be of
comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of Prime-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance
on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of United States banks, including their branches abroad, and of
United States branches of foreign banks, which are members of the Federal
Reserve System or the Federal Deposit Insurance Corporation, and have at least
$1 billion in deposits as of the date of their most recently published financial
statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. 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 U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Interamerican Development Bank.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term mortgage backed securities includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations.
There are currently three basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as GNMA, FNMA, and FHLMC (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full-faith and credit" of
the U.S.); (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole mortgage loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
governmental or private lenders. Such securities, which are ownership interests
in the underlying mortgage loans, differ from conventional debt securities,
which provide for periodic payment of interest in fixed amounts (usually
semi-annually) with principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a "pass
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such mortgage loans, net of any fees paid
to the guarantor of such securities and the services of the underlying mortgage
loans.
Collateralized mortgage obligations in which the Fund may invest are
securities issued by a U.S. government instrumentality that are collateralized
by a portfolio of mortgages or mortgage-backed securities. The issuer's
obligation to make interest and principal payments is secured by the underlying
portfolio of mortgages or mortgage-backed securities.
ZERO COUPON "STRIPPED" BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Coupon zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond.
Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon bonds have the right upon default
on the underlying coupon obligations or principal obligations to proceed
directly and individually against the issuer and are not required to act in
concert with other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or coupon zero coupon bonds (either initially or in the secondary market)
is treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
coupon bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market value at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds items.
EQUIPMENT TRUST CERTIFICATES
Equipment Trust Certificates are a mechanism for financing the purchase
of transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.
Under an equipment trust certificate, the equipment is used as the
security for the debt and title to the equipment is vested in a trustee. The
trustee leases the equipment to the user, i.e. the railroad, airline, trucking
or oil company. At the same time equipment trust certificates in an aggregate
amount equal to a certain percentage of the equipment's purchase price are sold
to lenders. The Trustee pays the proceeds from the sale of certificates to the
manufacturer. In addition, the company using the equipment makes an initial
payment of rent equal to their balance of the purchase price to the trustee,
which the trustee then pays to the manufacturer. The trustee collects lease
payments from the company and uses the payments to pay interest and principal on
the certificates. At maturity, the certificates are redeemed and paid, the
equipment is sold to the company and the lease is terminated.
Generally, these certificates are regarded as obligations of the
company that is leasing the equipment and are shown as liabilities in its
balance sheet. However, the company does not own the equipment until all the
certificates are redeemed and paid. In the event the company defaults under its
lease, the trustee terminates the lease. If another lessee is available, the
trustee leases the equipment to another user and makes payments on the
certificates from new lease rentals.
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 "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds which are rated AAA are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds which are rated AA are judged to be of high quality by
all standards. Together with the AAA group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in AAA
securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. BAA - Bonds which are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds which are rated BA are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
7. CAA - Bonds which 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 or interest.
8. CA - Bonds which are rated CA represent obligations which are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds which 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.
MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. AAA: An issue which is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. AA: An issue which is rated "AA" is considered a high grade
preferred stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
3. A: An issue which is rated "A" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater then in the
"AAA" and "AA" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. BAA: An issue which is rated "BAA" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be questionable
over any great length of time.
5. BA: An issue which is rated "BA" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
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 Fund writes only covered options. Options
written by the Fund will normally have expiration dates of not more than nine
months from the date written. The exercise price of the options may be below,
equal to, or above the current market values of the underlying securities at the
times the options are written.
Unless the option has been exercised, the Fund may close out an option
it has written by effecting a closing purchase transaction, whereby it purchases
an option covering the same underlying security and having the same exercise
price and expiration date ("of the same series") as the one it has written. If
the Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund will generally write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and for some options no secondary market may exist. In such
event it might not be possible to effect a closing transaction in a particular
option. If the Fund as a covered call option writer is unable to effect a
closing purchase transaction, it will not be able to sell the underlying
securities until the option expires or it delivers the underlying securities
upon exercise.
Because the Fund intends to qualify as a regulated investment company
under the Internal Revenue Code, the extent to which the Fund may write covered
call options and enter into so-called "straddle" transactions involving put and
call options may be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation (OCC), a
clearing corporation which assumes responsibility for the completion of options
transactions.
PURCHASING PUT AND CALL OPTIONS. The Fund can close out a put option it
has purchased by effecting a closing sale transaction; for example, the Fund may
close out a put option it has purchased by selling a put option. If, however, a
secondary market does not exist at a time the Fund wishes to effect a closing
sale transaction, the Fund will have to exercise the option to realize any
profit. In addition, in a transaction in which the Fund does not own the
security underlying a put option it has purchased, the Fund 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 Fund would incur
additional transaction costs.
The Fund may also purchase call options for the purpose of offsetting
previously written call options of the same series.
The Fund will not purchase a put option if, as a result of such
purchase, more than 10% of its total assets would be invested in premiums for
such options. The Fund's ability to purchase put and call options may be limited
by the Internal Revenue Code's requirements for qualification as a regulated
investment company.
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options. 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 securities.
Because the Fund can write only covered options, it may at times be
unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new debt securities against which it can write options. This
may result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss on the transaction.
OPTIONS TRADING MARKETS
Options which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded are the Chicago Board
Options Exchange and the New York, American, Pacific and Philadelphia Stock
Exchanges. 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 Fund. The use of
options traded in the over-the-counter market may be subject to limitations
imposed by certain state securities authorities. In addition to the limits on
its use of options discussed herein, the Fund is subject to the investment
restrictions described in the prospectus and the statement of additional
information.
The staff of the Commission currently is of the view that the premiums
which the Fund pays for the purchase of unlisted options, and the value of
securities used to cover unlisted options written by the Fund, are considered to
be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its fundamental investment restriction
prohibiting it from investing more than 10% of its total assets (taken at
current value) in any combination of illiquid assets and securities. The Fund
intends to request that the Commission staff reconsider its current view. It is
the intention of the Fund to comply with the staff's current position and the
outcome of such reconsideration.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
On Treasury Bonds and Notes. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with its Custodian liquid assets maturing no
later than those which would be deliverable in the event of an assignment of an
exercise notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options 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 Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any particular time,
and for some options no secondary market may exist. In such event, it might not
be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or 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 Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions which are related to
currency and other financial futures contracts for hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to enter into such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indices 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").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
(GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
INDEX BASED FUTURES CONTRACTS
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made.
No physical delivery of the underlying stocks in the index is made.
Currently stock index futures contracts can be purchased or sold on the
Standard and Poor's Corporation (S&P) Index of 500 Stocks, the S&P Index of 100
Stocks, the New York Stock Exchange Composite Index, the Value Line Index and
the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.
The Fund does not believe that differences between existing stock
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indices or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the specified dollar amount
times the difference between the closing value of the index on the expiration
date of the contract and the price at which the futures contract is originally
made, in most cases such futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by an offsetting transaction in which the Fund enters into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument or index and same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund is paid the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the closing
out of a futures contract purchase is effected by an offsetting transaction in
which the Fund enters into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain. If the purchase price
exceeds the offsetting sale price the Fund realizes a loss. The amount of the
Fund's gain or loss on any transaction is reduced or increased, respectively, by
the amount of any transaction costs incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency or other
financial futures contracts and sell such options to terminate an existing
position. Options on currency or other financial futures are similar to options
on stocks except that an option on a currency or other financial futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
currency or other instruments making up a financial futures index at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account. This amount represents the amount by
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. If an option is exercised the last trading day
prior to the expiration date of the option, the settlement will be made entirely
in cash equal to the difference between the exercise price of the option and
value of the currency or other financial futures.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency and other financial
futures contracts is analogous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on commodity futures contracts may be
purchased to hedge against an interest rate increase or a market advance when
the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin deposits on
such futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indices underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. In addition
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in 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 contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund
invests in foreign securities they usually will be denominated in foreign
currencies and the Fund may hold funds in foreign currencies. Thus, the value of
a Fund share will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rate or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to engage in currency futures contracts only for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc, and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark, Swiss Franc and French
Franc, 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, French Francs and
Canadian Dollars. Options can be exercised at any time during the contract life,
and require a deposit subject to normal margin requirements. Since a futures
contract must be exercised, the Fund must continually make up the margin
balance. As a result, a wrong price move could result in the Fund losing more
than the original investment, as it cannot walk away from the futures contract
as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments,
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworthiness of each other party. The Fund does not intend to trade more
than 5% of its net assets under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Fund sells sterling it generally
must pay pounds to a counterparty earlier in the day than it will be credited
with dollars in New York. In the intervening hours, the buyer can go into
bankruptcy or can be declared insolvent. Thus, the dollars may never be credited
to the Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents, or limits on inflows of investment funds from abroad. Governments
take such measures, for example, to improve control over the domestic banking
system, or to influence the pattern of receipts and payments between residents
and foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payments interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result, performance may be delayed, and can
result in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
<PAGE>
KEYSTONE WORLD BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
February 28, 1997
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 dated February 28, 1997. You may obtain a copy of the prospectus
from the Fund's principal underwriter, Evergreen Keystone Distributor, Inc. or
your broker-dealer. See "Service Providers" below.
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TABLE OF CONTENTS
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Page
The Fund ......................................................2
Service Providers..............................................2
Investment Restrictions........................................3
Distributions and Taxes........................................4
Valuation of Securities........................................5
Brokerage......................................................6
Sales Charge...................................................8
Distribution Plans............................................11
Trustees and Officers.........................................13
Investment Adviser............................................16
Principal Underwriter.........................................18
Sub-administrator.............................................19
Declaration of Trust..........................................19
Expenses .....................................................21
Standardized Total Return and Yield Quotations................22
Financial Statements..........................................22
Additional Information........................................23
Appendix ....................................................A-1
17732
<PAGE>
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THE FUND
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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 nondiversified portfolio 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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SERVICE PROVIDERS
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<TABLE>
<CAPTION>
Service Provider
- ------------------------------------- ---------------------------------------------------------
<S> <C>
Investment adviser (referred to Keystone Investment Management Company, 200 Berkeley
in this SAI as "Keystone") Street, Boston, Massachusetts 02116. (Keystone is a
wholly-owned subsidiary of First Union Keystone, Inc.
(formerly, Keystone Investments, Inc.) ("First Union
Keystone"), also located at 200 Berkeley Street, Boston,
Massachusetts 02116.)
Principal underwriter ( referred Evergreen Keystone Distributor, Inc. (formerly, Evergreen
to in this SAI as "EKD" or the Funds Distributor, Inc.), 125 W. 55th Street, New York,
"Principal Underwriter") New York 10019.
Marketing services agent and Evergreen Keystone Investment Service, Inc. (formerly,
predecessor to EKD (referred to Keystone Investment Distributors Company), 200 Berkeley
in this SAI as "EKIS") Street, Boston, Massachusetts 02116.
Sub-administrator (referred to in The BISYS Group, Inc., 3435 Stelzer Road, Columbus, Ohio
this SAI as "BISYS") 43219.
Transfer and dividend Evergreen Keystone Service Company (formerly, Keystone
disbursing agent (referred to in Investor Resource Center, Inc.), 200 Berkeley Street,
this SAI as "EKSC") Boston, Massachusetts 02116. (EKSC is a wholly-owned
subsidiary of Keystone.)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants.
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
</TABLE>
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INVESTMENT RESTRICTIONS
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Fundamental Investment Restrictions
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 (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). 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.
Non-Fundamental Investment Restrictions
With respect to illiquid securities, the Fund intends to follow the
policies of the Securities and Exchange Commission. Currently, the Fund will not
invest more than 15% of its net assets in illiquid securities. Also, the Fund
will treat securities as illiquid if it may not sell or dispose of the security
in the ordinary course of business within seven days at approximately the value
at which the Fund has valued such securities on its books.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
You will ordinarily receive distributions in shares, unless you elect
before the record date to receive them as cash. Unless the Fund receives
instructions to the contrary, it will assume that you wish to receive that
distribution and future gains and income distributions in shares. Your
instructions continue in effect until changed in writing. If you have not opted
to receive cash, the Fund will determine the number of shares that you should
receive based on its net asset value per share as computed at the close of
business on the ex-dividend date after adjustment for the distribution.
Capital gains distributions that reduce the net asset value of your
shares below your cost are, to the extent of the reduction, a return of your
investment. Since distributions of capital gains depend upon profits realized
from the sale of the Fund's portfolio securities, they may or may not occur.
Distributions are taxable whether you receive them in cash or
additional shares. Long-term capital gains distributions are taxable as such
regardless of how long you have held the shares. If, however, you hold the
Fund's shares for less than six months and redeem them at a loss, you will
recognize a long-term capital loss to the extent of the long-term capital gain
distribution received in connection with such shares. The Fund intends to
distribute only such net capital gains and income as it has predetermined, to
the best of its ability, to be taxable as ordinary income. Since the Fund's
income distributions are largely derived from interest on bonds, they are not to
any significant degree eligible for the corporate 70% dividends received
deduction. Distributions designated by the Fund as capital gains are not
eligible for the corporate 70% dividends received deduction
The Fund will advise you annually as to the federal income tax status
of your distributions. These comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Your dividends and distributions may also be subject to state and
local taxes.
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
actual dividends and the amount the Fund advises him is his pro rata portion of
income taxes withheld by foreign governments from interest and dividends paid on
the 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 National Association of Securities Dealers, Inc. ("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.
(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 investments maturing in 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 investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market.
(10) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(11) 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.
(12) 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.
(13) 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.
(14) 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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Selection of Brokers
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services").
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
The Fund considers the receipt of research services by the Fund or
Keystone to be in addition to, and not instead of, the services Keystone is
required to perform under the Advisory Agreement (as defined below). Keystone
believes that it cannot determine or practically allocate the cost, value and
specific application of such research services between the Fund and its other
clients, who may indirectly benefit from the availability of such services.
Similarly, the Fund may indirectly benefit from information made available from
transactions effected for Keystone's other clients. The Advisory Agreement also
permits Keystone to pay higher brokerage commissions for brokerage and research
services in accordance with Section 28(e) of the Securities Exchange Act of
1934; if Keystone does so on a basis that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker-dealer. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares when
selecting of broker-dealers to execute portfolio transactions, subject to the
requirements of best execution described above.
Brokerage Commissions
The Fund expects to purchase and sell its securities and temporary
instruments through principal transactions. The Fund normally purchases bonds
and money market instruments directly from the issuer or from an underwriter or
market maker for the securities. In general, the Fund will not pay brokerage
commissions 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.
General Brokerage Policies
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions. In order to take advantage of the availability of lower purchase
prices, the Fund may occasionally participate in group bidding for the direct
purchase from an issuer of certain securities.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD, or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Trustees periodically reviews the Fund's brokerage policy.
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the Board of Trustees
may change, modify or eliminate any of the foregoing practices.
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SALES CHARGE
- --------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to EKD or its predecessor. See the prospectus for
additional information on a particular class.
Class Distinctions
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
Redemption Timing CDSC Rate
Month of purchase and the first twelve-month
period following the month of purchase...................5.00%
Second twelve-month
period following the month of purchase...................4.00%
Third twelve-month
period following the month of purchase...................3.00%
Fourth twelve-month
period following the month of purchase...................3.00%
Fifth twelve-month
period following the month of purchase...................2.00%
Sixth twelve-month
period following the month of purchase...................1.00%
Thereafter....................................................0.00%
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after the month of purchase, will automatically convert to Class A
shares without imposition of a front-end sales charge or exchange fee.
(Conversion of Class B shares represented by stock certificates will require the
return of the stock certificate to EKSC.) See "Calculation of Contingent
Deferred Sales Charge" below.
Class C Shares
Class C shares are available only through broker-dealers who have entered into
special distribution agreements with EKD. The Fund offers Class C shares at net
asset value (without an initial sales charge). With certain exceptions, however,
the Fund will charge a CDSC of 1.00%, if you redeem shares purchased after
January 1, 1997, during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
Calculation of Contingent Deferred Sales Charge
Any CDSC imposed upon the redemption of Class A, Class B or Class C shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. Upon request for redemption, the Fund will
redeem shares not subject to the CDSC first. Thereafter, the Fund will redeem
shares held the longest first.
Shares That Are Not Subject to a Sales Charge or CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the shares of
the same class of another Keystone America Fund. However, if you are exchanging
shares that are still subject to a CDSC, the CDSC will carry over to the shares
you acquire by the exchange. Moreover, the Fund will compute any future CDSC
based upon the date you originally purchased the shares you tendered for
exchange.
Waiver of Sales Charges
The Fund may sell its shares at net asset value without an initial sales charge
to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax sheltered
annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan") or a TSA plan sponsored by a
public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan");
3. institutional investors, which may include bank trust departments and
registered investment advisers;
4. investment advisers, consultants or financial planners who place trades
for their own accounts or the accounts of their clients and who charge
such clients a management, consulting, advisory or other fee;
5. clients of investment advisers or financial planners who place trades
for their own accounts if the accounts are linked to the master account
of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans,
which place trades through an omnibus account maintained with the Fund
by the broker-dealer;
7. employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered
into an agreement to sell shares of the Fund, and members of the
immediate families of such employees, will be at net asset value
without the imposition of a front-end sales charge.
8. certain Directors, Trustees, officers employees of the Fund, First
Union Keystone, Keystone, EKD or their affiliates and to the immediate
families of such persons; or
9. a bank or trust company in a single account in the name of such bank or
trust company as trustee if the initial investment in shares of the
Fund or any fund in the Keystone Families 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.
With respect to items 8 and 9 above, the Fund will only sell shares to these
parties upon the purchasers written assurance that he or she is buying the
shares for investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. In addition, the Fund will not
charge a CDSC on redemptions by such purchasers.
Waiver of CDSCs
With respect to shares purchased after January 1, 1997, the Fund does not impose
a CDSC when the shares you are redeeming represent:
1. an increase in the value of the shares you redeem above the net cost of
such shares;
2. certain shares for which the Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and
capital gains distributions;
3. shares that are in the accounts of a shareholder who has died or become
disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit plan
qualified under the Employee Retirement Income Security Act of 1974
("ERISA");
5. automatic withdrawals from the ERISA plan of a shareholder who is a
least 59 1/2 years old;
6. shares in an account that we have closed because the account has an
aggregate net asset value of less than $1,000;
7. automatic withdrawals under an Systematic Income Plan of up to 1.0% per
month of your initial account balance;
8. withdrawals consisting of loan proceeds to a retirement plan
participant;
9. financial hardship withdrawals made by a retirement plan participant;
10. withdrawals consisting of returns of excess contributions or excess
deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan that
purchased Class C shares (this waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets).
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
EKD) remaining unpaid from time to time.
Class A Distribution Plan
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 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 EKD to
enable EKD to pay or to have paid to others who sell Class A shares a service or
other fee, at any such intervals as EKD may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
Class B Distribution Plans
The Class B Distribution Plans 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 EKD and/or its predecessor. Payments are
made to EKD (1) to enable EKD to pay to others (broker-dealers) commissions in
respect of Class B shares sold since inception of a Distribution Plan; (2) to
enable EKD to pay or to have paid to others a service fee, at such intervals as
EKD may determine, in respect of Class B shares maintained by any such recipient
and outstanding on the books of the Fund for specified periods; and (3) as
interest.
EKD generally reallows to broker-dealers or others a commission equal
to 4.00% of the price paid for each Class B share sold. The broker-dealer or
other party may also 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
and outstanding on the books of the Fund for specified periods.
EKD 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 EKD from the
Fund ("Advances"). EKD intends to seek full reimbursement of such Advances from
the Fund (together with annual interest thereon at the prime rate plus 1%) at
such time in the future as, and to the extent that, payment thereof by the Fund
would be within the permitted limits. If the Fund's Independent Trustees
authorize such reimbursements of Advances, the effect would be to extend the
period of time during which the Fund incurs the maximum amount of costs allowed
by the Class B Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to EKD
sold to a financial institution substantially all of its 12b-1 fee collection
rights and CDSC collection rights in respect of Class B shares sold during the
period beginning approximately June 1, 1995 through November 30, 1996. 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.
The financing of payments made by EKD to compensate broker-dealers or
other persons for distributing shares of the Fund will be provided by FUNB or
its affiliates.
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 EKD and/or its predecessor. Payments are
made to EKD (1) to enable EKD to pay to others (broker-dealers) commissions in
respect of Class C shares sold since inception of the Distribution Plan; (2) to
enable EKD to pay or to have paid to others a service fee, at such intervals as
EKD may determine, in respect of Class C shares maintained by any such recipient
and outstanding on the books of the Fund for specified periods; and (3) as
interest.
EKD generally reallows to broker-dealers or others a commission in the
amount of 0.75% of the price paid for each Class C share sold plus the first
year's service fee in advance in the amount of 0.25% of the price paid for each
Class C share sold. Beginning approximately fifteen months after purchase,
broker-dealers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25%,
respectively, of the average daily net asset value of each Class C share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
Distribution Plans - General
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, EKD and EKIS will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
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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:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers,
Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds other than Evergreen Investment Trust; real
estate developer and construction consultant; and
President of Centrum Equities and Centrum
Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
*FOSTER BAM: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds other than Evergreen Investment Trust; Partner
in the law firm of Cummings & Lockwood; Director,
Symmetrix, Inc. (sulphur company) and Pet Practice,
Inc. (veterinary services); and former Director,
Chartwell Group Ltd. (Manufacturer of office
furnishings and accessories), Waste Disposal
Equipment Acquisition Corporation and Rehabilitation
Corporation of America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and
Chairman of its Investment Committee); former
Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments,
Inc.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; and
former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice Presi dent, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Asso ciates
(environmental consulting); and former Director,
Keystone Investments, Inc. and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Trustee of all the funds in the
Evergreen Family of Funds; former Chairman of the
Distribution Foundation for the Carolinas; and
former Vice President of Lance Inc. (food
manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Eco nomic
Advisers; Chairman of the Board and Director,
Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Di rector, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds; and Sales Representative with Nucor- Yamoto,
Inc. (Steel producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds; former Vice President and Director of Rexham
Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds; and Partner in the law firm of Holcomb and
Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; Vice
Chair and former Executive Vice President, DHR
International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruit ment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds; Medical Director, U.S. Health Care/Aetna
Health Services; and former Managed Health Care
Consultant; former President, Primary Physician
Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee of all the funds in the Evergreen Family of
Funds; and Attorney, Law Offices of Michael S.
Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman, Environmental Warranty, Inc. (Insurance
agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation;
former Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller,
Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Families of Funds; President and Treasurer of all
the funds in the Evergreen Family of Funds; Senior
Managing Director, Furman Selz LLC since 1992;
Managing Director from 1984 to 1992; Consultant to
BISYS Fund Services since 1996; 230 Park Avenue,
Suite 910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Families of Funds; Secretary of all
the funds in the Evergreen Family of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services since 1995;
Vice President/Assistant General Counsel, Alliance
Capital Management from 1988-1995; 3435 Stelzer
Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
During the fiscal year ended October 31, 1996, no Trustee or officer
received any direct remuneration from the Fund. Annual retainers and meeting
fees paid by all funds in the Keystone Families of Funds (which includes more
than thirty mutual funds) for the fiscal year ended October 31, 1996 totaled
approximately $411,000. As of January 31, 1997, the Trustees and officers
beneficially owned less than 1.0% of the Fund's then outstanding Class A, Class
B and Class C shares, respectively.
Except as set forth above, the address of all of the Fund's Trustees
and the address of the Fund is 200 Berkeley Street, Boston, Massachusetts
02116-5034.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone provides investment advise, management and administrative services to
the Fund.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by FUNB, a wholly-owned subsidiary of First Union. The
predecessor corporation to First Union Keystone was acquired by FUNB by merger
into a wholly-owned subsidiary of FUNB, which entity then succeeded to the
business of the predecessor corporation. Contemporaneously with the Acquisition,
the Fund entered into a new investment advisory agreement with Keystone and into
a principal underwriting agreement with EKD, a wholly-owned subsidiary of BISYS.
The new investment advisory agreement (the "Advisory Agreement") was approved by
the shareholders of the Fund on December 9, 1996, and became effective on
December 11, 1996.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB and Evergreen Asset Management Corp.,
wholly-owned subsidiaries of FUNB, manage or otherwise oversee the investment of
over $60 billion in assets as of December 31, 1996, belonging to a wide range of
clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Portfolio's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees; (5) brokerage commissions, brokers' fees and expenses; (6)
issue and transfer taxes;(7) costs and expenses under the Distribution Plan; (8)
taxes and trust fees payable to governmental agencies; (9) the cost of share
certificates;(10) fees and expenses of the registration and qualification of the
Fund and its shares with the SEC or under state or other securities laws; (11)
expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; and (14) charges and expenses of
filing annual and other reports with the SEC and other authorities, and (15) all
extraordinary charges and expenses of the Fund.
The Fund, on behalf of the Portfolio, pays Keystone a fee for its
services at the annual rate of:
Aggregate Net Asset
Management Value of the Shares
Fee Income of the Portfolio
- -------------------------------------------------------------------------------
1.5% of gross dividend and
interest 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 each business day and
payable monthly.
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 for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaced EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or EKD in respect of underwriting and distribution
services performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by EKD for the provision of certain
marketing support services to EKD at an annual rate of up to .75% of the average
daily net assets of the Fund, subject to certain restrictions.
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers, and
others, acting as principals, for sales of shares to them. The Underwriting
Agreements provide that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it. EKD
or EKIS, its predecessor, may receive payments from the Fund pursuant to the
Fund's Distribution Plans.
All subscriptions and sales of shares by EKD are at the public offering
price of the shares, which is determined in accordance with the provisions of
the Fund's Declaration of Trust, By-Laws, current prospectuses and statement of
additional information. All orders are subject to acceptance by the Fund and the
Fund reserves the right, in its sole discretion, to reject any order received.
Under the Underwriting Agreements, the Fund is not liable to anyone for failure
to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
EKD has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares. EKD has also agreed
that it will indemnify and hold harmless the Fund and each person who has been,
is, or may be a Trustee or officer of the Fund against expenses reasonably
incurred by any of them in connection with any claim, action, suit, or
proceeding to which any of them may be a party that arises out of or is alleged
to arise out of any misrepresentation or omission to state a material fact on
the part of EKD or any other person for whose acts EKD is responsible or is
alleged to be responsible, unless such misrepresentation or omission was made in
reliance upon written information furnished by the Fund.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software, and Fund data files.
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SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS provides officers and certain administrative services to the Fund
pursuant to a sub-administration agreement. For its services under that
agreement BISYS will receive from Keystone an annual fee at the maximum annual
rate of .01% of the average daily net assets of the Fund.
- -------------------------------------------------------------------------------
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; (2) requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (3) 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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EXPENSES
- --------------------------------------------------------------------------------
Investment Advisory Fees
For each of the Portfolio's last three fiscal years, the table below lists the
total dollar amounts paid by the Fund, on behalf of the Portfolio, to Keystone
for services rendered under the Advisory Agreement.
For more information, see "Investment Adviser."
Fee Paid to Keystone for
Fiscal Year Ended Services Rendered under the Percentage of Portfolio
October 31, Advisory Agreement Average Net Assets
- -------------------- ------------------------------ -----------------------
1996 $93,994 0.64%
1995 $93,806 0.65%
1994 $61,697 0.64%
Distribution Plan Expenses
Listed below are the amounts paid by each class of shares under its respective
Distribution Plan to EKIS for the fiscal year ended October 31, 1996. For more
information, see "Distribution Plans."
Class B Shares Sold Class B Shares Sold on
Class A Shares Prior to June 1, 1995 or after June 1, 1995 Class C Shares
- ----------------- ---------------------- ------------------------ --------------
$21,291 $30,767 $13,709 $11,245
Underwriting Commissions
For each of the Portfolio's last three fiscal years, the table below lists the
aggregate dollar amounts of underwriting commissions (front-end sales charges,
plus distribution fees, plus CDSCs) paid with respect to the public distribution
of the Portfolio's shares. The table also indicates the aggregate dollar amount
of underwriting commissions retained by EKIS. For more information, see
"Principal Underwriter" and "Sales Charges."
Aggregate Dollar Amount of
Fiscal Year Ended Aggregate Dollar Amount of Underwriting Commissions
October 31, Underwriting Commissions Retained by EKIS
- ------------------ ----------------------------- ---------------------------
1996 $57,562 $26,779
1995 $55,036 $12,298
1994 $67,005 ($44,771)
Brokerage Commissions
For the Fiscal Period Aggregate Dollar Amount of
Ended October 31, Brokerage Commissions Paid
- ---------------------- ----------------------------
1996 $0
1995 $6,695
1994 $9,000
- --------------------------------------------------------------------------------
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 annual total return for the one year period
ended October 31, 1996 was 8.58%. The Class A average annual total return for
the five year period ended October 31, 1996 , and for the period of January 9,
1987 (commencement of operations) to October 31, 1996 were 6.10% and 6.97%,
respectively, (including any applicable sales charge). The annual total returns
for Class B and Class C of the Portfolio for the one year period ended October
31, 1996 was 9.04% and 13.09%, respectively, (including any applicable sales
charge). The average annual 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, 1996 were 3.97% and 4.68%, 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.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the SEC:
Schedule of Investments as of October 31, 1996;
Financial Highlights for each of the the years in the two-year period
ended October 31, 1996, the period from January 1, 1994 to October 31,
1994, each of the years in the six-year period ended December 31, 1993,
and the period from January 9, 1987 to December 31, 1987 for Class A
shares;
Financial Highlights for each of the years in the two-year period ended
October 31, 1996, the period from January 1, 1994 to October 31, 1994,
and the period from August 2, 1993 to December 31, 1993 for Class B and
C shares;
Statement of Assets and Liabilities as of October 31, 1996;
Statement of Operations for the year ended October 31, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended October 31, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated November 29, 1996.
Copies of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Redemptions in Kind
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
General
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
January 31, 1997.
As of January 31, 1997, Merrill Lynch Pierce Fenner & Smith, For Sole
Benefit of Its Customers, Attn: Fund Administration, 4800 Deer Lake Dr. E, 3rd
Floor, Jacksonville, FL 32246-6484 owned 611.601% of the Portfolio's outstanding
Class B shares.
As of January 31, 1997, Merrill Lynch Pierce Fenner & Smith, For Sole
Benefit of Its Customers, Attn: Fund Administration, 4800 Deer Lake Dr. E, 3rd
Floor, Jacksonville, FL 32246-6484 Robert Samuel Klepper, Susan Leslie Klepper
Comm Property House Account, 424 Keel Lane, Redwood Shoes, CA 94065-1107;
PaineWebber for the Benefit of PaineWebber Cdn., FBO: Howard I. Richert, PO Box
3321, Weehawken, NJ 07087-8154; Susan T. Fox TTEE, Susan T. Fox Trust, U/A DTD
11/2/95, 117 Ryan Avenue, Mill Valley, CA 94941; 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 18.411%, 8.998%,7.160%,
7.15%, 5.864% and 5.360%, respectively, of the Portfolio's outstanding Class C
shares.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or EKD, 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 Balanced Fund II - Seeks current income and capital appreciation
consistent with the preservation of capital.
Keystone Capital Preservation and Income Fund - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
Keystone Fund for Total Return - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
Keystone Fund of the Americas - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada), and Latin America (Mexico and countries in South and Central
America).
Keystone Global Opportunities Fund - Seeks long-term capital growth from foreign
and domestic securities.
Keystone Global Resources and Development Fund - Seeks long-term capital growth
by investing primarily in equity securities.
Keystone Government Securities Fund - Seeks income and capital preservation
from U.S. government securities.
Keystone America Hartwell Emerging Growth Fund, Inc. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
Keystone Intermediate Term Bond Fund - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
Keystone Omega Fund - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
Keystone Small Company Growth Fund II - Seeks long-term growth of capital by
investing primarily in equity securities with small market capitalizations.
Keystone State Tax Free Fund - A mutual fund consisting of four separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
Keystone State Tax Free Fund - Series II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
Keystone 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.
<PAGE>
[COVER]
[PHOTO OF SAILBOAT GLIDING THROUGH WATER]
- KEYSTONE STRATEGIC INCOME FUND
{KEYSTONE LOGO]
ANNUAL REPORT
JULY 31, 1996
KEYSTONE AMERICA
FAMILY OF FUNDS
[Filled in Diamond]
Balanced Fund II
California Insured Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources & Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic income Fund
Tax Free Income Fund
World Bond Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone Funds, contact your
financial adviser or call Keystone.
{KEYSTONE LOGO]
KEYSTONE INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
[RECYCLE LOGO]
SIF-R-9/96
16.4M
<PAGE>
Keystone Strategic Income Fund
Seeks generous income from a diversified portfolio of high yield,
foreign, and U.S. government or agency obligations.
Dear Shareholder:
We are pleased to report on the performance of Keystone Strategic Income Fund
for the twelve-month period which ended July 31, 1996. Following our letter
to you we have included a discussion with your Fund's manager.
Performance
Your Fund provided the following returns including price changes and
reinvested dividends for the twelve-month period ended July 31, 1996:
Class A shares returned 6.84%.
Class B shares returned 6.21%.
Class C shares returned 6.07%.
For the same twelve-month period, the Lehman Aggregate Bond Index--a broad
index of U.S. corporate, government and mortgage-backed securities--returned
5.53% and the Salomon World Government Bond Index--a U.S. dollar index of
foreign government bonds--returned 2.05%.
We were pleased with your Fund's improved results. They were achieved during
a period of generally declining bond prices which had an adverse impact on
the performance of many fixed income investments. While your Fund experienced
a slight price decline, shareholders benefitted from the Fund's diversified
asset strategy. This strategy is intended to provide attractive income and
returns with lower price volatility. Strength in the foreign markets and
demand for high yield bonds helped to offset price declines among U.S.
government and agency securities. We believe the differing performances of
the markets underscored the value of this type of asset allocation strategy.
The U.S. bond market experienced two different types of climates over the
past twelve months. Interest rates declined through much of 1995 resulting in
bond price increases. This was prompted by slower economic growth and
relatively low inflation. However, in early 1996 interest rates began to
rise. Reports of a strengthening economy stimulated concerns about higher
inflation rates. This news had a particularly negative effect on the prices
of U.S. government bonds whose performance is influenced to a great extent by
changes in interest rates.
Asset allocation
For much of the year, approximately 45% of net assets were invested in high
yield bonds, 35% in foreign bonds and 20% in U.S. government and agency
securities. The foreign sector primarily consisted of investments in Latin
America and Denmark, Sweden, Italy and Canada. Your Fund's Latin American
holdings were U.S. dollar-denominated and invested in large, well-established
corporations with solid cash flows. During the year, we recognized value in
the so-called "high yield" European countries of Denmark, Sweden and Italy.
We established positions in European bonds by shifting assets from Latin
America. The move also served to broaden the portfolio's diversification.
An increased emphasis on foreign bonds
Recently, we reduced the high yield portion by 10% and increased the foreign
bond and U.S. government and agency holdings each by 5%. As of July 31, 1996,
Strategic Income Fund was structured as follows: 25% in high grade bonds, 33%
in high yield bonds and 42% in foreign bonds. Approximately half of the
foreign investments were Latin American and half were in the government bonds
of Denmark, Sweden and Italy at the end of the period. We attempted to limit
our exposure to currency fluctuations by hedging approximately 25% of the
Fund's non-dollar foreign holdings into U.S. dollars.
-continued-
1
<PAGE>
Strategic Income Fund's flexibility enabled your management to find value in
the high yield sector and foreign bond markets. Lower interest rates over the
past year prompted many investors to attempt to maximize yield by investing
in high yield bonds. Demand for this sector supported high yield bond prices
when the U.S. government bond prices declined in the first half of 1996.
Attractive returns were also found in the foreign bond markets. We invested
in bonds issued by well-established Latin American corporations which
generated attractive income. Latin America's investment environment has
improved dramatically from the devaluation of the Mexican peso in 1994.
Industry privatization, dramatically lower inflation and improved fiscal
policies have resulted in a rebound in investor confidence and bond prices.
Our outlook
Looking ahead, we expect that the stronger economic growth we have seen over
the past few months should moderate in the fourth quarter. We anticipate a
slower economy in early 1997 with few inflationary pressures. This should
provide a stable backdrop for the fixed-income markets.
We will continue to seek value through careful research, analysis and sector
diversification. We are confident that this philosophy can build attractive
returns and above average income for the long-term fixed income investor.
We are pleased to inform you that Keystone has agreed to be acquired by
First Union Corporation. The acquisition is subject to a number of
conditions, including approvals of investment advisory agreements with
Keystone by fund shareholders. First Union is a financial services firm based
in Charlotte, North Carolina. It is the nation's sixth largest bank holding
company with assets of approximately $140 billion. First Union, through its
wholly-owned subsidiary Evergreen Asset Management Corp., manages more than
$16 billion in 36 mutual funds. Keystone will remain a separate entity after
its acquisition and will continue to provide investment advisory and
management services to the Fund. We believe First Union's acquisition of
Keystone should strengthen the investment management services we provide to
you.
Thank you for your continued support of Keystone Strategic Income Fund. We
encourage you to write to us with questions or comments about your
investment.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[PHOTO - ALBERT H. ELFNER, III]
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
[PHOTO - GEORGE S. BISSELL]
September 1996
2
<PAGE>
A Discussion With
Your Fund's Manager
[PHOTO - RICHARD CRYAN]
Richard Cryan is portfolio manager of the Fund and
heads Keystone's high yield bond team. Mr. Cryan has
more than 16 years of investment experience, and served
as president of Wasserstein Perella Asset Management
and also as a portfolio manager at Fidelity Investments.
Dick received his BS from the University of Colorado
and his MBA from Columbia University. In managing
the Fund, he is supported by Gilman Gunn, head of
Keystone's international bond group and Chris Conkey,
head of Keystone's domestic high grade bond group.
Q How do you manage the Fund?
A Our ongoing strategy in managing the Fund is to provide a premium yield
and consistent performance, with reduced price fluctuations. We seek this by
diversifying the portfolio into three asset classes: high yield corporate
bonds, foreign bonds, and U.S. government securities. Our own analysis has
shown that historically a blend of these asset classes can provide most of
the returns of a single asset class, with lower price volatility.
Q How do you determine the Fund's asset allocation?
A Asset allocation decisions are driven by our outlook for the risk and
reward potential in each market sector. This includes evaluation of the
current economic and business cycle and its effects on the asset class.
Within a sector, we seek investments that will limit volatility and maximize
the Fund's income. The Fund's asset allocations are actively managed and
reviewed on a regular basis. We attempt to maintain a high degree of
liquidity to accommodate asset shifts in the event there is a change in a
sector's risk/reward profile. Our allocations as of July 31, 1996 appear on
page four.
Q What was the environment like for bonds over the last twelve months?
A The U.S. bond market experienced two different kinds of climates during
the fiscal year. Interest rates declined as bond prices rose during the last
half of 1995. However, early in 1996 interest rates rose and bond prices fell
(see yield chart on page four). Reports showed the economy gaining strength
and investors becoming concerned about higher inflation rates. This news had
the greatest effect on long-term U.S. government and agency securities, but
also influenced the performance of the high yield and foreign bond markets.
Fund Profile
Objective: Seeks generous income from high yield, foreign, and
U.S. government or agency obligations.
Commencement of investment operations: April 14, 1987
Average maturity: 10 years
Net assets: $223 million
Newspaper listing: "StrInc"
3
<PAGE>
****************************[line chart]**************************************
The Benchmark 30-Year
U.S. Treasury Bond Yield
Date Yield
91 7.930
7.880
7.820
7.770
7.880
7.960
8.040
7.930
7.870
7.820
7.980
7.930
7.800
7.770
7.570
7.510
92 7.480
7.460
7.600
7.700
7.770
7.760
7.900
7.940
7.800
7.920
8.060
8.040
7.940
7.870
7.880
7.930
8.040
8.010
7.900
7.800
7.820
7.830
7.850
7.820
7.780
7.620
7.630
7.680
7.560
7.440
7.390
7.320
7.350
7.410
7.280
7.290
7.320
7.340
7.320
7.520
7.530
7.630
7.630
7.750
7.570
7.530
7.590
7.500
7.440
7.430
7.360
7.390
93 7.460
7.340
7.300
7.210
7.160
7.120
7.010
6.890
6.750
6.850
6.800
6.930
7.050
6.840
6.750
6.790
6.940
6.840
6.940
7.030
6.980
6.900
6.790
6.810
6.710
6.660
6.640
6.540
6.700
6.560
6.530
6.350
6.210
6.120
5.950
5.880
6.030
6.050
5.980
5.910
5.780
5.980
5.960
6.210
6.150
6.330
6.250
6.250
6.180
6.280
6.210
6.350
94 6.230
6.300
6.280
6.210
6.360
6.410
6.630
6.720
6.840
6.910
6.900
6.990
7.110
7.260
7.290
7.210
7.300
7.530
7.500
7.300
7.390
7.260
7.310
7.450
7.510
7.610
7.690
7.540
7.550
7.380
7.530
7.480
7.490
7.490
7.490
7.700
7.780
7.790
7.820
7.900
7.830
7.980
7.960
8.150
8.140
8.130
7.940
7.910
7.850
7.850
7.850
7.880
95 7.860
7.790
7.890
7.740
7.600
7.680
7.580
7.540
7.550
7.460
7.370
7.370
7.430
7.380
7.330
7.330
7.340
7.010
7.000
6.900
6.740
6.520
6.710
6.620
6.500
6.620
6.520
6.590
6.960
6.900
6.900
6.970
6.900
6.720
6.600
6.590
6.460
6.590
6.480
6.420
6.300
6.350
6.340
6.270
6.320
6.230
6.250
6.090
6.050
6.090
6.050
5.950
96 6.040
6.160
5.970
6.040
6.140
6.100
6.220
6.410
6.380
6.690
6.740
6.640
6.670
6.660
6.810
6.790
6.780
7.110
6.920
6.830
6.830
6.990
7.040
7.090
7.100
6.900
7.180
7.020
6.960
7.010
The release of stronger than expected U.S. growth statistics during the first
quarter of 1996 caused yields to rise and bond prices to fall.
Source: Fact Set
******************************************************************************
High yield bonds held their value better than any other domestic bond sector
during that time. The lower interest rates we have seen over the past year
caused many investors to "stretch for yield", creating strong demand for high
yield bonds. This demand supported the prices of high yield bonds when the
higher quality sectors incurred losses.
Q How about the foreign markets?
A Selected foreign markets performed well. The investment climate in Latin
America has turned around from what it had been several years ago. Valuations
have rebounded due to a number of positive trends that have taken place.
These included a reduced role of the government in managing the economy,
industry privatization and aggressive inflation-fighting policies. The Fund's
Latin American holdings provided the portfolio with attractive current
income.
In Europe, our holdings of Danish, Swedish and Italian bonds also were
strong performers, due to a favorable environment in these particular
countries. The economic environment in these countries has been relatively
stable, inflation has been low and deficit reduction policies have been in
place, despite a sluggish economic environment in many other European
countries. These government bonds appeared undervalued to us at the time of
purchase.
Asset Allocation
as of July 31, 1996
*********************[pie chart]***********************
High grade (includes U.S. government, agency
and mortgage-backed securities) 24.7%
Foreign bonds (non-U.S.$) 19.6%
Foreign bonds (U.S.$) 22.3%
High yield 31.6%
Other(1) 1.8%
*******************************************************
- -----------------------
1 Includes common and preferred stocks and warrants, repurchase agreements,
and other assets and liabilities.
4
<PAGE>
Top 10 Holdings
as of July 31, 1996
<TABLE>
<CAPTION>
<S> <C>
as of July 31, 1996 Percentage of
net assets
Kingdom of Sweden, 10.25%, 2003 6.9
Kingdom of Denmark, 8%, 2003 5.9
Federal Home Loan Mortgage Corp., 7.69%, 2022 5.4
Government National Mortgage Assoc., 6.5%, 2023 4.4
Republic of Italy, 9.5%, 2006 3.9
U.S. Treasury Bonds, 7.875%, 2021 3.9
Telecom Argentina, 8.375%, 2000 3.8
Government National Mortgage Assoc.,
6.50%, 2009 3.8
New Zealand Government, 8%, 2001 2.9
Telefonica de Argentina, 11.875%, 2004 2.8
</TABLE>
In New Zealand, conservative fiscal and monetary policies have resulted in
strong performance for government bonds. The government has been running
budget surpluses and paying down its debt. Further, the central bank's strict
monetary policy has kept inflation to a minimum.
Q How did Strategic Income Fund perform during the past year?
A We believe the Fund performed as it was designed. The last six months were
an unusually volatile period for U.S. interest rates, but the Fund
demonstrated good stability. The Fund's ability to diversify enabled it to
benefit from the positive performances in the foreign and high yield markets.
Further, the blend of assets helped to provide insulation from the decline
experienced by U.S. Treasury and agency securities.
Q You recently re-allocated 10% of the Fund's assets from high yield to
foreign and high grade bonds. Why?
A The risk/reward profile for high yield bonds has changed over the past few
months. Strength in that sector has driven yields to historically low levels
relative to U.S. Treasuries. We believed that the high yield market had had
good performance, with little further improvement expected over the short
term. Increasing the U.S. Treasury holdings in the high grade sector also
enhanced the Fund's liquidity. We built a larger position in the foreign
sector because we believed that selected markets were attractively valued. We
expected that a larger commitment to that sector would both improve
diversification and enhance overall performance.
Q What is your outlook for these market sectors over the next six months?
A We see positive factors in each of the sectors. Together, we look for them
to provide investors with above average income and attractive returns. We
share Federal Reserve Board Chairman Alan Greenspan's view that the economy
will grow slowly through the beginning of 1997 and that inflation will remain
low. That should provide a healthy climate for domestic fixed-income
securities.
Our outlook for high yield bonds is neutral. We expect to see their strength
relative to U.S. Treasuries subside, with those sectors resuming a
relationship that is closer to historical performance. We also anticipate a
solid performance from the foreign sector. Trends are in place that should
continue to strengthen the economic fundamentals of the respective countries.
We expect that the foreign sector will provide the portfolio with attractive
investment value and high current yield.
[DIAMOND-(filled in)]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
5
<PAGE>
Your Fund's Performance
Growth of an investment in
Keystone Strategic Income Fund Class A
**************************[mountain chart]***********************************
In Thousands
Reinvested Distributions Initial Investment
4/87 9534 9534
9649 9735
7/88 9001 10172
8677 11084
7/90 6905 10131
5867 10195
7/92 6744 13118
7486 16290
7/94 7001 16593
6563 17090
7/96 6448 18259
Total Value: $18,259
*****************************************************************************
Twelve-Month Performance as of July 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class A Class B Class C
Total returns* 6.84% 6.21% 6.07%
Net asset value 7/31/95 $6.89 $6.92 $6.92
7/31/96 $6.77 $6.81 $6.80
Dividends $0.57 $0.52 $0.52
Capital gains None None None
</TABLE>
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of July 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 6.84% 6.21% 6.07%
1-year 1.76% 2.28% 6.07%
5-year 70.60% -- --
Life of Class 82.59% 25.14% 27.87%
Average Annual Returns
1-year w/o sales charge 6.84% 6.21% 6.07%
1-year 1.76% 2.28% 6.07%
5-year 11.27% -- --
Life of Class 6.69% 6.62% 7.28%
</TABLE>
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received for holding shares for one year and redeeming
after the end of the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares to another Keystone fund for a $10 fee by
contacting Keystone directly. The exchange fee is waived for individual
investors who make an exchange using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
6
<PAGE>
Growth of an Investment
*****************************[line chart]*************************************
Comparison of change in value of a $10,000 investment in Keystone Strategic
Income Fund Class A, the Lehman Aggregate Bond Index, and the Consumer Price
Index.
In Thousands April 14, 1987 through July 31, 1996
Class A Lehman Aggregate Consumer Price Index
Bond Index (LABI) (CPI)
4/87 9534 10000 10000
9735 9802 10152
7/88 10172 10544 10571
11084 12147 11097
7/90 10131 13004 11632
10195 14392 12150
7/92 13118 16520 12533
16290 18202 12881
7/94 16593 18219 13238
17090 20058 13604
7/96 18259 21166 14005
Average Annual Total Return
---------------------------
1 Year 5 Year Life of Class
Class A 1.76% 11.27% 6.69%
Class B 2.28% -- 6.62%
Class C 6.07% -- 7.28%
Past performance is no guarantee of future results. The performance of Class B
or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the different
classes. Class B and Class C shares were introduced February 1, 1993. The
Consumer Price Index and Lehman Aggregate Bond Index are from March 31, 1987.
******************************************************************************
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Strategic Income Fund
The Fund seeks generous income from high yield, foreign, and U.S. government
or agency obligations. The return is quoted after deducting sales charges (if
applicable), fund expenses, and transaction costs and assumes reinvestment of
all distributions.
2. Lehman Aggregate Bond Index (LABI)
The LABI is a broad-based, unmanaged fixed-income market index of U.S.
government, corporate, and mortgage-backed securities. It represents the
price change and coupon income of several thousand securities with various
maturities and qualities. Securities are selected and compiled by Lehman
Brothers, Inc. according to criteria that may be unrelated to your Fund's
investment objective. It would be difficult for most individual investors to
duplicate this index.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding what the chart means
The chart demonstrates your Fund's performance in relation to a well known
investment index and to increases in the cost of living. It is important to
understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other important
financial considerations such as safety, stability and consistency.
7
<PAGE>
Limitations of the chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance can be distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or stocks that have a certain market capitalization. Indexes usually do
not have the same investment restrictions as your Fund.
Indexes do not include the costs of investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of several measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future returns may be different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
8
<PAGE>
SCHEDULE OF INVESTMENTS--July 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (98.2%)
INDUSTRIAL BONDS & NOTES (31.6%)
AEROSPACE (0.5%)
Airplanes Pass Thru Trust Bond (Subord.) 10.875% 2019 $1,000,000 $1,040,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
BROADCASTING (2.6%)
Ackerly Communications Incorporated Sr. Notes 10.750 2003 775,000 802,125
EZ Communications, Incorporated Sr. Notes (Subord.) 9.750 2005 1,000,000 985,000
K-III Communications Corporation (f) Sr. Notes 8.500 2006 1,000,000 915,000
Park Broadcasting, Incorporated (f) Sr. Notes 11.750 2004 1,000,000 1,150,000
Paxson Communications Corporation Sr. Notes (Subord.) 11.625 2002 1,000,000 1,040,000
Sinclair Broadcast Group, Incorporated Sr. Notes (Subord.) 10.000 2005 1,000,000 982,500
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
5,874,625
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
CABLE/OTHER VIDEO DISTRIBUTION (3.5%)
Adelphia Communications Corporation Sr. Notes 12.500 2002 1,000,000 1,027,500
Cablevision Systems Corporation Sr. Deb. (Subord.) 10.500 2016 1,000,000 960,000
Comcast Corporation Sr. Deb. (Subord.) 10.625 2012 1,000,000 1,045,000
Diamond Cable Communications Company
(Eff. Yield 11.09%)(e) Sr. Disc. Notes 0.000 2005 1,000,000 595,000
Fundy Cable Limited Sr. Notes 11.000 2005 1,000,000 1,015,000
Marcus Cable Operating Company Sr. Disc. Notes
(Eff. Yield 10.54%)(e) (Subord.) 0.000 2004 1,000,000 720,000
Rogers Cablesystems Limited Sr. Notes 10.000 2005 1,000,000 995,000
Videotron Holdings, PLC
(Eff. Yield 11.00%)(e) Sr. Disc. Notes 0.000 2005 2,000,000 1,305,000
Videotron Group Limited Sr. Notes (Subord.) 10.250 2002 150,000 154,500
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
7,817,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
CHEMICALS (1.4%)
Rexene Corporation Sr. Notes 11.750 2004 1,000,000 1,092,500
Sifto Canada, Incorporated Sr. Notes 8.500 2000 1,000,000 970,000
Viridian, Incorporated Notes 9.750 2003 1,000,000 1,027,500
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
3,090,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
CONSUMER (1.2%)
Exide Corporation Sr. Notes 10.000 2005 1,500,000 1,470,000
International Semi-Tech Electronics,
Incorporated (Eff. Yield 11.98%)(e) Sr. Disc. Notes 0.000 2003 2,000,000 1,130,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
2,600,000
(continued on next page)
9
<PAGE>
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
DIVERSIFIED MEDIA (0.7%)
Lifestyle Brands Gtd. Deb. (Subord.) 10.000% 1997 $ 700,000 $ 700,000
Viacom, Incorporated Deb. (Subord.) 8.000 2006 1,000,000 915,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
1,615,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
ENERGY (2.8%)
Clark USA, Incorporated Sr. Notes 10.875 2005 1,000,000 1,007,500
Falcon Drilling Company Sr. Notes 8.875 2003 1,000,000 960,000
Ferrellgas Partners Limited Partnership (f) Sr. Notes 9.375 2006 775,000 747,875
Gulf Canada Resources Limited Sr. Notes (Subord.) 9.625 2005 1,000,000 1,007,500
Plains Resources, Incorporated (f) Sr. Notes (Subord.) 10.250 2006 500,000 495,000
TransTexas Gas Corporation Sr. Notes 11.500 2002 1,000,000 995,000
Vintage Petroleum, Incorporated Sr. Notes (Subord.) 9.000 2005 1,000,000 962,500
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
6,175,375
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
FINANCIAL (0.9%)
Conseco, Incorporated Sr. Notes 10.500 2004 1,000,000 1,137,000
Reliance Group Holdings, Incorporated Sr. Deb. (Subord.) 9.750 2003 1,000,000 990,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
2,127,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
FOODS/TOBACCO/BEVERAGES (2.6%)
American Rice, Incorporated Mtge. Notes 13.000 2002 500,000 460,000
Chiquita Brands International, Incorporated Sr. Notes 10.250 2006 500,000 497,500
Iowa Select Farms (8/2/94-$2,696,506)
(Eff. Yield 16.62%)(c)(e) Sr. Disc. Notes 0.000 2004 5,680,000 3,153,536
Specialty Foods Corporation Sr. Notes (Subord.) 11.250 2003 2,000,000 1,680,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
5,791,036
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
FOREST PRODUCTS/CONTAINERS (3.8%)
Buckeye Cellulose Corporation Sr. Notes (Subord.) 8.500 2005 1,000,000 952,500
Calmar, Incorporated Sr. Notes (Subord.) 11.500 2005 1,000,000 972,500
Container Corporation of America Sr. Notes 11.250 2004 1,000,000 1,040,000
Owens-Illinois, Incorporated Sr. Deb. 11.000 2003 1,000,000 1,077,500
Rainy River Forest Products, Incorporated Sr. Notes 10.750 2001 1,000,000 1,052,500
Riverwood International Corporation Gtd. Sr. Notes 10.250 2006 1,000,000 985,000
Tembec Finance Corporation Sr. Notes 9.875 2005 2,500,000 2,325,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
8,405,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
GAMING (2.9%)
Boyd Gaming Corporation Sr. Notes (Subord.) 10.750 2003 1,000,000 1,035,000
Colorado Gaming and Entertainment Company Sr. Secd. PIK Notes 12.000 2003 1,958,427 1,821,337
10
<PAGE>
Grand Palais Casino Incorporated (8/15/94-
$2,488,391)(b)(c)(d) Sr. Secd. PIK Notes 18.250% 1997 $2,488,391 $ 25
HMH Properties, Incorporated Sr. Secd. Notes 9.500 2005 1,500,000 1,440,000
Showboat, Incorporated Sr. Notes (Subord.) 13.000 2009 1,000,000 1,140,000
Starcraft Corporation (b)(c)(d) Notes (Subord.) 16.500 1998 750,000 15,000
Trump Atlantic City Associates 1st Mtge. Notes 11.250 2006 1,000,000 975,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
6,426,362
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
HEALTHCARE (0.4%)
Regency Health Services, Incorporated Sr. Notes (Subord.) 9.875 2002 1,000,000 970,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
HOUSING (0.9%)
Continental Homes Holding Corporation Sr. Notes 10.000 2006 1,000,000 950,000
Schuller International Group, Incorporated Sr. Notes 10.875 2004 1,000,000 1,080,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
2,030,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
MANUFACTURING (1.1%)
Alpine Group, Incorporated Sr. Notes 12.250 2003 1,000,000 1,020,000
Koppers Industries, Incorporated Sr. Notes 8.500 2004 1,550,000 1,476,375
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
2,496,375
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
METALS/MINERALS (1.3%)
AK Steel Corporation Sr. Notes 10.750 2004 750,000 811,875
GS Technologies Operations, Incorporated Sr. Notes 12.250 2005 1,000,000 1,027,500
Jorgensen Earle Sr. Notes 10.750 2000 1,000,000 990,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
2,829,375
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
RETAIL (1.3%)
Cole National Group, Incorporated Sr. Notes 11.250 2001 1,000,000 1,050,000
Finlay Fine Jewelry Corporation Sr. Notes 10.625 2003 1,000,000 987,500
Michaels Stores, Incorporated Sr. Notes 10.875 2006 1,000,000 990,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
3,027,500
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
TELECOMMUNICATIONS (1.1%)
Bell Cablemedia PLC (Eff. Yield 10.67%)(e) Sr. Disc. Notes 0.000 2005 2,000,000 1,240,000
Teleport Communications Group Sr. Notes 9.875 2006 1,200,000 1,152,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
2,392,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
TRANSPORTATION (0.9%)
Eletson Holdings, Incorporated 1st Pfd. Mtge. Notes 9.250 2003 1,000,000 955,000
Gearbulk Holding Limited Sr. Notes 11.250 2004 1,000,000 1,040,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
1,995,000
11
<PAGE>
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
WIRELESS COMMUNICATIONS (1.7%)
Centennial Cellular Corporation Sr. Notes 8.875% 2001 $ 1,000,000 $ 930,000
Mobile Telecommunication Technology Sr. Notes 13.500 2002 1,000,000 1,055,000
Rogers Cantel Sr. Deb. 9.375 2008 1,000,000 970,000
Vanguard Cellular Systems, Incorporated Deb. 9.375 2006 1,000,000 965,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
3,920,000
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$75,507,476) 70,621,648
- ------------------------------------------------------------------------------- ------- ----------- ------------
MORTGAGE-BACKED SECURITIES (18.7%)
FHLMC Participation Certificate Pool
#607352 7.694 2022 24,900,000 11,981,648
FNMA Grantor Trust 95-T5A 7.000 2035 1,500,000 1,202,013
FNMA Pool #322356 7.000 2025 4,602,585 4,372,687
FNMA Pool #324193 7.000 2025 6,261,500 5,833,333
GNMA Pool #354714 6.500 2023 11,613,669 9,796,589
GNMA Pool #780163 6.500 2009 10,000,000 8,509,694
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
TOTAL MORTGAGE-BACKED SECURITIES (COST--$42,392,278) 41,695,964
- --------------------------------------------------------------------- ------ ------- ----------- ------------
FOREIGN BONDS (U.S. DOLLARS) (22.3%)
Celulose Nipo Brasileiras Unsecd. Deb. 9.375 2003 3,750,000 3,726,563
Grupo Industrial Durango S.A. Notes 12.000 2001 2,500,000 2,521,875
Grupo Industrial Durango S.A. Notes 12.625 2003 400,000 403,500
Grupo Televisa S.A. (f) Sr. Notes 11.875 2006 2,900,000 2,936,250
Indah Kiat International Finance Co. Gtd. Sr. Secd. Notes 11.375 1999 2,000,000 2,100,000
Indah Kiat International Finance Co. Gtd. Sr. Secd. Notes 11.875 2002 3,000,000 3,210,000
Intermedia Capital Partners (f) Sr. Notes 11.250 2006 500,000 501,250
Ispat Mexicana S.A. Sr. Unsecd. Deb. 10.375 2001 2,000,000 1,940,000
Klabin Fabricadora Papel Unsecd. Deb. 11.000 1998 2,000,000 2,037,500
Klabin Fabricadora Papel Unsecd. Deb. 10.000 2001 5,000,000 4,950,000
Nuevo Energy Company Sr. Notes (Subord.) 9.500 2006 1,000,000 980,000
Telecom Argentina Unsecd. Deb. 8.375 2000 9,000,000 8,554,500
Telecom Argentina (f) Unsecd. Deb. 8.375 2000 1,440,000 1,375,200
Telecom Brasil Bonds 10.000 1997 4,852,000 4,949,040
Telefonica de Argentina Unsecd. Deb. 8.375 2000 1,000,000 962,500
Telefonica de Argentina Unsecd. Deb. 11.875 2004 6,000,000 6,360,000
Vencemos Financing (f) Unsecd. Deb. 9.250 1996 150,000 150,000
Yacimientos Petroliferos Fiscales S.A.
(YPF) Unsecd. Notes 8.000 2004 2,300,000 2,041,250
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (COST--$48,725,761) 49,699,428
- -------------------------------------------------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------- ------ ------- ----------- ------------
FOREIGN BONDS (NON U.S. DOLLARS) (19.6%)
Denmark (Kingdom of) Deb. 8.000% 2003 70,500,000 $ 13,177,461
Danish Krone
Italy (Republic of) Deb. 9.500 2006 13,250,000,000 8,784,868
Italian Lira
New Zealand Government Deb. 8.000 2001 9,500,000 6,450,593
New Zealand Dollar
Sweden (Kingdom of) Deb. 10.250 2003 91,000,000 15,359,518
Swedish Krona
- ------------------------------------------- ---------------------- ------ ---------------------- ------------
TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (COST--$40,175,830) 43,772,440
- ------------------------------------------------------------------------------- ------- ----------- ------------
U.S. GOVERNMENT ISSUES (6.0%)
U.S. Treasury Bonds (h) 7.875 2021 $7,998,000 8,709,102
U.S. Treasury Notes 6.250 1998 4,300,000 4,302,666
U.S. Treasury Notes 6.250 2000 500,000 495,155
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
TOTAL U.S. GOVERNMENT ISSUES (COST--$13,245,149) 13,506,923
- ------------------------------------------------------------------------------- ------- ----------- ------------
TOTAL FIXED INCOME (COST--$220,046,494) 219,296,403
- ------------------------------------------------------------------------------- ------- ----------- ------------
Shares
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
COMMON STOCKS/WARRANTS (0.7%)
Casino America, Incorporated (b) 110,614 753,558
Casino America, Incorporated, wts. (b) 19,582 19,582
Colorado Gaming and Entertainment Company (b) 195,842 636,487
Grand Palais Casinos, Inc., Series A, wts. (8/15/94-$727)(b)(c) 72,794 73
Grand Palais Casinos, Inc., Series B, wts. (8/15/94-$397)(b)(c) 39,706 40
Grand Palais Casinos, Inc., Series C, wts. (8/15/94-$3,507)(b)(c) 350,735 351
Grand Palais Casinos, Inc., Series D, wts. (8/15/94-$-0-)(b)(c) 160,136 160
Grand Palais Casinos, Inc., wts. (8/15/94-$57)(b)(c) 87,342 87
Iowa Select Farms, wts. (2/4/94-$955,122)(b)(c) 117,800 117,800
Nextel Communications Incorporated, wts. (b) 4,820 48
Pagemart, Inc., wts. (b)(f) 13,340 80,040
- ------------------------------------------------------------------------------- ------- ----------- ------------
TOTAL COMMON STOCKS/WARRANTS (COST--$3,231,103) 1,608,226
- ------------------------------------------------------------------------------- ------- ----------- ------------
PREFERRED STOCK (0.6%) (COST--$2,106,054)
Ampex Corp. (b)(c) 2,156 1,317,047
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
Coupon Maturity Maturity
Rate Date Value
- ------------------------------------------- ---------------------- ------ ------- ----------- ------------
REPURCHASE AGREEMENT (0.2%) (COST--$500,000)
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, dated 7/31/96) (g) 5.687% 08/01/96 $500,079 500,000
- --------------------------------------------------------------------- ------ ------- ----------- ------------
</TABLE>
(continued on next page)
13
<PAGE>
<TABLE>
<CAPTION>
Market
Value
- --------------------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENTS (COST--$225,883,651)(a) $222,721,676
OTHER ASSETS AND LIABILITIES--NET (0.3%) 601,086
- --------------------------------------------------------------------------------
NET ASSETS (100.0%) $223,322,762
- --------------------------------------------------------------------------------
</TABLE>
(a) The cost of investments for federal income tax purposes is $226,402,398.
Gross unrealized appreciation and depreciation of investments, based on
idenified tax cost at July 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $ 6,433,451
Gross unrealized depreciation (10,114,173)
--------------
Net unrealized depreciation ($ 3,680,722)
==============
</TABLE>
(b) Non-income producing.
(c) All or a portion of these securities are either (1) restricted securities
(i.e., securities which may not be publicly sold without registration
under the Federal Securities Act of 1933) or (2) illiquid securities, and
are valued using market quotations where readily available. In the
absence of market quotations, the securities are valued based upon their
fair value determined under procedures approved by the Board of Trustees.
The Fund may make investments in an amount up to 15% of the value of the
Fund's net assets in such securities. The date of acquisition and cost
are set forth in parentheses after the title of each restricted security.
On the date of acquisition there were no market quotations on similar
securities and the above securities were valued at acquisition costs. At
July 31, 1996, the fair value of these restricted securities was
$3,272,072 (1.47% of the Fund's net assets).
(d) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on these securities. At July 31,
1996, the market value of these securities was $15,025.
(e) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(f) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
(g) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at July 31, 1996.
(h) $2,000,000 principal amount of this security is used as collateral for a
reverse repurchase agreement at July 31, 1996.
Legend of Portfolio Abbreviations:
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
U.S. $ Value at In Exchange Net Unrealized
Exchange July 31, 1996 for U.S. $ Appreciation/
Date (Depreciation)
- -------- --------- ------------ ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
----------------------------------------
8/20/96 18,670,638 Danish Krone 3,282,480 3,159,000 ($123,480)
8/20/96 25,024,580 Swedish Krona 3,784,253 3,700,000 (84,253)
--------
Net Unrealized Depreciation on Forward Foreign Currency Exchange
Contracts ($207,733)
========
See Notes to Financial Statements.
</TABLE>
14
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994(c) 1993 1992
- --------------------------------- -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of year $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10
- ----------------------------- ------- ------ ------- ------ --------
Income from investment
operations:
Net investment income 0.54 0.64 0.61 0.69 0.78
Net realized and unrealized
gain (loss) on investments,
closed futures contracts and
forward foreign currency
related transactions (0.09) (0.45) (0.44) 0.89 0.89
- ----------------------------- ------- ------ ------- ------ --------
Total from investment
operations 0.45 0.19 0.17 1.58 1.67
- ----------------------------- ------- ------ ------- ------ --------
Less distributions from:
Net investment income (0.52) (0.60) (0.61) (0.72) (0.75)
In excess of investment
income 0 (0.03) (0.03) (0.02) 0
Tax basis return of capital (0.05) (0.02) (0.04) 0 0
Net realized gains on
investments 0 0 0 0 0
- ----------------------------- ------- ------ ------- ------ --------
Total distributions (0.57) (0.65) (0.68) (0.74) (0.75)
- ----------------------------- ------- ------ ------- ------ --------
Net asset value end
of year $6.77 $6.89 $7.35 $7.86 $7.02
- ----------------------------- ------- ------ ------- ------ --------
Total return (a) 6.84% 3.00% 1.86% 24.13% 28.73%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.30%(d) 1.33% 1.32% 1.80% 2.09%
Total expenses excluding
reimbursement 1.30%(d) 1.33% 1.32% 1.80% 2.12%
Net investment income 8.05% 9.31% 7.79% 9.50% 11.73%
Portfolio turnover rate 101% 95% 92% 151% 95%
- ----------------------------- ------- ------ ------- ------ --------
Net assets end of year
(thousands) $68,118 $85,970 $105,181 $85,793 $70,459
- ----------------------------- ------- ------ ------- ------ --------
</TABLE>
<TABLE>
<CAPTION>
February 13,
1987
(Commencement
of Operations)
to
1991 1990 1989 1988 July 31, 1987
- ----------------------------- ------ ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
year $ 7.17 $ 9.02 $ 9.36 $ 10.04 $10.00
- ----------------------------- ------ ------ ------- ------- ---------------
Income from investment
operations:
Net investment income 0.89 1.03 1.10 1.05 0.22
Net realized and unrealized
gain (loss) on investments,
closed futures contracts and
forward foreign currency
related transactions (1.01) (1.79) (0.31) (0.65) 0.00
- ----------------------------- ------ ------ ------- ------- ---------------
Total from investment
operations (0.12) (0.76) 0.79 0.40 0.22
- ----------------------------- ------ ------ ------- ------- ---------------
Less distributions from:
Net investment income (0.89) (1.04) (1.11) (1.08) (0.18)
In excess of investment
income (0.06) (0.05) 0 0 0
Tax basis return of capital 0 0 0 0 0
Net realized gains on
investments 0 0 (0.02) 0 0
- ----------------------------- ------ ------ ------- ------- ---------------
Total distributions (0.95) (1.09) (1.13) (1.08) (0.18)
- ----------------------------- ------ ------ ------- ------- ---------------
Net asset value end
of year $ 6.10 $ 7.17 $ 9.02 $ 9.36 $10.04
- ----------------------------- ------ ------ ------- ------- ---------------
Total return (a) 0.54% (8.55%) 9.00% 4.49% 2.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.00% 2.00% 1.81% 1.28% 1.00%(b)
Total expenses excluding
reimbursement 2.25% 2.01% 1.90% 2.08% 6.08%(b)
Net investment income 15.23% 12.91% 12.06% 10.98% 10.12%(b)
Portfolio turnover rate 82% 36% 73% 46% 13%
- ----------------------------- ------ ------ ------- ------- ---------------
Net assets end of year
(thousands) $70,246 $83,106 $138,499 $114,310 $8,191
- ----------------------------- ------ ------ ------- ------- ---------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized for the period from April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.28%.
See Notes to Financial Statements.
15
(continued on next page)
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended July 31,
February 1, 1993
(Date of Initial
Public Offering)
1996 1995 1994(c) to July 31, 1993
- ------------------------------------------------------ -------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 6.92 $ 7.38 $ 7.89 $ 7.07
- ------------------------------------------------ ------- ------- ------- ---------------
Income from investment operations:
Net investment income 0.50 0.60 0.55 0.24
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
forward foreign currency related transactions (0.09) (0.47) (0.44) 0.92
- ------------------------------------------------ ------- ------- ------- ---------------
Total from investment operations 0.41 0.13 0.11 1.16
- ------------------------------------------------ ------- ------- ------- ---------------
Less distributions from:
Net investment income (0.47) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital (0.05) (0.01) (0.04) 0
- ------------------------------------------------ ------- ------- ------- ---------------
Total distributions (0.52) (0.59) (0.62) (0.34)
- ------------------------------------------------ ------- ------- ------- ---------------
Net asset value end of year $ 6.81 $ 6.92 $ 7.38 $ 7.89
- ------------------------------------------------ ------- ------- ------- ---------------
Total return (a) 6.21% 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.07%(d) 2.06% 2.07% 2.37%(b)
Net investment income 7.28% 8.58% 7.11% 7.18%(b)
Portfolio turnover rate 101% 95% 92% 151%
- ------------------------------------------------ ------- ------- ------- ---------------
Net assets end of year (thousands) $123,389 $149,091 $162,866 $35,415
- ------------------------------------------------------------------------------- --------------------
</TABLE>
(a) Excluding applicable sales charges
(b) Annualized
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.05%.
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering)
1996 1995 1994(c) to July 31, 1993
- ------------------------------------------------ ------- ------ ------ ---------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $6.92 $7.37 $7.88 $7.07
- ------------------------------------------------ ------- ------ ------ ---------------
Income from investment operations:
Net investment income 0.49 0.59 0.55 0.24
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
forward foreign currency related transactions (0.09) (0.45) (0.44) 0.91
- ------------------------------------------------ ------- ------ ------ ---------------
Total from investment operations 0.40 0.14 0.11 1.15
- ------------------------------------------------ ------- ------ ------ ---------------
Less distributions from:
Net investment income (0.47) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital (0.05) (0.01) (0.04) 0
- ------------------------------------------------ ------- ------ ------ ---------------
Total distributions (0.52) (0.59) (0.62) (0.34)
- ------------------------------------------------ ------- ------ ------ ---------------
Net asset value end of year $6.80 $6.92 $7.37 $7.88
- ------------------------------------------------ ------- ------ ------ ---------------
Total return (a) 6.07% 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.07%(d) 2.08% 2.07% 2.25%(b)
Net investment income 7.29% 8.56% 7.09% 7.35%(b)
Portfolio turnover rate 101% 95% 92% 151%
- ------------------------------------------------ ------- ------ ------ ---------------
Net assets end of year (thousands) $31,816 $46,221 $59,228 $19,706
- ------------------------------------------------ ------- ------ ------ ---------------
</TABLE>
(a) Excluding applicable sales charges
(b) Annualized
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31,
1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.05%.
See Notes to Financial Statements.
17
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1996
<TABLE>
<CAPTION>
Assets (Note 3)
<S> <C>
Investments at market value
(identified cost--$225,883,651) $222,721,676
Cash 145,431
Receivable for:
Investments sold 1,294,074
Fund shares sold 157,880
Interest 4,542,928
Prepaid expenses and other assets 168,577
- ---------------------------------------------------- -------------
Total assets 229,030,566
- ---------------------------------------------------- -------------
Liabilities (Notes 2, 3 and 5)
Payable for:
Investments purchased 2,073,892
Reverse repurchase agreement 2,237,856
Fund shares redeemed 352,972
Distributions to shareholders 656,991
Net unrealized depreciation on foreign currency
exchange contracts 207,733
Due to related parties 16,112
Other accrued expenses 162,248
- ---------------------------------------------------- -------------
Total liabilities 5,707,804
- ---------------------------------------------------- -------------
Net assets $223,322,762
- ---------------------------------------------------- -------------
Net assets represented by (Note 1)
Paid-in capital $297,544,782
Accumulated distributions in excess of net
investment income (1,169,996)
Accumulated net realized loss on investments,
closed futures contracts and foreign currency
related transactions (69,700,772)
Net unrealized depreciation on investments, foreign
currency exchange contracts and related
transactions (3,351,252)
- ---------------------------------------------------- -------------
Total net assets $223,322,762
- ---------------------------------------------------- -------------
Net Asset Value Per Share (Note 2)
Class A Shares
Net assets of $68,118,372 / 10,060,162 shares
outstanding $ 6.77
Offering price per share ($6.77 / 0.9525) (based
on a sales charge of 4.75% of the offering price
on July 31, 1996) $ 7.11
Class B Shares
Net assets of $123,388,688 / 18,132,004 shares
outstanding $ 6.81
Class C Shares
Net assets of $31,815,702 / 4,680,973 shares
outstanding $ 6.80
- ---------------------------------------------------- -------------
</TABLE>
STATEMENT OF OPERATIONS
Year Ended July 31, 1996
<TABLE>
<CAPTION>
Investment income (Note 1)
<S> <C> <C>
Interest (net of foreign withholding
taxes of $48,566) $23,880,913
Other income 133,017
- ------------------------------------- ---------- ------------
24,013,930
- ------------------------------------- ---------- ------------
Expenses (Notes 4 and 5)
Management fee $ 1,663,669
Transfer agent fees 655,455
Accounting, auditing and legal fees 79,228
Custodian fees 173,082
Trustees' fees and expenses 30,556
Distribution Plan expenses 1,972,005
Miscellaneous 140,311
- ------------------------------------- ---------- ------------
Total expenses 4,714,306
Less: Expenses paid indirectly
(Note 6) (37,066)
- ------------------------------------- ---------- ------------
Net expenses 4,677,240
- ------------------------------------- ---------- ------------
Net investment income 19,336,690
- ------------------------------------- ---------- ------------
Net realized and unrealized loss on
investments and foreign currency
related transactions
(Notes 1 and 3)
Net realized loss on:
Investments (2,858,545)
Foreign currency related
transactions (1,073,293)
- ------------------------------------- ---------- ------------
Net realized loss on investments and
foreign currency related
transactions (3,931,838)
- ------------------------------------- ---------- ------------
Net change in unrealized
appreciation (depreciation) on:
Investments (48,177)
Foreign currency related
transactions 295,422
- ------------------------------------- ---------- ------------
Net change in unrealized
appreciation on investments and
foreign currency related
transactions 247,245
- ------------------------------------- ---------- ------------
Net realized and unrealized loss on
investments and foreign currency
related transactions (3,684,593)
- ------------------------------------- ---------- ------------
Net increase in net assets resulting
from operations $15,652,097
- ------------------------------------- ---------- ------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995
- ------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Operations
Net investment income $ 19,336,690 $ 25,856,250
Net realized loss on investments, closed futures contracts
and foreign currency related transactions (3,931,838) (38,021,996)
Net change in unrealized appreciation on investments and foreign
currency related transactions 247,245 17,203,692
- ------------------------------------------------------------------- ----------- -------------
Net increase in net assets resulting from operations 15,652,097 5,037,946
- ------------------------------------------------------------------- ----------- -------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (5,945,153) (8,015,693)
Class B Shares (9,706,657) (12,000,626)
Class C Shares (2,690,979) (3,983,775)
In excess of net investment income:
Class A Shares 0 (385,252)
Class B Shares 0 (576,777)
Class C Shares 0 (191,469)
Tax basis return of capital:
Class A Shares (564,217) (199,090)
Class B Shares (921,197) (298,065)
Class C Shares (255,384) (98,947)
- ------------------------------------------------------------------- ----------- -------------
Total distributions to shareholders (20,083,587) (25,749,694)
- ------------------------------------------------------------------- ----------- -------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 5,908,665 10,254,533
Class B Shares 18,284,154 34,092,723
Class C Shares 3,935,676 12,856,402
Payment for shares redeemed:
Class A Shares (25,781,907) (27,229,543)
Class B Shares (46,918,273) (44,185,075)
Class C Shares (19,524,124) (24,956,159)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 3,365,004 4,322,219
Class B Shares 5,354,257 6,821,317
Class C Shares 1,848,660 2,742,673
- ------------------------------------------------------------------- ----------- -------------
Net decrease in net assets resulting from capital share
transactions (53,527,888) (25,280,910)
- ------------------------------------------------------------------- ----------- -------------
Total decrease in net assets (57,959,378) (45,992,658)
- ------------------------------------------------------------------- ----------- -------------
Net assets
Beginning of year 281,282,140 327,274,798
- ------------------------------------------------------------------- ----------- -------------
End of year [including accumulated distributions in excess of
net investment income as follows: 1996--($1,169,996) and
1995--($1,023,303)](Note 1) $223,322,762 $281,282,140
- ------------------------------------------------------------------- ----------- -------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Strategic Income Fund (the "Fund") is a Massachusetts business
trust for which Keystone Management, Inc. ("KMI") is the Investment Manager
and Keystone Investment Management Company ("Keystone") is the Investment
Adviser. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") and KMI is in turn a wholly-owned subsidiary of Keystone. The Fund is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end investment company. The Fund offers several
classes of shares. The Fund's investment objective is to seek high current
income from high yield, foreign and U.S. Government or agency obligations.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
Investments are usually valued at the closing sales price, or in the absence
of sales and for over-the- counter securities, the mean of the bid and asked
prices as furnished by an independent pricing service.
U.S. Government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices. Listed corporate bonds, other
fixed income securities, mortgage and other asset-backed securities, and
other related securities are valued at prices provided by an independent
pricing service. In determining value for normal institutional-size
transactions, the pricing service uses methods based on market transactions
for comparable securities and various relationships between securities that
are generally recognized by institutional traders. Security valuations not
available from an independent pricing service (including restricted
securities) are valued at fair value as determined in good faith according to
procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
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.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the
collateral daily and will require the seller to provide additional collateral
in the event the market value of the securities pledged falls below the
carrying value of the repurchase agreement.
C. Reverse Repurchase Agreements
The Fund enters into reverse repurchase agreements with qualified
third-party broker-dealers. Interest on the value of reverse repurchase
agreements is based upon competitive market rates at the time of issuance. At
the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with the custodian containing
liquid assets having a value not less than the repurchase price
20
<PAGE>
(including accrued interest). If the counterparty to the transaction is
rendered insolvent, the ultimate realization of the securities to be
repurchased by the Fund may be delayed or limited.
D. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States dollars
as follows: market value of investments, assets and liabilities at the daily
rate of exchange; purchases and sales of investments, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gain (loss) which result from changes in
foreign currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement
date on investment securities transactions, foreign currency transactions and
the difference between the amounts of interest and dividends recorded on the
books of the Fund and the amount actually received. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between
the initial purchase trade date and subsequent sale trade date is included in
realized gain (loss) on foreign currency transactions.
E. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the
value of the contract changes. Such changes are recorded as unrealized gains
or losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, (iii) the possibility that Keystone will not
accurately predict changes in exchange rates, interest rates or market
prices, and (iv) the credit risk that the other party will not fulfill the
obligations of the contract. Futures contracts also involve elements of
market risk in excess of the amount reflected in the statement of assets and
liabilities.
F. Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts
("forward contracts") to settle portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain foreign currency
assets. Forward contracts are recorded at the forward rate and
marked-to-market daily. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. The Fund bears the risk of an unfavorable change in the
foreign currency exchange rate underlying the forward contract and is subject
to the credit risk that the other party will not fulfill the obligations of
the contract. Forward contracts involve elements of market risk in excess of
the amount reflected in the statement of assets and liabilities.
G. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the
identified cost basis. Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums. Dividend income is recorded
on the ex-dividend date.
21
<PAGE>
H. Federal Income Taxes
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 (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly,
no provision for federal income taxes is required.
I. Distributions
The Fund distributes net investment income monthly and net capital gains, if
any, annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment for paydown gains (losses) and foreign security
transactions for income tax purposes that have been recognized for financial
statement purposes.
J. Class Allocations
Class A shares are offered at a public offering price that 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 how long the shares have been held.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years will automatically convert to Class A shares. Class B shares
purchased prior to June 1, 1995 that have been outstanding for seven years
will automatically convert to Class A shares. Class C shares are sold subject
to a contingent deferred sales charge payable on shares redeemed within one
year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the
relative net assets of each class. Currently, class specific expenses are
limited to expenses incurred under the Distribution Plan for each class.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Shares of
beneficial interest of the Fund are currently divided into Class A, Class B
and Class C. Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year ended July 31,
Class A 1996 1995
- --------------- ---------- ------------
<S> <C> <C>
Shares sold 862,737 1,476,748
Shares redeemed (3,779,494) (3,933,229)
Shares issued
in reinvestment
of dividends and
distributions 493,925 630,245
- --------------- ---------- ------------
Net decrease (2,422,832) (1,826,236)
- --------------- ---------- ------------
Class B
Shares sold 2,657,436 4,868,980
Shares redeemed (6,840,568) (6,393,919)
Shares issued
in reinvestment
of dividends and
distributions 781,880 989,682
- --------------- ---------- ------------
Net decrease (3,401,252) (535,257)
- --------------- ---------- ------------
Class C
Shares sold 573,201 1,847,558
Shares redeemed (2,845,554) (3,594,976)
Shares issued
in reinvestment
of dividends and
distributions 270,184 397,992
- --------------- ---------- ------------
Net decrease (2,002,169) (1,349,426)
- --------------- ---------- ------------
</TABLE>
22
<PAGE>
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities
(excluding short-term securities and U.S. government securities) for the year
ended July 31, 1996 were $251,943,715 and $304,655,949, respectively.
As of July 31, 1996, the Fund has a capital loss carryover for federal
income tax purposes of approximately $65,917,000 that expires as follows:
$1,843,000--1998, $11,547,000--1999, $12,167,000--2000, $5,288,000--2002 and
$35,072,000--2004.
The average daily balance of reverse repurchase agreements outstanding
during the year ended July 31, 1996 was approximately $1,621,500 at a
weighted average interest rate of 5.59%. The maximum amount of borrowing
during the year was $3,345,994 (including accrued interest). On July 31, 1996
the Fund had a reverse repurchase agreement outstanding in the amount of
$2,237,856 (including accrued interest at a rate of 5.73%) maturing on August
12, 1996.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted by its Class A, B and C shares pursuant to Rule 12b-1 under the
1940 Act. Under the Distribution Plans, the Fund pays its principal
underwriter, Keystone Investment Distributors Company ("KIDC"), a
wholly-owned subsidiary of Keystone, amounts that are calculated and paid
daily.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average net assets of the Class A shares, to
pay expenses related to the distribution of Class A shares. During the year
ended July 31, 1996, the Fund paid $181,536 to KIDC under the Class A
Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays
a distribution fee not to exceed 1.00% of the average daily net assets of
Class B and Class C shares, respectively. Of these amounts, 0.75% is used to
pay distribution expenses and 0.25% is used to pay service fees.
During the year ended July 31, 1996, under the Class B Distribution Plans,
the Fund paid or accrued $1,279,839 for Class B shares purchased before June
1, 1995 and $119,872 for Class B shares purchased on or after June 1, 1995.
The Fund paid $390,758 under the Class C Distribution Plan.
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, and subject to the discretion of the Independent Trustees,
payments to KIDC may continue as compensation for its services that had been
earned while the Distribution Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. KIDC intends to seek
full payment of such distribution costs from the Fund at such time in the
future as, and to the extent that, payment thereof by the Class B or Class C
shares would be within permitted limits.
At July 31, 1996 total unpaid distribution costs were $9,880,397 for Class B
shares purchased before June 1, 1995 and $911,527 for Class B shares
purchased on or after June 1, 1995. Unpaid distribution costs for Class C
were $4,739,883 at July 31, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid to
KIDC.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to
23
<PAGE>
the Fund. In return, KMI is paid a management fee, computed and paid daily,
at an annual rate of 2.00% of the Fund's gross investment income plus an
amount determined by applying percentage rates starting at 0.50% and
declining as net assets increase to 0.25% per annum, to the net asset value
of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone under
which Keystone provides investment advisory and management services to the
Fund. In return for its services, Keystone receives an annual fee equal to
85% of the management fee received by KMI.
During the year ended July 31, 1996, the Fund paid or accrued $24,365 to
Keystone for certain accounting services. The Fund paid or accrued $655,455
to Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of
Keystone, for services rendered as the Fund's transfer and dividend
disbursing agent.
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.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended July 31, 1996, the Fund incurred total custody fees of
$173,082 and received a credit of $37,066 pursuant to this expense offset
arrangement, resulting in a net custody expense of $136,016. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
(7.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.045 for Class A, $0.041 for
Class B and $0.041 for Class C were declared payable on September 6, 1996 to
shareholders of record on August 23, 1996. These distributions are not
reflected in the accompanying financial statements.
(8.) Subsequent Event
On September 6, 1996, Keystone Investments, Inc. entered into an Agreement
and Plan of Acquisition and Merger (the "Acquisition") with First Union
Corporation and First Union National Bank of North Carolina ("First Union")
whereby First Union would acquire all the assets and liabilities of Keystone
Investments, Inc. Subject to the receipt of the required regulatory and
shareholder approvals, the Acquisition is expected to take place in late
December 1996.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Strategic Income Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Strategic Income Fund, including the schedule of investments, as of
July 31, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the
years in the nine-year period then ended and the period from February 13,
1987 (commencement of operations) to July 31, 1987 for Class A shares and for
each of the years in the three-year period ended July 31, 1996 and the period
from February 1, 1993 (date of initial public offering) to July 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 July 31, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Strategic Income Fund as of July 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 6, 1996
25
<PAGE>
FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in
shares or cash, are as follows:
<TABLE>
<CAPTION>
Income Return of
Dividends Capital
------------ --------------
<S> <C> <C>
CLASS A
SHARES 0.52 0.05
============ ==============
CLASS B
SHARES 0.47 0.05
============ ==============
CLASS C
SHARES 0.47 0.05
============ ==============
</TABLE>
In January 1997 complete information on calendar year 1996 distributions
will be forwarded to you to assist in completing your 1996 federal income tax
return.
26
<PAGE>
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)-- Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
SEMIANNUAL REPORT
JANUARY 31, 1997
<PAGE>
PAGE 1
- ------------------------------
Keystone Strategic Income Fund
Seeks generous income from high yield,
foreign and U.S. government or agency obligations.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Strategic
Income Fund for the six-month period which ended January 31, 1997.
Performance:
For the periods which ended January 31, 1997, your Fund produced the
following investment results:
Class A shares returned 7.34% for the six month period and 9.87% for the
twelve-month period.
Class B shares returned 6.78% for the six month period and 8.91% for the
twelve-month period.
Class C shares returned 6.79% for the six month period and 8.92% for the
twelve-month period.
During the same time span, the average total returns of the benchmark
indexes representing the three asset classes in which your Fund invests were
4.40% for the six months and 5.10% for the 12 months.1 The benchmark indexes
include the Lehman Aggregate Bond Index, the Salomon World Government Bond
Index and the Merrill Lynch High Yield Index.
We were pleased with your Fund's progress during this six-month period. We
believe two important objectives were achieved. First, the Fund outperformed
the average return of its index benchmarks. Second, the Fund's price
stability was improved, despite volatility in the overall market.
New strategies worked as designed
We think the long-term strategies implemented during the past fiscal year
were successful. Our primary objective was to increase the quality and
liquidity of your Fund's holdings to lay the foundation for stronger and more
consistent performance. To that end, we focused on the high-yield portion of
the portfolio. We increased the number of high-yield securities to broaden
diversification and upgraded the quality of large holdings. At the end of
January 1997, we moved 10% of total net assets out of the international
portion and invested the assets equally in U.S. high-yield bonds and U.S.
Treasuries. This decision was motivated by our concern that the high-yielding
European bonds of Italy, Sweden and Spain, which had outperformed our
expectations in 1996, were vulnerable to investors' doubts about the
successful debut of European Monetary Union.
Favorable market environment
Throughout the six-month period, about 65% of the portfolio was invested in
two asset classes that were performance leaders: foreign bonds and U.S.
high-yield bonds. In the foreign arena, your Fund targeted Brazil, Argentina
and Mexico in Latin America, and the so called "high-yield" countries of
Denmark, Sweden and Italy in Europe. These positions offered significant
yield advantage over comparable U.S. issues, while also generating attractive
price appreciation. Your Fund took profits from these "high-yield" European
holdings after the close of the fiscal year, and began shifting assets to the
high-grade industrialized countries, such as Germany, the United Kingdom and
Canada.
- ------------
1 The Lehman Aggregate Bond Index--a broad index of U.S. corporate,
government and mortgage securities--returned 4.94% for the six months and
3.25% for the 12 months which ended on January 31, 1997. The total returns
of the Salomon World Government Bond Index--a U.S. dollar index of foreign
government bonds--were 0.44% for the six months and 2.12% for the 12
months. The Merrill Lynch High Yield Index returned 7.82% and 9.92% for the
same six- and twelve-month periods.
-continued-
<PAGE>
PAGE 2
- ------------------------------
Keystone Strategic Income Fund
The U.S. portion of the portfolio benefited from its high-yield holdings.
High-yield bonds were the bright spot in the generally lackluster bond market
during 1996. The stronger-than-expected economic growth, which hurt
investment-grade corporate bonds and Treasuries, had a positive impact on the
ability of the issuers of high-yield bonds to pay their debt. Bond investors,
hungry for higher yields, flocked to the high-yield issues. The brisk demand
drove the prices up and the yields, which move in the opposite direction,
lower. Although the average difference in yield between high-yield bonds and
Treasuries had narrowed during the year, we think the spread, which was 3.42
percentage points on December 26, 1996,2 was still high enough to adequately
compensate the investors for the additional risk.
Strategic diversification benefited the Fund
Your Fund's asset allocation performed exactly as it was designed to do
during the six months. Individually, each of the asset classes in the
portfolio--the foreign bonds, the U.S. government and agency securities, and
the high-yield securities--reflected the market forces of its own class.
Together, they produced an attractive total return for the 12-month period
which ended January 31, 1997, with less volatility than each class would be
likely to generate alone. The Fund's asset allocation remained largely
unchanged since our last report in July 1996. At the close of this reporting
period, 40.4% of net assets was invested in foreign bonds; 29.1% in
mortgage-backed securities and U.S. government issues; 24.7% in high-yield
securities; and 5.8% in other assets and liabilities.
Prescott B. Crocker to take over the Fund's management
We are pleased to inform you that Senior Vice President and group leader of
the High Yield Bond Team Prescott B. Crocker took the Fund's helm effective
March 1, 1997. Richard Cryan, who successfully restructured the portfolio and
strengthened the Fund's performance during the past fiscal year, is moving on
to manage Evergreen Keystone's institutional assets.
The new portfolio manager brings more than 25 years' experience and an
impressive track record managing fixed-income assets of high yield and
strategic portfolios. More information about Mr. Crocker and a brief
interview about his investment philosophy and outlook follows this letter.
Keystone acquired by First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired
by First Union Corporation. First Union, based in Charlotte, N.C., is the
nation's sixth largest bank holding company with assets of approximately $130
billion. Keystone Investment Management Company will continue to be the
investment adviser, responsible for managing your Fund's portfolio. First
Union also owns another mutual fund management company, Evergreen Asset
Management Corp. Together, Evergreen and Keystone oversee approximately $30
billion in assets. Some services will now be provided under the "Evergreen
Keystone Funds" umbrella.
- -----------
2 Source: The Merrill Lynch Master II Index.
-continued-
<PAGE>
PAGE 3
- ------------------------------
We believe the partnership between Evergreen and Keystone will strengthen our
ability to offer you outstanding investment management services.
Thank you for your continued support of Keystone Strategic Income Fund. As
always, we welcome your questions and comments.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment
Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
March 1997
[Photo of Albert H. Elfner, III]
Albert H. Elfner, III
[Photo of George S. Bissell]
George S. Bissell
<PAGE>
PAGE
- ------------------------------
Keystone Strategic Income Fund
A Discussion With
Your Fund Manager
[Photo of Prescott Crocker]
Senior Vice President and head of the High Yield Bond Team
Prescott Crocker is portfolio manager of Keystone High Income
Bond Fund. A Chartered Financial Analyst, Mr. Crocker
has 25 years of senior-level investment experience. He is a
graduate of Harvard College and holds an M.B.A. in
international finance from Harvard Business School.
Q How would you describe your investment style and philosophy?
A I started my career in the financial industry as a banker. In that
environment I looked at companies not as a buyer but rather a lender. Having
come from that broader perspective, as a high yield manager, I always try to
understand how I am going to get my money back.
I value working with a team. I interact with the people by asking them the
"what ifs" of the future in their areas. What can happen in the future to
affect this credit? To what extent is the market understanding or even
perceiving these possibilities?
Q What are the key factors in your selection process?
A There are three elements that we consider of greatest value in selecting
securities. The first is the quality of the management. We believe the most
reliable indication of the management's commitment to the business is a high
equity stake in the company. The degree of the management's experience and
understanding of the business is also an important factor.
The second element of key importance in our analysis is the value of assets.
We closely follow stock valuations, so that when we analyze the quality and
the future potential of the issuers under consideration, we can derive our
own assessment of the level of risk in that debt. This process is similar to
that of a bank evaluating the value of a house in order to determine the
extent of the loan. If the loan is perceived to be risky, the amount of the
loan will be lower than it would be for a higher-quality loan.
The third element is cashflow. We try to be forward looking, to have an
understanding of how margins might change and how cashflows might develop.
Consequently, we generally invest in companies that have tangible assets and
real cashflows rather than in start-up companies.
- --------------------------------------------------------------------------------
Fund Profile
Objective: Seeks generous income from high yield, foreign and U.S. government
or agency obligations.
Commencement of investment operations: April 14, 1987
Average maturity: 10 years
Net assets: $208 million
Newspaper listing: "StrInc"
- --------------------------------------------------------------------------------
<PAGE>
PAGE 5
- ------------------------------
Q What factors drive your asset allocation decisions?
A It's always a tradeoff between the need for broad diversification and the
expectations for return. We will never be less than 20% represented in any of
our three asset categories, which are U.S. high yield securities, U.S.
government obligations and foreign bonds. This is to ensure that we get the
benefits of diversification if any one of these very distinct markets
underperforms. However, we try to overweight those asset classes that we
think can offer the best risk-adjusted returns going forward. For instance
last year, we were overweighted in high-yield and emerging-market debt, as
well as the high-yielding bonds in Europe. That was a good call for the Fund,
because those asset classes turned out to be market leaders.
Q Do you intend to use a team of managers for the Fund's three asset
classes or will you manage the Fund alone?
A There is a great resource of expertise in the international and high-grade
fixed-income departments at Keystone. We will manage the Fund by drawing on
those resources and listening closely to the advice of these experts.
However, the overall management of the portfolio and the strategic decisions,
such as the investment allocations and portfolio weightings, is my
responsibility. As one of the founders of the strategic fund concept and a
manager of strategic funds since 1989, I am well prepared to manage that
responsibility.
Q What is your outlook for the U.S. fixed- income markets?
A We think the worldwide economy is characterized by excess capacity and low
price pressures, which are compounded by the weak Japanese and European
economies. That, combined with the strong U.S. dollar, is likely to keep
inflation subdued in the United States. We expect the U.S. economy will go
through brief periods of softness as well as strength, which will cause some
fluctuations in interest rates and prices of bonds. We see these fluctuations
as short-lived and relatively benign, given the strength of our economic and
corporate fundamentals. Beyond that, our country is becoming less of a
consumer and more of an asset saver, which makes it structurally less likely
that shortages of goods and services would occur. More likely we would see
shortages in investment opportunities which would lead to higher values of
securities.
What this means for the Fund is that we see very modest interest-rate
volatility and solid real returns above money market instruments.
Q What is your outlook for the foreign fixed- income markets?
A We've had impressive returns in Latin American bonds and the high-yielding
European bonds over the past two years. We continue to see real value in
those markets, although we think that volatility should be viewed as a
standard ingredient in the mix.
To illustrate what we view as real value, consider Argentina. It is a
BB-rated country but its government bonds yield 4 percentage points more than
U.S.
[Description of Pie Chart]
Asset Allocation
as of January 31, 1997
[graph]
U.S. Government and agency issues 29.1%
Common stocks and preferred stocks 1.2%
Other 4.6%
Foreign bonds (U.S.$) 16.3%
Foreign bonds (non-U.S.$) 24.1%
High yield corporate bonds (industrial bonds and notes) 24.7%
[end graph]
<PAGE>
PAGE 6
- ------------------------------
Keystone Strategic Income Fund
Treasuries. In contrast BB-rated U.S. corporate bonds yield 1.7 percentage
points more that U.S. Treasuries. At the same time, if a BB-rated U.S.
corporate bond were to default on its debt, the International Monetary Fund
and the U.S. government would not come to the rescue, as they did when Mexico
devaluated its peso in 1994. So we believe there is real value in the
emerging-market sovereign debt. We also believe that given the policies of
growth, free enterprise and privatization in most Latin American countries,
the yield advantages of their bonds are going to narrow and their returns
will be better than the returns of U.S. high-yield bonds.
Emerging market corporate bonds are generally rated higher than most
American high yield corporate securities. The higher ratings point to less
potential risk, so it's reasonable to expect that this debt will be treated
well in the marketplace.
European economies are experiencing high levels of unemployment and very low
levels of inflation. The yields on European bonds haven't fully reflected the
low inflation and, as a result, have been offering the best real, or
inflation adjusted, rates of return of all the world's markets. A similar
situation exists in Canada, where inflation is virtually nonexistent and the
economy lags the U.S. economy. The Fund maintains positions in Canada as well
as in Germany, Denmark and the United Kingdom.
(diamond)
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors Company
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 7
- ------------------------------
Your Fund's Performance
[Description of Mountain Chart]
Growth of an investment in
Keystone Strategic Income Fund Class A
In Thousands
[graph]
4/87 9523.81 9523.81
8990.48 9593.42
1/89 8914.28 10678.2
7371.43 10047
1/91 4847.62 7756.32
6371.43 11729.6
1/93 6761.9 13888.4
7952.38 18073.5
1/95 6342.86 15747.5
6561.9 17835.1
1/97 6657.14 19599.2
[end graph]
Total Value: $19,599
A $10,000 investment in Keystone Strategic Income Fund Class A made on April 14,
1987 with all distributions reinvested was worth $19,599 on January 31, 1997.
Past performance is no guarantee of future results.
Six-Month Performance as of January 31, 1997
==================================================================
Class A Class B Class C
Total returns* 7.34% 6.78% 6.79%
Net asset value 7/31/96 $6.77 $6.81 $6.80
1/31/97 $6.99 $7.02 $7.01
Dividends $0.27 $0.25 $0.25
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of January 31, 1997
==================================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 9.87% 8.91% 8.92%
1-year 4.66% 4.91% 8.92%
5-year 59.13% -- --
Life of Class 95.99% 33.72% 36.55%
Average Annual Returns
1-year w/o sales charge 9.87% 8.91% 8.92%
1-year 4.66% 4.91% 8.92%
5-year 9.74% -- --
Life of Class 7.10% 7.54% 8.10%
Class A shares were introduced April 14, 1987. Performance is reported at the
current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received for holding shares for one year and redeeming
at the end of the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing. You may also exchange funds through Keystone's Automated Response
Line (KARL). The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 8
- ------------------------------
Keystone Strategic Income Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 9
- ------------------------------
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
FIXED INCOME (94.2%)
INDUSTRIAL BONDS & NOTES (24.7%)
AEROSPACE (0.3%)
Airplanes Pass Thru Trust Bond (Subord.) 10.875% 2019 $ 500,000 $ 554,550
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING (2.9%)
Ackerly Communications,
Incorporated Sr. Notes 10.750 2003 775,000 821,500
EZ Communications,
Incorporated Sr. Notes (Subord.) 9.750 2005 1,000,000 1,035,000
K-III Communications
Corporation (e) Sr. Notes 8.500 2006 750,000 738,750
Park Broadcasting,
Incorporated (e) Sr. Notes 11.750 2004 263,000 318,230
Paxson Communications
Corporation Sr. Notes (Subord.) 11.625 2002 1,000,000 1,050,000
SFX Broadcasting, Incorporated
(e) Sr. Notes (Subord.) 10.750 2006 1,000,000 1,060,000
Sinclair Broadcast Group,
Incorporated Sr. Notes (Subord.) 10.000 2005 1,000,000 1,025,000
- ----------------------------------------------------------------------------------------------------------------
6,048,480
- ----------------------------------------------------------------------------------------------------------------
CABLE/OTHER VIDEO DISTRIBUTION (3.8%)
Adelphia Communications
Corporation Sr. Notes 12.500 2002 500,000 512,500
Cablevision Systems
Corporation Sr. Deb. (Subord.) 9.875 2013 425,000 416,500
Cablevision Systems
Corporation Sr. Deb. (Subord.) 10.500 2016 575,000 592,250
Comcast Corporation Sr. Deb. (Subord.) 10.625 2012 500,000 552,500
Diamond Cable Communications
Company
(Eff. Yield 11.09%)(d) Sr. Disc. Notes 0.000 2005 2,000,000 1,410,000
Frontiervision Sr. Notes (Subord.) 11.000 2006 250,000 257,500
Fundy Cable Limited Sr. Notes 11.000 2005 1,000,000 1,060,000
Rogers Cablesystems Limited Sr. Notes 10.000 2005 1,000,000 1,055,000
Telewest Communications PLC
(Eff. Yield 9.07%)(d) Sr. Disc. Deb. 0.000 2007 650,000 445,250
Videotron Holdings, PLC (Eff.
Yield 11.00%)(d) Sr. Disc. Notes 0.000 2005 2,000,000 1,580,000
- ----------------------------------------------------------------------------------------------------------------
7,881,500
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS (1.4%)
Astor Corporation (e) Sr. Notes (Subord.) 10.500 2006 750,000 781,875
Freedom Chemicals,
Incorporated (e) Sr. Notes (Subord.) 10.625 2006 750,000 793,125
NL Industries, Incorporated Sr. Notes 11.750 2003 535,000 564,425
Rexene Corporation Sr. Notes 11.750 2004 675,000 757,688
- ----------------------------------------------------------------------------------------------------------------
2,897,113
- ----------------------------------------------------------------------------------------------------------------
CONSUMER (1.0%)
Exide Corporation Sr. Notes 10.000 2005 1,000,000 1,033,750
Harvard Industries,
Incorporated Sr. Notes 11.125 2005 550,000 418,000
International Semi-Tech
Electronics, Incorporated
(Eff. Yield 11.98%)(d) Sr. Disc. Notes 0.000 2003 1,025,000 604,750
- ----------------------------------------------------------------------------------------------------------------
2,056,500
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<PAGE>
PAGE 10
- ------------------------------
Keystone Strategic Income Fund
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
DIVERSIFIED MEDIA (0.9%)
Cinemark USA, Incorporated Sr. Notes (Subord.) 9.625% 2008 $ 500,000 $ 508,750
Lamar Advertising Company Sr. Secd. Notes 9.625 2006 450,000 460,125
Lifestyle Brands Gtd. Deb. (Subord.) 10.000 1997 350,000 350,000
Deb. (Subord.)
Viacom, Incorporated Exchangeable 8.000 2006 500,000 485,000
- ----------------------------------------------------------------------------------------------------------------
1,803,875
- ----------------------------------------------------------------------------------------------------------------
ENERGY (2.9%)
Clark USA, Incorporated Sr. Notes 10.875 2005 1,000,000 1,010,000
Ferrellgas Partners Limited
Partnership (e) Sr. Notes 9.375 2006 775,000 783,719
HS Resources, Incorporated
(b)(e) Sr. Notes (Subord.) 9.250 2006 450,000 459,000
Nuevo Energy Company Sr. Notes (Subord.) 9.500 2006 1,000,000 1,055,000
Parker Drilling Corporation
(b)(e) Gtd. Deb. 9.750 2006 1,000,000 1,055,000
Plains Resources, Incorporated
(e) Sr. Notes (Subord.) 10.250 2006 500,000 540,000
TransTexas Gas Corporation Sr. Notes 11.500 2002 500,000 548,750
Vintage Petroleum,
Incorporated Sr. Notes (Subord.) 9.000 2005 500,000 513,750
- ----------------------------------------------------------------------------------------------------------------
5,965,219
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL (0.5%)
Reliance Group Holdings,
Incorporated Sr. Deb. (Subord.) 9.750 2003 1,000,000 1,050,000
- ----------------------------------------------------------------------------------------------------------------
FOODS/TOBACCO/BEVERAGES (1.6%)
Chiquita Brands International,
Incorporated Sr. Notes 10.250 2006 500,000 525,000
Iowa Select Farms
(8/2/94-$2,243,310)
(Eff. Yield 16.62%)(b)(d) Sr. Disc. Notes 0.000 2004 4,336,000 2,793,685
- ----------------------------------------------------------------------------------------------------------------
3,318,685
- ----------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS/CONTAINERS (2.8%)
Buckeye Cellulose Corporation Sr. Notes (Subord.) 8.500 2005 1,000,000 1,005,000
Container Corporation of
America Sr. Notes 11.250 2004 1,000,000 1,090,000
Four M Corporation (e) Sr. Notes 12.000 2006 375,000 393,750
Owens-Illinois, Incorporated Sr. Notes (Subord.) 10.500 2002 934,000 987,705
Printpack, Incorporated (b)(e) Sr. Notes (Subord.) 10.625 2006 350,000 367,500
Rainy River Forest Products,
Incorporated Sr. Notes 10.750 2001 1,000,000 1,082,500
Tembec Finance Corporation Sr. Notes 9.875 2005 1,000,000 952,500
- ----------------------------------------------------------------------------------------------------------------
5,878,955
- ----------------------------------------------------------------------------------------------------------------
GAMING (2.2%)
Casino America, Incorporated Sr. Notes 12.500 2003 1,000,000 985,000
Grand Palais Casino,
Incorporated (8/15/94-
$2,488,391)(a)(b)(c) Sr. Secd. PIK Notes 18.250 1997 2,488,391 25
Lodgenet Entertainment
Corporation (e)(b) Sr. Notes 10.250 2006 1,000,000 998,750
Prime Hospitality Corporation 1st Mtge. Notes 9.250 2006 500,000 505,000
</TABLE>
<PAGE>
PAGE 11
- ------------------------------
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest Maturity Par Market
Rate Date Value Value
- ----------------------------------------------------------------------------------------------------------------
GAMING (CONTINUED)
Showboat, Incorporated Sr. Notes (Subord.) 13.000% 2009 $ 1,000,000 $ 1,147,500
Starcraft Corporation
(a)(b)(c) Notes (Subord.) 16.500 1998 750,000 15,000
Trump Atlantic City Associates 1st Mtge. Notes 11.250 2006 1,000,000 965,000
- ----------------------------------------------------------------------------------------------------------------
4,616,275
- ----------------------------------------------------------------------------------------------------------------
HOUSING (0.9%)
Continental Homes Holding
Corporation Sr. Notes 10.000 2006 1,000,000 1,032,500
Schuller International Group,
Incorporated Sr. Notes 10.875 2004 750,000 828,750
- ----------------------------------------------------------------------------------------------------------------
1,861,250
- ----------------------------------------------------------------------------------------------------------------
METALS/MINERALS (0.5%)
Jorgensen Earle Sr. Notes 10.750 2000 1,000,000 1,015,000
- ----------------------------------------------------------------------------------------------------------------
RETAIL (1.2%)
Cole National Group,
Incorporated Sr. Notes 11.250 2001 800,000 884,000
Finlay Fine Jewelry
Corporation Sr. Notes 10.625 2003 1,000,000 1,060,000
Michaels Stores, Incorporated Sr. Notes 10.875 2006 475,000 467,875
- ----------------------------------------------------------------------------------------------------------------
2,411,875
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.8%)
Dial Call Communications,
Incorporated
(Eff. Yield 11.24%)(d) Sr. Disc. Notes 0.000 2005 1,000,000 715,000
MFS Communications (Eff. Yield
8.87%)(d) Sr. Disc. Notes 0.000 2004 500,000 436,250
Teleport Communications Group Sr. Notes 9.875 2006 525,000 555,188
- ----------------------------------------------------------------------------------------------------------------
1,706,438
- ----------------------------------------------------------------------------------------------------------------
TRANSPORTATION (0.2%)
Eletson Holdings, Incorporated 1st Pfd. Mtge. Notes 9.250 2003 500,000 501,250
- ----------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS (0.8%)
Mobile Telecommunication
Technology Sr. Notes 13.500 2002 100,000 98,000
Rogers Cantel Sr. Deb. 9.375 2008 500,000 520,000
Vanguard Cellular Systems,
Incorporated Deb. 9.375 2006 1,000,000 1,007,500
- ----------------------------------------------------------------------------------------------------------------
1,625,500
- ----------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$51,973,075) 51,192,465
- ----------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (19.3%)
FHLMC Participation
Certificate Pool #607352 7.682 2022 7,809,335 8,166,847
FHLMC Participation
Certificate Pool #846298 7.190 2022 2,706,272 2,792,548
FNMA Grantor Trust 95-T5A 7.000 2035 1,211,607 1,178,288
FNMA Pool #322356 7.000 2025 4,465,438 4,370,547
FNMA Pool #324193 7.000 2025 5,933,684 5,807,593
GNMA Pool #354714 6.500 2023 10,123,066 9,718,143
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
- ------------------------------
Keystone Strategic Income Fund
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
================================================================================================================
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (CONTINUED)
GNMA Pool #780163 6.500% 2009 $ 8,188,857 $ 8,115,894
- ----------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $40,139,924) 40,149,860
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) (16.3%)
Argentina (Republic of) Deb. 11.375 2017 2,600,000 2,678,000
Argentina Global Deb. 11.000 2006 2,500,000 2,640,625
Comtel Brasileira (e) Notes 10.750 2004 5,500,000 5,768,125
Grupo Industrial Durango S.A. Notes 12.000 2001 2,500,000 2,700,000
Grupo Industrial Durango S.A. Notes 12.625 2003 400,000 442,000
Grupo Televisa S.A. Sr. Notes 11.875 2006 2,900,000 3,193,625
Indah Kiat International
Finance Co. Gtd. Sr. Secd. Notes 11.875 2002 3,000,000 3,210,000
Intermedia Capital Partners
(e) Sr. Notes 11.250 2006 500,000 527,500
Ispat Mexicana S.A. Sr. Unsecd. Deb. 10.375 2001 750,000 770,625
Klabin Fabricadora Papel Unsecd. Deb. 10.000 2001 5,000,000 5,062,500
Telefonica de Argentina Unsecd. Deb. 11.875 2004 6,000,000 6,862,500
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (COST--$31,571,261) 33,855,500
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (NON U.S. DOLLARS) (24.1%)
Denmark (Kingdom of) Deb. 8.000 2003 35,500,000 6,317,353
Danish Krone
Germany (Federal Republic of) Deb. 6.875 2005 9,400,000 6,216,481
Deutsche Mark
Italy (Republic of) Deb. 9.500 2006 13,250,000,000 9,411,183
Italian Lira
New Zealand Government Deb. 8.000 2001 9,500,000 6,714,807
New Zealand Dollar
Spain (Government of) Deb. 10.900 2003 870,000,000 7,824,001
Spanish Peseta
Sweden (Kingdom of) Deb. 10.250 2003 46,000,000 7,669,992
Swedish Krona
United Kingdom Treasury Govt. Gtd. 7.000 2001 3,710,000 5,916,692
Pound Sterling
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (COST--$48,616,270) 50,070,509
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT ISSUES (9.8%)
U.S. Treasury Bonds 7.875 2021 7,723,000 8,603,885
U.S. Treasury Bonds 6.500 2026 3,230,000 3,108,358
U.S. Treasury Notes 5.750 1998 350,000 349,069
U.S. Treasury Notes 6.125 1998 4,380,000 4,398,483
U.S. Treasury Notes 6.250 2000 500,000 501,250
U.S. Treasury Notes 6.125 2001 3,500,000 3,478,685
- ----------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT ISSUES (COST--$19,983,408) 20,439,730
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 13
- ------------------------------
Schedule of Investments--January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Market
Value
===============================================================================================
<S> <C> <C> <C> <C>
TOTAL FIXED INCOME (COST--$192,283,938) $195,708,064
- -----------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------
COMMON STOCKS/WARRANTS (0.6%)
Casino America, Incorporated (a) 104,514 290,680
Casino America, Incorporated, wts. (a) 19,582 196
Colorado Gaming and Entertainment Company (a) 170,042 765,189
Grand Palais Casinos, Inc., Series A,
wts.(8/15/94-$727)(a)(b)(c) 72,794 73
Grand Palais Casinos, Inc., Series B,
wts.(8/15/94-$397)(a)(b)(c) 39,706 40
Grand Palais Casinos, Inc., Series C,
wts.(8/15/94-$3,507)(a)(b)(c) 350,735 351
Grand Palais Casinos, Inc., Series D,
wts.(8/15/94-$-0-)(a)(b)(c) 160,136 160
Grand Palais Casinos, Inc., wts.(8/15/94-$57) (a)(b)(c) 87,342 87
Iowa Select Farms, wts. (2/4/94-$955,122) (a)(b) 117,800 117,800
Nextel Communications, Incorporated, wts. (a) 4,820 48
- -----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/WARRANTS (COST--$3,034,293) 1,174,624
===============================================================================================
PREFERRED STOCK (0.6%) (COST--$2,106,054)
Ampex Corp.(a)(b) 2,156 1,185,800
- -----------------------------------------------------------------------------------------------
Coupon Maturity Maturity
Rate Date Value
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.2%)
(COST--$4,655,000)
Keystone Joint Repurchase Agreement
(Investments in repurchase
agreements, in a joint trading
account, dated 1/31/97)(f) 5.580% 02/03/97 $4,657,165 4,655,000
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$202,079,285) 202,723,488
OTHER ASSETS AND LIABILITIES--NET (2.4%) 4,987,852
- -----------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $207,711,340
===============================================================================================
</TABLE>
(a) Non-income producing.
(b) All or a portion of these securities are either (1) restricted securities
(i.e., securities which may not be publicly sold without registration
under the Federal Securities Act of 1933) or (2) illiquid securities, and
are valued using market quotations where readily available. In the
absence of market quotations, the securities are valued based upon their
fair value determined under procedures approved by the Board of Trustees.
The Fund may make investments in an amount up to 15% of the value of the
Fund's net assets in such securities. The date of acquisition and cost
are set forth in parentheses after the title of each restricted
securitiy. On the date of acquisition there were no market quotations on
similar securities and the above securities were valued at acquisition
costs. At January 31, 1997, the fair value of these restricted securities
was $2,912,221 (1.40% of the Fund's net assets).
(c) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on these securities. At January 31,
1997, the face value of these securities was $15,736 (0.01% of the Fund's
net assets).
(d) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(e) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at January 31, 1997.
(continued on next page)
<PAGE>
PAGE 14
- ------------------------------
Keystone Strategic Income Fund
Schedule of Investments--January 31, 1997 (Unaudited)
Legend of Portfolio Abbreviations:
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
<TABLE>
<CAPTION>
Exchange U.S. Value at In Exchange Net Unrealized
Date January 31, 1997 for U.S.$ Appreciation
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to Deliver
---------------------------------------------------
2/20/97 2,997,435 Deutsche Mark $1,834,685 2,005,000 $170,315
2/20/97 11,621,326 Danish Krone 1,863,303 2,023,000 159,697
3/13/97 7,414,942 New Zealand Dollar 5,093,352 5,139,000 45,648
4/28/97 3,710,000 Pound Sterling 5,933,873 6,027,006 93,133
----------------
Net Unrealized Appreciation on Forward Foreign Currency Exchange Contracts $468,793
================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Year Ended July 31,
Six Months Ended
January 31, 1997 1996 1995 1994(b) 1993 1992
==============================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
period $6.77 $6.89 $7.35 $7.86 $7.02 $6.10
- --------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.26 0.54 0.64 0.61 0.69 0.78
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.23 (0.09) (0.45) (0.44) 0.89 0.89
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 0.49 0.45 0.19 0.17 1.58 1.67
- --------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.52) (0.60) (0.61) (0.72) (0.75)
In excess of investment income 0 0 (0.03) (0.03) (0.02) 0
Tax basis return of capital 0 (0.05) (0.02) (0.04) 0 0
- --------------------------------------------------------------------------------------------------------------
Total distributions (0.27) (0.57) (0.65) (0.68) (0.74) (0.75)
- --------------------------------------------------------------------------------------------------------------
Net asset value end of period $6.99 $6.77 $6.89 $7.35 $7.86 $7.02
==============================================================================================================
Total return(a) 7.34% 6.84% 3.00% 1.86% 24.13% 28.73%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.30%(c)(d) 1.30%(c) 1.33% 1.32% 1.80% 2.09%
Total expenses excluding
reimbursement 1.30%(c)(d) 1.30%(c) 1.33% 1.32% 1.80% 2.12%
Net investment income 7.38%(d) 8.05% 9.31% 7.79% 9.50% 11.73%
Portfolio turnover rate 39% 101% 95% 92% 151% 95%
- --------------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $63,384 $68,118 $85,970 $105,181 $85,793 $70,459
==============================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 1.28% (annualized) for the six months ended January 31, 1997
and 1.28% for the year ended July 31, 1996.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ------------------------------
Keystone Strategic Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Six Months Ended Year Ended July 31, Public Offering)
January 31, 1997 1996 1995 1994(b) to July 31, 1993
=========================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
period $6.81 $6.92 $7.38 $7.89 $7.07
- ---------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.24 0.50 0.60 0.55 0.24
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.22 (0.09) (0.47) (0.44) 0.92
- ---------------------------------------------------------------------------------------------------------
Total from investment operations 0.46 0.41 0.13 0.11 1.16
- ---------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) (0.47) (0.55) (0.55) (0.24)
In excess of net investment
income 0 0 (0.03) (0.03) (0.10)
Tax basis return of capital 0 (0.05) (0.01) (0.04) 0
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.52) (0.59) (0.62) (0.34)
- ---------------------------------------------------------------------------------------------------------
Net asset value end of period $7.02 $6.81 $6.92 $7.38 $7.89
=========================================================================================================
Total return(a) 6.78% 6.21% 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.06%(c)(d) 2.07%(c) 2.06% 2.07% 2.37%(d)
Net investment income 6.62%(d) 7.28% 8.58% 7.11% 7.18%(d)
Portfolio turnover rate 39% 101% 95% 92% 151%
- ---------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $116,861 $123,389 $149,091 $162,866 $35,415
=========================================================================================================
</TABLE>
(a) Excluding applicable sales charges.
(b) Calculation based on average shares outstanding.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 2.05% (annualized) for the six months ended January 31, 1997
and 2.05% for the year ended July 31, 1996.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Six Months Ended Year Ended July 31, Public Offering)
January 31, 1997 1996 1995 1994(b) to July 31, 1993
=========================================================================================================
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value beginning of
period $6.80 $6.92 $7.37 $7.88 $7.07
- ---------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.23 0.49 0.59 0.55 0.24
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions 0.23 (0.09) (0.45) (0.44) 0.91
- ---------------------------------------------------------------------------------------------------------
Total from investment operations 0.46 0.40 0.14 0.11 1.15
- ---------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) (0.47) (0.55) (0.55) (0.24)
In excess of net investment
income 0 0 (0.03) (0.03) (0.10)
Tax basis return of capital 0 (0.05) (0.01) (0.04) 0
- ---------------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.52) (0.59) (0.62) (0.34)
- ---------------------------------------------------------------------------------------------------------
Net asset value end of period $7.01 $6.80 $6.92 $7.37 $7.88
=========================================================================================================
Total return(a) 6.79% 6.07% 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.06%(c)(d) 2.07%(c) 2.08% 2.07% 2.25%(d)
Net investment income 6.62%(d) 7.29% 8.56% 7.09% 7.35%(d)
Portfolio turnover rate 39% 101% 95% 92% 151%
- ---------------------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $27,466 $31,816 $46,221 $59,228 $19,706
=========================================================================================================
</TABLE>
(a) Excluding applicable sales charges
(b) Calculation based on average shares outstanding.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 2.05% (annualized) for the six months ended January 31, 1997
and 2.05% for the year ended July 31, 1996.
(d) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ------------------------------
Keystone Strategic Income Fund
FINANCIAL HIGHLIGHTS--CLASS Y SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
January 2, 1997
(Date of Initial
Public Offering)
to January 31, 1997
- -------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Net asset value beginning of period $ 7.03
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.00
Net realized and unrealized loss on investments and foreign currency related
transactions (0.03)
- -------------------------------------------------------------------------------------------------------
Total from investment operations (0.03)
- -------------------------------------------------------------------------------------------------------
Distributions from net investment income (0.05)
- -------------------------------------------------------------------------------------------------------
Net asset value end of period $ 6.95
=======================================================================================================
Total return(a) 0.00%
Ratios/supplemental data
Ratios to average net assets (annualized)
Total expenses --
Net investment income --
Portfolio turnover rate 39%
- -------------------------------------------------------------------------------------------------------
Net assets end of period $ 7
=======================================================================================================
</TABLE>
(a) Excluding applicable sales charges
See Notes to Financial Statements.
<PAGE>
PAGE 19
- ------------------------------
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997 (Unaudited)
Assets (Note 2)
Investments at market value
(identified cost--$202,079,285) $202,723,488
Receivable for:
Investments sold 247,624
Fund shares sold 937,354
Interest 4,840,604
Net unrealized appreciation on forward foreign currency
exchange contracts 468,793
Prepaid expenses and other assets 48,100
- ------------------------------------------------------------------------
Total assets 209,265,963
- ------------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5)
Payable for:
Fund shares redeemed 702,122
Distributions to shareholders 588,038
Distribution fee payable 113,175
Due to related parties 17,751
Other accrued expenses 133,537
- ------------------------------------------------------------------------
Total liabilities 1,554,623
- ------------------------------------------------------------------------
Net assets $207,711,340
========================================================================
Net assets represented by
Paid-in capital $275,046,381
Accumulated distributions in excess of net investment
income (1,428,141)
Accumulated net realized loss on investments, closed
futures contracts and forward foreign currency
related transactions (66,895,983)
Net unrealized appreciation on investments, forward
foreign currency exchange contracts and related
transactions 989,083
- ------------------------------------------------------------------------
Total net assets $207,711,340
========================================================================
Net Asset Value Per Share (Note 2)
Class A Shares
Net assets of $63,384,114 / 9,073,720 shares
outstanding $ 6.99
Offering price per share ($6.99 / 0.9525)
(based on a sales charge of 4.75% of the offering
price on January 31, 1997) $ 7.34
Class B Shares
Net assets of $116,861,219 / 16,650,892 shares
outstanding $ 7.02
Class C Shares
Net assets of $27,466,000 / 3,918,336 shares
outstanding $ 7.01
Class Y Shares
Net assets of $7 / 1.007 shares outstanding $ 6.95
========================================================================
STATEMENT OF OPERATIONS
Six Months Ended January 31, 1997 (Unaudited)
Investment income
Interest (net of foreign withholding
taxes of $53,306) $ 9,581,565
Other income 23,475
- -------------------------------------------------------------------
9,605,040
- -------------------------------------------------------------------
Expenses (Notes 4, 5 and 6)
Management fee $ 709,713
Distribution Plan expenses 848,831
Transfer agent fees 294,152
Custodian fees 80,188
Accounting, auditing and legal fees 32,684
Trustees' fees and expenses 18,011
Other 43,870
- -------------------------------------------------------------------
Total expenses 2,027,449
Less: Expenses paid indirectly (13,510)
- -------------------------------------------------------------------
Net expenses 2,013,939
- -------------------------------------------------------------------
Net investment income 7,591,101
- -------------------------------------------------------------------
Net realized and unrealized gain on
investments and forward foreign
currency related transactions
(Note 3)
Net realized gain on:
Investments 2,468,026
Forward foreign currency related
transactions 336,763
- -------------------------------------------------------------------
Net realized gain on investments and
forward foreign currency related
transactions 2,804,789
- -------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on:
Investments 3,806,178
Forward foreign currency related
transactions 534,157
- -------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments and
forward foreign currency related
transactions 4,340,335
- -------------------------------------------------------------------
Net realized and unrealized gain on
investments and forward foreign
currency related transactions 7,145,124
- -------------------------------------------------------------------
Net increase in net assets resulting
from operations $14,736,225
===================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 20
- ------------------------------
Keystone Strategic Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
=======================================================================================================
(Unaudited)
<S> <C> <C>
Operations
Net investment income $ 7,591,101 $ 19,336,690
Net realized gain (loss) on investments and foreign currency
related transactions 2,804,789 (3,931,838)
Net change in unrealized appreciation (depreciation) on investments
and foreign currency related transactions 4,340,335 247,245
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,736,225 15,652,097
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1)
Net investment income:
Class A Shares (2,542,747) (5,945,153)
Class B Shares (4,249,560) (9,706,657)
Class C Shares (1,056,939) (2,690,979)
Class Y Shares 0 0
Tax basis return of capital:
Class A Shares 0 (564,217)
Class B Shares 0 (921,197)
Class C Shares 0 (255,384)
Class Y Shares 0 0
- -------------------------------------------------------------------------------------------------------
Total distributions to shareholders (7,849,246) (20,083,587)
- -------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 2,372,142 5,908,665
Class B Shares 9,153,950 18,284,154
Class C Shares 1,868,759 3,935,676
Class Y Shares 7 0
Payment for shares redeemed:
Class A Shares (10,521,212) (25,781,907)
Class B Shares (21,597,202) (46,918,273)
Class C Shares (7,871,440) (19,524,124)
Class Y Shares 0 0
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 1,314,675 3,365,004
Class B Shares 2,112,165 5,354,257
Class C Shares 669,755 1,848,660
Class Y Shares 0 0
- -------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share
transactions (22,498,401) (53,527,888)
- -------------------------------------------------------------------------------------------------------
Total decrease in net assets (15,611,422) (57,959,378)
- -------------------------------------------------------------------------------------------------------
Net assets
Beginning of period 223,322,762 281,282,140
- -------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of
net investment income as follows: 1997--($1,428,141) and
1996--($1,169,996)] (Note 1) $207,711,340 $223,322,762
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 21
- ------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1.) Significant Accounting Policies
Keystone Strategic Income Fund (the "Fund") is a Massachusetts business trust
for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone was formerly a wholly- owned
subsidiary of Keystone Investments, Inc. ("KII") and is currently a
subsidiary of First Union Keystone, Inc. First Union Keystone, Inc. is a
wholly-owned subsidiary of First Union National Bank of North Carolina which
in turn is a wholly-owned subsidiary of First Union Corporation ("First
Union"). The Fund is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a diversified, open-end investment company. The
Fund offers several classes of shares. The Fund's investment objective is to
seek high current income from high yield, foreign and U.S. Government or
agency obligations.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
U.S. Government obligations held by the Fund are valued at the mean between
the over-the-counter bid and asked prices as furnished by an independent
pricing service. Listed corporate bonds, other fixed income securities,
mortgage and other asset-backed securities, and other related securities are
valued at prices provided by an independent pricing service. In determining
value for normal institutional-size transactions, the pricing service uses
methods based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders. Securities for which valuations are not available from
an independent pricing service (including restricted securities) are valued
at fair value as determined in good faith according to procedures established
by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
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.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the
collateral daily and will require the seller to provide additional collateral
in the event the market value of the securities pledged falls below the
carrying value of the repurchase agreement.
C. Reverse Repurchase Agreements
The Fund enters into reverse repurchase agreements with qualified third-party
broker-dealers. Interest on the value of reverse repurchase agreements is
based upon competitive market rates at the time of issuance. At the time the
Fund enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with the custodian containing liquid assets
having a value not less than the repurchase price (including accrued
interest). If the counterparty to the
<PAGE>
PAGE 22
- ------------------------------
Keystone Strategic Income Fund
transaction is rendered insolvent, the ultimate realization of the securities
to be repurchased by the Fund may be delayed or limited.
D. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into United States dollars
as follows: market value of investments, assets and liabilities at the daily
rate of exchange; purchases and sales of investments, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gain (loss) resulting from changes in foreign
currency exchange rates is a component of net unrealized appreciation
(depreciation) on investments and foreign currency transactions. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement
date on investment securities transactions, foreign currency transactions and
the difference between the amounts of interest and dividends recorded on the
books of the Fund and the amount actually received. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between
the initial purchase trade date and subsequent sale trade date is included in
realized gain (loss) on foreign currency transactions
E. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the
value of the contract changes. Such changes are recorded as unrealized gains
or losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other
party will not fulfill their obligations under the contract. Futures
contracts also involve elements of market risk in excess of the amount
reflected in the statement of assets and liabilities.
F. Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated
in a foreign currency and to hedge certain foreign currency assets or
liabilities. Forward contracts are recorded at the forward rate and
marked-to-market daily. Realized gains and losses arising from such
transactions are included in net realized gain (loss) on foreign currency
related transactions. The Fund bears the risk of an unfavorable change in the
foreign currency exchange rate underlying the forward contract and is subject
to the credit risk that the other party will not fulfill their obligations
under the contract. Forward contracts involve elements of market risk in
excess of the amount reflected in the statement of assets and liabilities.
G. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the
identified cost basis. Interest income is recorded on the accrual basis and
includes amortization of discounts. Dividend income is recorded on the
ex-dividend date.
H. Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the
<PAGE>
PAGE 23
- ------------------------------
Internal Revenue Code of 1986, as amended (the "Code"). Thus, the Fund is
relieved of any federal income tax liability by distributing all of its net
taxable investment income and net taxable capital gains, if any, to its
shareholders. The Fund also intends to avoid excise tax liability by making
the required distributions under the Code. Accordingly, no provision for
federal income taxes is required.
I. Distributions
The Fund distributes net investment income monthly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the
close of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment for paydown gains (losses) and foreign security
transactions for income tax purposes that have been recognized for financial
statement purposes.
J. Class Allocations
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 that
is payable upon redemption and decreases depending on how long the shares
have been held. Class B shares purchased after January 1, 1997 will
automatically convert to Class A shares after seven years. Class B shares
purchased prior to January 1, 1997 will retain their existing conversion
features.
Class C shares are sold subject to a contingent deferred sales charge
payable on shares redeemed within one year after the month of purchase.
Class Y shares are sold without a front-end or contingent deferred sales
charge and pay no distribution or shareholder servicing expenses.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the
relative net assets of each class. Currently, class specific expenses are
limited to expenses incurred under the Distribution Plans for each class,
except Class Y.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Shares of
beneficial interest of the Fund are currently divided into Class A, Class B,
Class C and Class Y. Transactions in shares of the Fund were as follows:
Six months ended Year ended
Class A January 31, 1997 July 31, 1996
- -----------------------------------------------------
Shares sold 339,922 862,737
Shares redeemed (1,516,027) (3,779,494)
Shares issued in
reinvestment of
dividends and
distributions 189,663 493,925
- -----------------------------------------------------
Net decrease (986,442) (2,422,832)
=====================================================
Class B
Shares sold 1,308,994 2,657,436
Shares redeemed (3,093,253) (6,840,568)
Shares issued in
reinvestment of
dividends and
distributions 303,147 781,880
- -----------------------------------------------------
Net decrease (1,481,112) (3,401,252)
=====================================================
<PAGE>
PAGE 24
- ------------------------------
Keystone Strategic Income Fund
Six months ended Year ended
Class C January 31, 1997 July 31, 1996
- -----------------------------------------------------
Shares sold 270,016 573,201
Shares redeemed (1,128,932) (2,845,554)
Shares issued in
reinvestment of
dividends and
distributions 96,279 270,184
- -----------------------------------------------------
Net decrease (762,637) (2,002,169)
=====================================================
January 2, 1997
(Date of Initial Public
Offering) to
Class Y January 31, 1997
- -----------------------------------------------------
Shares sold 1
Shares redeemed 0
Shares issued in
reinvestment of
dividends and
distributions 0
- -----------------------------------------------------
Net increase 1
=====================================================
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the six months ended January 31,
1997:
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------
Non-U.S.Government $44,287,898 $101,107,448
U.S. Government $18,522,734 $ 12,926,552
The average daily balance of reverse repurchase agreements outstanding
during the six months ended January 31, 1997 was approximately $3,431,700 at
a weighted average interest rate of 5.19%. The maximum amount of borrowing
during the year was $8,654,137 (including accrued interest).
As of July 31, 1996, the Fund had a capital loss carryover for federal
income tax purposes of approximately $65,917,000 which expires as follows:
$1,843,000--1998, $11,547,000--1999, $12,167,000--2000, $5,288,000--2002 and
$35,072,000--2004.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted for its Class A, B and C shares pursuant to Rule 12b-1 under
the 1940 Act. Under the Distribution Plans, the Fund pays its principal
underwriter amounts which are calculated and paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting
agreement with Evergreen Keystone Distributor, Inc. (formerly, Evergreen
Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group
Inc. Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter.
The Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average daily net assets of the
Class A shares, to pay expenses related to the distribution of Class A
shares.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund
pays a distribution fee which may not exceed 1.00% annually of the average
daily net assets of Class B and Class C shares, respectively. Of that amount,
0.75% is used to pay distribution expenses and 0.25% is used to pay service
fees.
During the six months ended January 31, 1997, amounts paid to EKD or EKIS
pursuant to the Fund's Class A, Class B and Class C Distribution Plans were
as follows:
Paid to Paid to
EKD EKIS
- -----------------------------------------
Class A -- $ 77,989
Class B prior
to June 1, 1995 -- 531,397
Class B on or
after June 1, 1995 $2,287 83,080
Class C 82 153,996
<PAGE>
PAGE 25
- ------------------------------
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, and subject to the discretion of the Independent Trustees,
payments to EKIS and/or EKD may continue as compensation for services which
had been earned while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek
full payment of such distribution costs from the Fund at such time in the
future as, and to the extent that, payment thereof by the Class B or Class C
shares would be within permitted limits.
At January 31, 1997 total unpaid distribution costs were $9,780,243 for
Class B shares purchased before June 1, 1995 and $1,253,913 for Class B
shares purchased on or after June 1, 1995. Unpaid distribution costs for
Class C were $4,914,792 at January 31, 1997.
Contingent deferred sales charges paid by redeeming shareholders are paid
to EKD or its predecessor.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone
serves as the Investment Adviser and Manager to the Fund. Keystone provides
the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed at an annual rate of 2.00% of the
Fund's gross investment income plus an amount determined by applying
percentage rates starting at 0.50% and declining as net assets increase to
0.25% per annum, to the average daily net asset value of the Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as Investment Manager to the Fund
and provided investment management and administrative services. Under an
investment advisory agreement between KMI and Keystone, Keystone served as
the Investment Adviser and provided investment advisory and management
services to the Fund. In return for its services, Keystone received an annual
fee equal to 85% of the management fee received by KMI.
During the six months ended January 31, 1997, the Fund paid or accrued
$12,137 to Keystone for certain accounting services. The Fund paid or accrued
$294,152 to Evergreen Keystone Service Company (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, for services
rendered as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
(6.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the six months ended January 31, 1997, the Fund incurred total custody
fees of $80,188 and received a credit of $13,510 pursuant to this expense
offset arrangement, resulting in a net custody expense of $66,678. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
(7.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.045 for Class A, $0.041 for
Class B, $0.041 for Class C and $0.045 for Class Y were declared payable by
March 6, 1997 to shareholders of record on February 25, 1997. These
distributions are not reflected in the accompanying financial statements.
<PAGE>
PAGE 26
- ------------------------------
Keystone Strategic Income Fund
Additional Information (Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday, December 9, 1996. In
addition, beside each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
------------- -----------
Frederick Amling 22,218,403 518,215
Laurence B. Ashkin 22,212,306 524,312
Charles A. Austin III 22,209,589 527,029
Foster Bam 22,210,042 526,577
George S. Bissell 22,213,540 523,078
Edwin D. Campbell 22,210,802 525,816
Charles F. Chapin 22,204,292 532,326
K. Dun Gifford 22,222,965 513,654
James S. Howell 22,211,652 524,966
Leroy Keith, Jr. 22,219,553 517,065
F. Ray Keyser, Jr. 22,216,675 519,943
Gerald M. McDonell 22,217,430 519,189
Thomas L. McVerry 22,221,616 515,002
William Walt Pettit 22,222,965 513,654
David M Richardson 22,222,821 513,797
Russell A. Salton, III M.D. 22,221,290 515,328
Michael S. Scofield 22,222,821 513,797
Richard J. Shima 22,209,416 527,203
Andrew J. Simons 22,220,346 516,272
2. To approve an Investment Advisory and Management Agreement between the
Fund and Keystone Investment Management Company.
Affirmative Against Abstain
------------- --------- ---------
21,667,114 278,428 791,076
<PAGE>
PAGE 27
- ------------------------------
Keystone Strategic Income Fund
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)-- Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
[KEYSTONE LOGO]
ANNUAL REPORT
OCTOBER 31, 1996
<PAGE>
PAGE 1
- ----------------------
Keystone World Bond Fund
Seeks current income from debt securities in the United States and abroad
Dear Shareholder:
We are pleased to report to you on the activities of Keystone World Bond Fund
for the fiscal year which ended October 31, 1996.
Performance
For the twelve-month period which ended October 31, 1996, your Fund produced a
strong double-digit total return, in addition to successfully meeting its
objective of current income. The Fund's investment results were as follows:
Class A shares returned 13.99%.
Class B shares returned 13.04%.
Class C shares returned 13.09%.
This strong performance reflected positive market conditions as well as the
Fund's asset allocation during the period. The Salomon World Government Bond
Index returned 5.37% for the twelve-month period. The average return of mutual
funds in the World Bond Fund category was 8.05% for the period, according to
Lipper Analytical Services, Inc.(1) The Fund's twelve-month performance ranked
in the top quartile of that category.
Market environment
The bond markets staged an impressive rally during the past fiscal year.
Virtually every market in which the Fund invests reported exceptional
performance. In Latin America, where the Fund had about one-third of its total
holdings, the total returns of some bonds outpaced the record-high returns of
U.S. stocks during the period.
The prevailing themes for the world's bond markets were declining inflation
and lower interest rates. Many U.S. investors looking for higher yields ventured
abroad to take advantage of government bonds in Australia, New Zealand, Europe
and Latin America, which offered high yields even after adjusting for inflation.
Managing the dollar's strength
The strength of the U.S. dollar hurt the returns of many international
portfolios but it benefitted your Fund. The portfolio maintained between 33% and
35% of net assets in U.S. dollar-denominated debt, which helped to enhance your
Fund's overall performance. We hedged our currency risk in European holdings. We
correctly anticipated that interest rates would decline in Europe, which would
weaken some European currencies.
Broad diversification helps to capture opportunities while reducing risk
Your Fund divided its holdings among a number of countries, seeking to increase
portfolio stability without sacrificing opportunities. For example, in Europe,
our investments were divided between the countries that we believed would
benefit from the European Monetary Union (EMU), as well as countries that in our
view would do better, and might help protect your Fund, if the EMU fell through.
In Latin America, we were more concerned with credit risk, so we analyzed every
single company from the bottom up to ensure it had a strong enough foundation to
withstand any downturns. At all times, we were mindful of the Fund's objective
of current income, and we invested in countries that paid high real yields in
addition to offering relatively stable environments.
- -----------
(1)Source: Lipper Analytical Services, Inc., an independent mutual fund rating
service. The average return in the World Bond Fund category was 8.05% for the
1-year and 7.48% for the 5-year periods which ended October 31, 1996. There are
125 funds in the 1-year and 34 funds in the 5-year World Bond Fund categories.
Performance is based on total return which includes reinvestment of dividends,
and does not include the effects of sales charges. Past performance is no
guarantee of future results.
(continued on next page)
<PAGE>
PAGE 2
- ----------------------
Keystone World Bond Fund
Looking ahead
We think that the markets in Europe, the Pacific Rim and the Americas are well
positioned for another successful year, although at more moderate levels than
during the past fiscal year. In the United States, the economy is in the sixth
year of an expansion, but economic fundamentals continue to be favorable and we
see no indications of a prolonged slowdown in the near future.
From the global perspective, we see strong indications of continued growth.
The emerging economies in Latin America, Asia, and Europe are supplying rising
demand for new technology, modern infrastructure, consumer goods and services.
The United States and, increasingly, other countries in Europe have been gearing
up to meet global demand.
Introducing the new portfolio manager
Richard A. Wisentaner, Vice President and Portfolio Manager, assumed
responsibilities as portfolio manager of Keystone World Bond Fund on October 1,
1996. As the principal analyst for your Fund during the previous two years, Mr.
Wisentaner is thoroughly familiar with your Fund's fixed-income investments and
he will maintain the continuity of management that contributed to your Fund's
success during the past fiscal year. Mr. Wisentaner will continue to work
closely with Gilman Gunn, Senior Vice President and head of the Keystone
International Investment team, who managed the Fund until October 1, 1996.
Keystone acquired by First Union Corporation
On another note, we are pleased to inform you that Keystone has been acquired by
First Union Corporation. First Union is a financial services firm based in
Charlotte, North Carolina. It is the nation's sixth largest bank holding company
with assets of approximately $130 billion. First Union, through its wholly owned
subsidiary Evergreen Asset Management Corp., together with Keystone mutual
funds, manages more than $30 billion in 70 mutual funds. Keystone will remain a
separate entity and will continue to provide investment advisory and management
services to the Fund. Other services will be provided under the "Evergreen
Keystone Funds" name. We believe First Union's acquisition of Keystone
strengthens the investment management services we provide you.
The past several months have been a time of dynamic change at Keystone
Investments. We appreciate the opportunity to share our news with you and thank
you for your continued support of Keystone funds. If you have any questions or
comments, please feel free to write to us.
Sincerely, [photo of Albert H. Elfner, III and photo of George S. Bissell]
/s/Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
December 1996 [Albert H. Elfner, III George S. Bissell]
<PAGE>
PAGE 3
- ----------------------
A Discussion With
Your Fund Manager
[photo of Richard Wisentaner]
Richard Wisentaner is portfolio manager of Keystone World Bond Fund.
An investment professional with broad experience in international
fixed-income research and analysis, Mr. Wisentaner has been a member
of Keystone's International team since September 1994. He received
an A.B. in Economics at Harvard University, and an M.B.A. in Finance
and International Business at the University of Chicago.
Q What was the overall investment climate for the world fixed-income markets
during the past fiscal year?
A In general, the world bond markets produced excellent performance during the
past twelve months which ended October 31, 1996. It was a broad-based rally,
encompassing both the emerging and established economies. The markets from
Europe to Australia responded to lower inflation levels and declining interest
rates. In the emerging economies, improving political and economic climates
demonstrated the countries' resolve to be competitive global market players.
Q What would you classify as the most significant opportunity for the Fund
during the past fiscal year?
A The Fund was heavily weighted in countries whose currencies move with the U.S.
dollar and thus represent no currency risk for the portfolio. That was a good
place to be in the face of the strong U.S. dollar. At the close of the fiscal
year, the fund had 8.9% of net assets in Canada, 11.2% in New Zealand, and 3.6%
in Australia. Those countries had among the highest real interest rates, and
their inflation levels were declining. The Fund had both positive currency
performance and capital appreciation from those markets. Our other top
performers were Latin American Eurobonds in Brazil, Argentina, and Mexico, which
posted gains in the 20%-40% range in U.S. dollar terms for the twelve-month
period.
Q What effect did the rising dollar have on the Fund's holdings in Europe and
Latin America?
A The Fund hedged its currency exposure in Western Europe. We believed that with
interest rates declining, the European currencies were likely to weaken relative
to the U.S. dollar. We had no exposure in Eastern Europe because we allocated
our below-investment-grade investments to Latin America. Our Latin American
holdings were dollar-denominated, so there was no currency impact on the Fund
from those countries.
Fund Profile
Objective: Seeks current income from debt securities in the
United States and abroad.
Commencement of investment operations: January 9, 1987
Average quality: A
Average maturity: 6 years
Net assets: $14.6 million
<PAGE>
PAGE 4
- ----------------------
Keystone World Bond Fund
Geographic Diversification
as of October 31, 1996
- ------------------------
Americas 43.5%
- ------------------------
Europe 38.8%
- ------------------------
Pacific 14.8%
- ------------------------
Other* 2.9%
- ------------------------
*Includes other assets and liabilities and short-term obligations.
Q What is your assessment of the Fund's performance?
A We are pleased with the Fund's results during the past fiscal year. Keystone
World Bond Fund is managed to minimize volatility, and that can hurt performance
in bull markets. In this bull market, our performance was significantly ahead of
the Salomon World Government Bond Index. The strong results of emerging-market
bonds in the portfolio was a partial reason for the Fund's edge over the Index.
The Salomon World Government Bond Index does not include emerging-market debt.
Q How do you minimize the risks of investing in international bonds?
A We deal with three types of risk: currency risk, credit risk, and
interest-rate risk. Credit risk is especially significant in emerging countries.
In those regions we buy Eurobonds rather than Brady Bonds. Eurobonds tend to be
shorter in duration, and less sensitive to interest rate movements than Brady
Bonds. We buy strong companies with strong cash flows and good profit margins
that we believe can withstand economic downturns. We don't invest in high-risk
countries, like Russia or Panama.
We seek to minimize currency risk by buying U.S. dollar-denominated bonds,
dollar-bloc bonds, and by hedging.
Interest-rate risk is minimized by shortening the duration of the bonds. Most
maturities in the portfolio at fiscal year-end were less than 10 years.
Q How did the preparations for the European Monetary Union (EMU) affect the
Fund?
A We have about 50% of net assets in Europe, so we watch the EMU developments
very closely. During the past fiscal year, the impact on the Fund was very
favorable. The countries that want to join the Union on January 1, 1999 have
been scrambling to trim their budget deficits and put their fiscal houses in
order. These efforts produced lower inflation and interest rates across Europe
and boosted the values of bonds. The strongest advances occurred in the
countries of peripheral Europe, such as Italy, Portugal, Spain and Sweden, where
the Fund increased allocations over the past fiscal year. Those countries
benefitted more from improving economies than the "core Europe," such as Germany
and France, where economic risks are generally considered lower.
Q Is there a likelihood that the EMU might not come to pass?
A We believe that the EMU is an unknown. If the recovery doesn't pick up in
Europe and its currencies become weaker, the EMU might fall through. The Fund
hedged against that possibility by diversifying into both core and peripheral
Europe. If the EMU were to fall through, we would shift more to core Europe.
<PAGE>
PAGE 5
- ----------------------
Q What is your outlook?
A We think it's unlikely that we will repeat the appreciation in bond values
that we saw in the past fiscal year. For prices to rise that far again, interest
rates, which move in the opposite direction, would have to fall to unprecedented
lows. Still, we believe that there's enough fuel left in this rally to produce
attractive returns, especially in peripheral European countries and Latin
America. We expect that as long as interest rates in Japan, Germany and the U.S.
remain low, as we think they will, investors might be willing to take on
additional risks outside of those established markets in order to earn higher
yields.
Our outlook for inflation is cautious, especially in the United States. The
U.S. employment has been high and wage inflation has been emerging. U.S.
commodity prices have been in check largely due to the slowdowns in Asia and
Europe, but we believe these markets have been coming out of their doldrums.
Overall, we think that efforts of many governments to reduce budget deficits
and keep inflation in check should have a positive long-term impact on
international bonds. Short-term fluctuations in any one market are inevitable,
but we believe that Keystone World Bond Fund is well positioned to capitalize on
the considerable opportunities available in international markets.
[diamond]
This column is intended to answer
your questions about your Fund.
If you have a question, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 6
- ----------------------
Keystone World Bond Fund
Your Fund's Performance
Growth of an investment in
Keystone World Bond Fund Class A
[MOUNTAIN CHART]
In Thousands
Initial Reinvested
Investment Distributions
1/87 10000 10000
9524 9524
9810 10276
10/88 9619 10921
9200 11049
10/90 9629 12270
9857 13727
10/92 9667 14459
9124 16703
10/94 8019 15791
8019 16995
10/96 8524 19376
A $10,000 investment in Keystone World Bond Fund Class A made on January 9,
1987 with all distributions reinvested was worth $19,376 on October 31, 1996.
Past performance is no guarantee of future results.
**Class A shares were introduced on January 9, 1987. Performance is reported
at the current maximum front-end sales charge of 4.75%.
Twelve-Month Performance as of October 31, 1996
-----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 13.99% 13.04% 13.09%
Net asset value 10/31/95 $8.42 $8.45 $8.42
10/31/96 $8.95 $8.97 $8.94
Dividends $0.60 $0.54 $0.54
Capital gains None None None
* Before deducting any sales charges.
Historical Record as of October 31, 1996
-----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 13.99% 13.04% 13.09%
1-year** 8.58% 9.04% 13.09%
5-year** 34.43% -- --
Life of class* 93.76% 13.49% 16.01%
Average Annual Returns
1-year w/o sales charge 13.99% 13.04% 13.09%
1-year** 8.58% 9.04% 13.09%
5-year** 6.10% -- --
Life of class* 6.97% 3.97% 4.68%
Class B shares were introduced on August 2, 1993. Shares purchased after June
1, 1995 are subject to a contingent deferred sales charge (CDSC) that declines
from 5% to 1% over six years from the month purchased. Performance assumes that
shares were redeemed after the end of a one-year holding period and reflects the
deduction of a 4% CDSC.
Class C shares were introduced on August 2, 1993. Performance reflects the
deduction of the 1% contingent deferred sales charge which applies during the
first year owned.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by calling or writing
to Keystone directly, or through Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 7
- ----------------------
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone World Bond
Fund Class A, the Salomon World Government Bond Index, and the Consumer Price
Index.
In Thousands January 9, 1987 through October 31, 1996
Average Annual Total Return
- ---------------------------------------------------------
1 Year 5 Year Life of Class
Class A 8.58% 6.10% 6.97%
Class B 9.04% -- 3.97%
Class C 13.09% -- 4.68%
[LINE CHART]
Class A SWGBI CPI
1/87 9524 10000 10000
10276 10974 10434
10/88 10921 12299 10878
11049 12624 11367
10/90 12270 13889 12081
13727 15458 12434
10/92 14459 17606 12833
16703 19720 13186
10/94 15791 20432 13529
16995 23540 13910
10/96 19376 24803 14281
Past performance is no guarantee of future results. The performance of Class B
or Class C shares will be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the different
classes. Class B and Class C shares were introduced February 1, 1993. The
Salomon World Government Bond Index and the Consumer Price Index are from
December 31, 1986. The Consumer Price Index is through September 30, 1996.
This chart graphically compares your Fund's total return performance to certain
investment indexes. It is the result of fund performance guidelines issued by
the Securities and Exchange Commission. The intent is to provide investors with
more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate a
hypothetical investment in:
1. Keystone World Bond Fund Class A
Your Fund seeks current income from debt securities in the U.S. and abroad. The
return is quoted after deducting sales charges (if applicable), fund expenses,
and transaction costs and assumes reinvestment of all distributions.
2. Salomon World Government Bond Index (SWGBI)
The SWGBI is a broad-based unmanaged index of foreign government bonds. It is
comprised of over 800 issues from 14 countries including the U.S. These
securities are selected and compiled by Salomon Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the US. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
Bureau of Labor Statistics. The CPI is generally considered a valuable benchmark
for investors who seek to outperform increases in the cost of living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help you
<PAGE>
PAGE 8
- ----------------------
Keystone World Bond Fund
evaluate fund performance in conjunction with the other important financial
considerations such as safety, stability and consistency.
The chart, however, limits the evaluation of Fund performance in several ways.
Because the measurement is based on total returns over an extended period of
time, the comparison often favors those funds which emphasize capital
appreciation when the market is rising. Likewise, when the market is declining,
the comparison usually favors those funds which take less risk.
Keystone World Bond FundPerformance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to buy
stocks that have been traded on a stock exchange for a minimum number of years
or of a certain company size. Indexes usually do not have the same investment
restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not take
into account any deductions for sales charges, transaction costs or other fund
expenses. Your Fund's performance figures do reflect such deductions. Sales
charges--whether up-front or deferred--pay for the cost of the investment advice
of your financial adviser. Transaction costs pay for the costs of buying and
selling securities for your Fund's portfolio. Fund expenses pay for the costs of
investment management and various shareholder services. None of these costs are
reflected in index total returns. The comparison is for illustration only. An
investor cannot invest in an index.
One of Several Measures
The chart is one of several tools you can use to understand your investment. It
should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your personal
financial situation, can best explain the features of your Keystone fund and how
it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either the
Fund or the indexes is not representative of what shareholders should expect to
receive from their Fund investment in the future; it is presented to illustrate
only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 9
- ----------------------
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for managing
a portfolio's assets prudently and making appropriate investment decisions, such
as which securities to buy, hold and sell, based on the investment objectives of
the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a claim
on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it has
borrowed money. A bond usually promises to pay interest income to the bondholder
at regular intervals and to repay the entire amount borrowed at maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or bonds)
that is exchangeable for a set number of another security type (usually common
stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short- term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The fund
pays income which can fluctuate daily. Liquidity and safety of principal are
primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund. The
NAV per share is determined by subtracting a fund's total liabilities from its
total assets, and dividing that amount by the number of fund shares outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net asset
value drops by the amount of the distribution because the distribution is no
longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses. Capital
gains are paid to fund shareholders on a per share basis. When a capital gain
distribution is made, the fund's net asset value drops by the amount of the
distribution because the distribution is no longer considered part of the fund's
assets.
YIELD--The annualized rate of income as measured against the current net asset
value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified period
of time, taking into account the change in a fund's market price and the
reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price at
which the share is sold to the public.
<PAGE>
PAGE 10
- ----------------------
Keystone World Bond Fund
SCHEDULE OF INVESTMENTS--October 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
=================================================================================================
<S> <C> <C> <C> <C>
INTERNATIONAL, GOVERNMENT AGENCIES AND ISSUES (97.1%)
AUSTRALIAN DOLLAR (3.6%)
New South Wales Treasury Corp. 12.600% 5/01/2006 500,000 $ 529,197
-------------------------------------------------------------------------------------------------
CANADIAN DOLLAR (8.9%)
Government of Canada 8.750 12/01/2005 1,500,000 1,303,126
-------------------------------------------------------------------------------------------------
DANISH KRONE (7.1%)
Kingdom of Denmark 9.000 11/15/1998 2,000,000 374,000
Kingdom of Denmark 7.000 12/15/2004 3,750,000 662,216
-------------------------------------------------------------------------------------------------
1,036,216
-------------------------------------------------------------------------------------------------
GERMAN DEUTSCHE MARK (4.6%)
Federal Republic of Germany 6.875 5/12/2005 950,000 665,138
-------------------------------------------------------------------------------------------------
IRISH POUND (4.8%)
Republic of Ireland 8.000 8/18/2006 400,000 698,258
-------------------------------------------------------------------------------------------------
ITALIAN LIRA (5.4%)
Republic of Italy 9.500 2/01/2006 1,105,000,000 792,147
-------------------------------------------------------------------------------------------------
NETHERLANDS GUILDER (4.0%)
Government of Netherlands 7.750 3/01/2005 875,000 581,202
-------------------------------------------------------------------------------------------------
NEW ZEALAND DOLLAR (11.2%)
Government of New Zealand 6.500 2/15/2000 700,000 485,072
Government of New Zealand 8.000 4/15/2004 750,000 551,822
Government of New Zealand 9.000 11/15/1996 850,000 601,344
-------------------------------------------------------------------------------------------------
1,638,238
-------------------------------------------------------------------------------------------------
PORTUGUESE ESCUDO (4.5%)
Republic of Portugal 10.625 06/23/2003 85,000,000 655,601
-------------------------------------------------------------------------------------------------
SPANISH PESETA (3.3%)
Kingdom of Spain 11.450 8/30/1998 32,000,000 270,431
Kingdom of Spain 12.250 3/25/2000 23,000,000 208,702
-------------------------------------------------------------------------------------------------
479,133
-------------------------------------------------------------------------------------------------
SWEDISH KRONA (5.1%)
Kingdom of Sweden 10.250 5/05/2003 4,200,000 747,655
-------------------------------------------------------------------------------------------------
UNITED STATES DOLLAR (34.6%)
Comtel Brasileira 10.750 9/26/2004 500,000 506,250
Grupo International Durango S.A. de CV 12.625 08/01/2003 600,000 627,000
Grupo Televisa S.A. de CV 11.875 5/15/2006 600,000 636,000
<PAGE>
PAGE 11
- ----------------------
Coupon Maturity Principal Market
Rate Date Amount Value
=================================================================================================
UNITED STATES DOLLAR--CONTINUED
Ispat Mexicana S.A. 10.375% 3/15/2001 1,025,000 $ 1,027,563
Klabin Fabricadora Papel 12.125 12/28/2002 250,000 257,500
Republic of Argentina 11.000 10/09/2006 500,000 487,500
Telecom Argentina 8.375 10/18/2000 500,000 488,750
Telecom Argentina STET France 12.000 11/15/2002 190,000 205,200
Telefonica de Argentina S.A. 11.875 11/01/2004 760,000 813,200
-------------------------------------------------------------------------------------------------
5,048,963
-------------------------------------------------------------------------------------------------
TOTAL INTERNATIONAL, GOVERNMENT AGENCIES & ISSUES (COST--$13,086,165) 14,174,874
=================================================================================================
TOTAL INVESTMENTS (COST $13,086,165)(A) 14,174,874
-------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (2.9%) 417,378
-------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $14,592,252
=================================================================================================
</TABLE>
(a) The cost of investments for federal income tax purposes is identical. Gross
unrealized appreciation and depreciation on investments, based on identified
tax cost, is as follows:
Gross unrealized appreciation $1,139,598
Gross unrealized depreciation (50,889)
-----------
Net unrealized appreciation $1,088,709
===========
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. $ Value
In at Unrealized
Exchange Exchange October 31, Appreciation/
Date for U.S. $ 1996 (Depreciation)
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Forward Foreign Currency Exchange Contracts to Sell:
Contracts to
Deliver
=========================================================================================================
11/13/96 21,243,600 Spanish Peseta $168,000 $166,395 $ 1,605
11/20/96 745,152 Deutsche Mark 502,500 492,654 9,846
11/20/96 2,033,783 Danish Krone 354,000 350,246 3,754
11/20/96 485,479 Netherland Guilder 292,000 286,497 5,503
01/09/97 318,829 Australian Dollar 250,000 252,144 (2,144)
Forward Foreign Currency Exchange Contracts to Buy:
Contracts to Receive
=========================================================================================================
11/13/96 21,243,600 Spanish Peseta $165,985 $166,395 $ 410
</TABLE>
<PAGE>
PAGE 12
- ----------------------
Keystone World Bond Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended
October 31, Period from Year Ended December 31,
----------------- January 1, 1994 to -------------------------------
1996 1995 October 31, 1994 1993 1992 1991 1990
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of year $ 8.42 $ 8.42 $ 9.56 $ 8.69 $10.77 $ 9.82 $ 9.76
- --------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.54 0.61 0.32 0.44 0.64 0.66 0.63
Net realized and
unrealized gain
(loss) on investments
and foreign currency
related transactions 0.59 (0.01) (0.96) 1.03 (0.79) 0.99 0.31
- --------------------------------------------------------------------------------------------------------
Total from investment
operations 1.13 0.60 (0.64) 1.47 (0.15) 1.65 0.94
- --------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.60) (0.54) 0 (0.43) (0.96) (0.45) (0.52)
In excess of net
investment income 0 0 0 (0.17) (0.28) 0 (0.04)
Tax basis return of
capital 0 (0.06) (0.50) 0 0 0 0
Net realized gains on
investments and
foreign currency
related transactions 0 0 0 0 (0.69) (0.25) (0.32)
- --------------------------------------------------------------------------------------------------------
Total distributions (0.60) (0.60) (0.50) (0.60) (1.93) (0.70) (0.88)
- --------------------------------------------------------------------------------------------------------
Net asset value end of
year $ 8.95 $ 8.42 $ 8.42 $ 9.56 $ 8.69 $ 10.77 $ 9.82
========================================================================================================
Total return (c) 13.99% 7.62% (6.72%) 17.26% (1.24%) 17.48% 10.11%
Ratios/supplemental
data
Ratios to average net
assets:
Total expenses (a) 2.01(d) 2.46(d) 2.20%(b) 2.20% 2.20% 2.00% 2.00%
Net investment income 7.14% 7.21% 4.66%(b) 4.62% 5.44% 6.43% 6.48%
Portfolio turnover rate 58% 108% 100% 107% 185% 204% 154%
- --------------------------------------------------------------------------------------------------------
Net assets end of year
(thousands) $8,618 $9,956 $6,047 $8,403 $7,121 $11,843 $13,833
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
January 9, 1987
(Commencement of
Operations) to
1989 1988 December 31, 1987
================================================= =============================
<S> <C> <C> <C>
Net asset value beginning of year $ 10.04 $11.02 $10.00
------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.61 0.54 0.56
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions (0.27) (0.92) 1.27
------------------------------------------------------------------------------
Total from investment operations 0.34 (0.38) 1.83
------------------------------------------------------------------------------
Less distributions from
Net investment income (0.62) (0.54) (0.56)
In excess of net investment income 0 0 0
Tax basis return of capital 0 0 0
Net realized gains on investments
and foreign currency related
transactions 0 (0.06) (0.25)
------------------------------------------------------------------------------
Total distributions (0.62) (0.60) (0.81)
------------------------------------------------------------------------------
Net asset value end of year $ 9.76 $10.04 $11.02
==============================================================================
Total return (c) 3.07% (3.34%) 19.10%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 1.81% 1.19% 1.88%(b)
Net investment income 5.81% 5.34% 5.68%(b)
Portfolio turnover rate 73% 335% 171%
------------------------------------------------------------------------------
Net assets end of year (thousands) $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) Excluding applicable sales charges.
(d) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses the expense ratio would have
been 2.00% and 2.44% for the years ended October 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 13
- ----------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
August 2, 1993
Year Ended October 31, Period from (Date of Initial
---------------------- January 1, 1994 to Public Offering) to
1996 1995 October 31, 1994 December 31, 1993
===============================================================================================================
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 8.45 $ 8.46 $ 9.58 $ 9.47
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.55 0.52 0.31 0.16
Net realized and unrealized gain (loss)
on investments and foreign currency
related transactions 0.51 0.01 (0.99) 0.21
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 1.06 0.53 (0.68) 0.37
- ---------------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.54) (0.48) 0 (0.11)
In excess of net investment income 0 0 0 (0.15)
Tax basis return of capital 0 (0.06) (0.44) 0
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.54) (0.44) (0.26)
- ---------------------------------------------------------------------------------------------------------------
Net asset value end of year $ 8.97 $ 8.45 $ 8.46 $ 9.58
===============================================================================================================
Total return (c) 13.04% 6.68% (7.18%) 3.93%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 2.76%(d) 3.21%(d) 2.95%(b) 2.95%(b)
Net investment income 6.40% 6.43% 4.05%(b) 3.79%(b)
Portfolio turnover rate 58% 108% 100% 107%
- ---------------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $4,917 $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) Excluding applicable sales charges.
(d) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.74% and 3.19% for the years ended October 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- ----------------------
Keystone World Bond Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
August 2, 1993
Year Ended October 31, Period from (Date of Initial
---------------------- January 1, 1994 to Public Offering) to
1996 1995 October 31, 1994 December 31, 1993
===============================================================================================================
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 8.42 $ 8.42 $ 9.58 $ 9.47
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income 0.56 0.56 0.30 0.18
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions 0.50 (0.02) (1.02) 0.19
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 1.06 0.54 (0.72) 0.37
- ---------------------------------------------------------------------------------------------------------------
Less distributions from
Net investment income (0.54) (0.48) 0 (0.12)
In excess of net investment income 0 0 0 (0.14)
Tax basis return of capital 0 (0.06) (0.44) 0
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.54) (0.44) (0.26)
- ---------------------------------------------------------------------------------------------------------------
Net asset value end of year $ 8.94 $ 8.42 $ 8.42 $ 9.58
===============================================================================================================
Total return (c) 13.09% 6.83% (7.61%) 3.93%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (a) 2.78%(d) 3.21%(d) 2.95%(b) 2.95%(b)
Net investment income 6.37% 6.49% 3.94%(b) 3.79%(b)
Portfolio turnover rate 58% 108% 100% 107%
- ---------------------------------------------------------------------------------------------------------------
Net assets end of year (thousands) $1,057 $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) Excluding applicable sales charges.
(d) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 2.77% and 3.19% for the years ended October 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- ----------------------
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
=======================================================================
Assets
Investments at market value (identified cost--
$13,086,165) $14,174,874
Receivable for:
Unrealized appreciation on forward foreign currency
exchange contracts 21,118
Interest 458,338
Prepaid expenses 7,474
-----------------------------------------------------------------------
Total assets 14,661,804
-----------------------------------------------------------------------
Liabilities
Payable for:
Unrealized depreciation on forward foreign currency
exchange contracts 2,144
Income distribution 23,167
Foreign taxes withheld 5,649
Other accrued expenses 38,592
-----------------------------------------------------------------------
Total liabilities 69,552
-----------------------------------------------------------------------
Net assets $14,592,252
=======================================================================
Net assets represented by
Paid-in capital $14,497,982
Undistributed net investment income 52,595
Accumulated net realized loss on investments and
foreign currency related transactions (1,066,795)
Net unrealized appreciation on investments and foreign
currency related transactions 1,108,470
-----------------------------------------------------------------------
Total net assets $14,592,252
=======================================================================
Net Asset Value and redemption price per share
Class A Shares
Net assets of $8,617,822 / 963,162 shares outstanding $8.95
Offering price per share ($8.95 / 0.9525) (based on a
sales charge of 4.75% of the offering price at October
31, 1996) $9.40
Class B Shares
Net assets of $4,917,178 / 548,173 shares outstanding $8.97
Class C Shares
Net assets of $1,057,252 / 118,324 shares outstanding $8.94
=======================================================================
STATEMENT OF OPERATIONS
Year Ended October 31, 1996
========================================================================
Investment income
Interest (net of foreign withholding taxes
of $7,569) $1,343,968
Expenses (Notes 4 and 5)
Management fee $ 93,994
Transfer agent fees 48,155
Accounting 20,918
Auditing and legal fees 24,015
Custodian fees 22,640
Printing expenses 19,338
Distribution Plan expenses 77,012
Registration fees 31,688
----------------------------------------------------------------------
Total expenses 337,760
Less: Expenses paid indirectly (Note 6) (1,671)
----------------------------------------------------------------------
Net expenses 336,089
----------------------------------------------------------------------
Net investment income 1,007,879
----------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign
currency related transactions Net realized gain on
investments and foreign currency related transactions 274,506
----------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments and
foreign currency related transactions 580,719
----------------------------------------------------------------------
Net realized and unrealized gain on
investments and foreign currency
related transactions 855,225
----------------------------------------------------------------------
Net increase in net assets resulting from
operations $1,863,104
======================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ----------------------
Keystone World Bond Fund
STATEMENTS OF CHANGES IN NET ASSETS Year Ended Year Ended
October 31, October 31,
1996 1995
=============================================================================
Operations
Net investment income $ 1,007,879 $ 1,011,006
Net realized gain (loss) on investments and
foreign currency related transactions 274,506 (583,415)
Net change in unrealized appreciation or
depreciation on investments and foreign
currency related transactions 580,719 685,420
- -----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 1,863,104 1,113,011
- -----------------------------------------------------------------------------
Distributions to shareholders from Net investment income:
Class A Shares (635,884) (653,425)
Class B Shares (279,243) (187,676)
Class C Shares (71,306) (82,887)
Tax basis return of capital:
Class A Shares 0 (65,389)
Class B Shares 0 (24,167)
Class C Shares 0 (7,767)
- -----------------------------------------------------------------------------
Total distributions to shareholders (986,433) (1,021,311)
- -----------------------------------------------------------------------------
Capital share transactions (Note 2)
Shares issued in acquisition of Keystone
Australia Income Fund: (Note 6) 0 6,401,180
Proceeds from shares sold:
Class A Shares 195,332 379,004
Class B Shares 2,034,239 1,382,294
Class C Shares 282,296 226,771
Payments for shares redeemed:
Class A Shares (2,510,565) (3,470,274)
Class B Shares (1,274,145) (1,277,770)
Class C Shares (514,425) (680,398)
Net asset value of shares issued in reinvestment
of distributions:
Class A shares 427,111 467,191
Class B shares 213,523 168,229
Class C shares 43,268 64,105
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share transactions (1,103,366) 3,660,332
- -----------------------------------------------------------------------------
Total increase (decrease) in net assets (226,695) 3,752,032
- -----------------------------------------------------------------------------
Net assets:
Beginning of year 14,818,947 11,066,915
- -----------------------------------------------------------------------------
End of year [including undistributed net
investment income (distributions in excess
of net investment income) in 1996 of
$52,595 and in 1995 of ($24,213)] $14,592,252 $14,818,947
=============================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ----------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone World Bond Fund (the "Fund") is a Massachusetts business trust for
which Keystone Management, Inc. ("KMI") is the Investment Manager and Keystone
Investment Management Company ("Keystone") is the Investment Adviser. Keystone
is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII") and KMI is in
turn a wholly-owned subsidiary of Keystone. The Fund is registered under the
Investment Company Act of 1940, as amended (the"1940 Act"), as a
non-diversified, open-end investment company. The Fund offers three classes of
shares. The Fund's investment objective is to earn investment income while also
seeking capital appreciation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Securities
Government obligations held by the Fund are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Listed corporate, other fixed income securities, mortgage and other
asset-backed securities, and other related securities are valued at prices
provided by an independent pricing service. In determining value for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities which are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to the procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Repurchase Agreements
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.
Securities pledged as collateral for repurchase agreements are held by the
custodian on the Fund's behalf. The Fund monitors the adequacy of the collateral
daily and will require the seller to provide additional collateral in the event
the market value of the securities pledged falls below the carrying value of the
repurchase agreement.
C. Foreign Currency
The books and records of the Fund are maintained in United States (U.S.)
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment
<PAGE>
PAGE 18
- ----------------------
Keystone World Bond Fund
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amounts actually received. The portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gain (loss) on
investments and foreign currency related transactions.
D. Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and marked-to-market daily.
Realized gains and losses arising from such transactions are included in net
realized gain (loss) on investments and foreign currency related transactions.
The Fund bears the risk of an unfavorable change in the foreign currency
exchange rate underlying the forward contract and is subject to the credit risk
that the other party will not fulfill their obligations under the contract.
Forward contracts involve elements of market risk in excess of the amount
reflected in the statement of assets and liabilities.
F. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums.
G. Federal Income Taxes
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
(the"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
H. Distributions
The Fund distributes net investment income monthly and net capital gains, if
any, at least annually. Distributions to shareholders are recorded at the close
of business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily 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.
I. Class Allocations
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 that is payable upon redemption
and decreases depending on how long the shares have been held. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
will automatically convert to Class A shares. Class B shares purchased prior to
June 1, 1995 that have been outstanding for seven years will automatically
convert to Class A shares. Class C shares are sold subject to a contingent
deferred sales charge payable on shares redeemed within one year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets
<PAGE>
PAGE 19
- ----------------------
of each class. Currently, class specific expenses are limited to expenses
incurred under the Distribution Plans for each class.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transaction in shares of the Fund
were as follows:
Year ended October 31,
Class A 1996 1995
---------------------------------------------------------------------------
Shares sold 22,718 42,522
Shares redeemed (291,986) (425,398)
Shares issued in acquistion of Australia
Income Fund (Note 6) 789,935
Shares issued in reinvestment of dividends 49,623 57,481
----------- ------------
Net increase (decrease) (219,645) 464,540
===========================================================================
Year ended October 31,
Class B 1996 1995
---------------------------------------------------------------------------
Shares sold 235,196 166,498
Shares redeemed (147,436) (156,895)
Shares issued in reinvestment of dividends 24,700 20,548
----------- ------------
Net increase 112,460 30,151
===========================================================================
Year ended October 31,
Class C 1996 1995
---------------------------------------------------------------------------
Shares sold 32,761 27,481
Shares redeemed (59,947) (83,800)
Shares issued in reinvestment of dividends 5,032 7,882
----------- ------------
Net decrease (22,154) (48,437)
===========================================================================
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended October 31, 1996, were $8,090,824 and
$8,134,796, respectively.
As of October 31, 1996, the Fund has a capital loss carryover for federal
income tax purposes of approximately $1,060,000, which expires as follows:
$246,000--2002 and $814,000--2003.
(4.) Distribution Plans
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter,
Keystone Investment Distributors Company ("KIDC"), a wholly-owned subsidiary of
Keystone, amounts that are calculated and paid daily.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.25% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares. During the year
ended October 31, 1996, the Fund paid $21,291 to KIDC under the Class A
Distribution Plan.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays a
distribution fee which may not exceed 1.00% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.25% is used to pay service fees.
During the year ended October 31, 1996, under the Class B Distribution Plans,
the Fund paid or accrued $30,767 for Class B shares purchased before June 1,
1995 and $13,709 for Class B shares purchased on or after June 1, 1995. The Fund
paid $11,245 under the Class C Distribution Plan.
<PAGE>
PAGE 20
- ----------------------
Keystone World Bond Fund
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, and subject to the discretion of the Independent Trustees, payments to
KIDC may continue as compensation for services that had been earned while the
Distribution Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. KIDC intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At October 31, 1996, total unpaid distribution costs were $251,498 for Class B
shares purchased before June 1, 1995, and $54,841 for Class B shares purchased
on or after June 1, 1995. Unpaid distribution costs for Class C were $128,839 at
October 31, 1996.
Contingent deferred sales charges paid by redeeming shareholders are paid to
KIDC.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under the terms of the Investment Management Agreement between KMI and the Fund,
KMI provides investment management and administrative services to the Fund. In
return, KMI is paid a management fee, computed and paid daily, at an annual rate
of 1.50%of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining as net assets increase
to 0.40% per annum, to the average daily net asset value of the Fund. During the
year ended October 31, 1996, the Fund paid or accrued to Keystone investment
management and advisory fees of $93,994, which represented 0.64% of the Fund's
average net assets.
During the year ended October 31, 1996, the Fund paid or accrued $20,918 to
Keystone for certain accounting services. The Fund paid or accrued $48,155 to
Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of Keystone,
for services rendered as the Fund's transfer and dividend disbursing agent.
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.
(6.) 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 were $10,313,320 and $6,401,180,
respectively. The net assets of the Fund immediately after the acquisition were
$16,714,500.
(7.) Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian. For
the year ended October 31, 1996, the Fund incurred total custody fees of $22,640
and received a credit of $1,671 pursuant to this expense offset arrangement,
resulting in a net custody expense of $20,969. The assets deposited with the
custodian under this expense offset arrangement could have been invested in
income-producing assets.
<PAGE>
PAGE 21
- ----------------------
(8.) Subsequent Distribution to Shareholders
Distributions from net investment income of $0.052 for Class A, $0.047 for Class
B and $0.047 for Class C were declared payable on December 5, 1996, to
shareholders of record November 25, 1996. This distribution is not reflected in
the accompanying financial statements.
(9.) Agreement and Plan of Acquisition
On September 6, 1996, KII entered into an Agreement and Plan of Acquisition and
Merger with First Union Corporation ("First Union") and First Union National
Bank of North Carolina ("FUNB-NC") and certain other parties pursuant to which
KII will be merged with and into a wholly-owned subsidiary of FUNB-NC. Subject
to the receipt of required regulatory and shareholder approvals, the proposed
merger is expected to take place in December 1996.
<PAGE>
PAGE 22
- ----------------------
Keystone World Bond Fund
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, including the schedule of investments, as of October 31, 1996,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for the two-year period then ended, the
period from January 1, 1994 to October 31, 1994, and the five-year period ended
December 31, 1993 for Class A shares and for the two-year period then ended, 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, 1996 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, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended and the financial highlights for each of the
years or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
November 29, 1996
<PAGE>
PAGE 23
- ----------------------
FEDERAL TAX STATUS--Fiscal 1996 Distributions (Unaudited)
The per share distributions paid to you for the fiscal year ended October 31,
1996, whether taken in shares or cash, are as follows:
Class A Shares Class B Shares Class C Shares
- ------------------------ ---------------------- ------------------------
Income Income Income
Dividends Dividends Dividends
- ------------------------ ---------------------- ------------------------
$0.60 $0.54 $0.54
In January of 1997, complete information on calendar year 1996 distributions
will be forwarded to you to assist you in completing your 1996 federal income
tax return.
<PAGE>
KEYSTONE STRATEGIC INCOME FUND
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability and
Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
Number Description
1 Declaration of Trust, as supplemented.(2)
2 Bylaws, as amended.(2)
3 Not applicable.
4 Agreement and Plan of Reorganization (included as Exhibit A to the
Proxy Statement/Prospectus contained in Part A to this registration
statement).
5 Declaration of Trust Articles III, V, VI and VIII; By-Laws
Article II.(2)
6 Investment Management and Advisory Agreement between Keystone
Investment Management Company and the Registrant.(3)
7(A) Principal Underwriting Agreements for Registrant's Class A, B and C
shares between Registrant and Evergreen Keystone Distributor, Inc.
("EKD"). (3)
(B) Principal Underwriting Agreements for Registrant's Class A, B and C
shares between Registrant and Evergreen Keystone Investment Services,
Inc. ("EKIS"). (3)
(C) Principal Underwriting Agreement for Registrant's Class Y
shares between Registrant and EKD. (3)
(D) Form of Dealer Agreements for Class A, B and C shares used by
EKD. (3)
8 Not applicable.
9 Custody Agreement between State Street Bank and Trust Company and
Registrant.(2)
10(A) Rule 12b-1 Distribution Plans.(2)
(B) Multiple Class Plan, as amended.(2)
11 Opinion and consent of Sullivan & Worcester LLP as to the legality of
the shares being issued.(3)
12 Tax opinion and consent of Sullivan & Worcester LLP. (5)
13 Not applicable.
14 Consent of KPMG Peat Marwick LLP.(3)
15 Not applicable.
16 Powers of Attorney.(3) (See signature page included herewith.)
17(A) Form of Proxy Card.(3)
(B) Registrant's Rule 24f-2 Declaration.(4)
- -------------------
(1) Incorporated by reference to post-effective amendment no. 20 to
Registrant's registration statement (No.33-11050) (the "Registration
Statement") dated December 9, 1996.
(2) Incorporated by reference to post-effective amendment no. 17 to the
registration statement dated September 29, 1995.
(3) Filed herewith.
(4) Incorporated by reference to the Registration Statement dated
September 25, 1996.
(5) To be filed by amendment.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus that is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective amendment,
an opinion of counsel and/or a copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of New York and State of
New York, on the 3rd day of April, 1997.
KEYSTONE STRATEGIC INCOME FUND
By: /s/ John J. Pileggi
-----------------------
Name: John J. Pileggi
Title: President
Know all men by these presents that each person whose signature appears
below hereby severally constitutes and appoints Dorothy E. Bourassa, Terrence
J. Cullen, Rosemary D. Van Antwerp, James P. Wallin and Martin J. Wolin, and
each of them singly, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign and affix the
undersigned's name to any and all amendments to this Registration Statement,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing necessary or
incidental to the performance and execution of the powers herein granted,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them or their substitutes, may lawfully do or cause to be done by virtue
hereof.
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated on the 12th of
March, 1997.
<TABLE>
<S> <C> <C>
/s/ George S. Bissell /s/ Charles F.Chapin /s/ William Walt Pettit
- ------------------------ ------------------------- -------------------------
George S. Bissell Charles F. Chapin William Walt Pettit
Chairman of the Board of Trustees Trustee Trustee
and Chief Executive Officer
/s/ John J. Pileggi /s/ K. Dun Gifford /s/ David M. Richardson
- ------------------------- ------------------------- -------------------------
John J. Pileggi K. Dun Gifford David M. Richardson
President amd Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ Frederick Amling /s/ James S. Howell /s/ Russell A. Salton, III, M.D.
- ------------------------- ------------------------- -------------------------
Frederick Amling James S. Howell Russell A. Salton, III MD
Trustee Trustee Trustee
/s/ Laurence B. Ashkin /s/ Leroy Keith, Jr. /s/ Michael S. Scofield
- ------------------------- ------------------------- -------------------------
Laurence B. Ashkin Leroy Keith, Jr. Michael S. Scofield
Trustee Trustee Trustee
/s/ Charles A. Austin, III /s/ F. Ray Keyser, Jr. /s/ Richard J. Shima
- -------------------------- ------------------------- -------------------------
Charles A. Austin, III F. Ray Keyser, Jr. Richard J. Shima
Trustee Trustee Trustee
/s/ Foster Bam /s/ Gerald M. McDonnell /s/ Andrew J. Simons
- ------------------------- ------------------------- -------------------------
Foster Bam Gerald M. McDonell Andrew J. Simons
Trustee Trustee Trustee
/s/ Edwin D. Campbell /s/ Thomas L. McVerry
- ------------------------- -------------------------
Edwin D. Campbell Thomas L. McVerry
Trustee Trustee
</TABLE>
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO. Page
6 Investment Management and Advisory Agreement
7 (a) Principal Underwriting Agreements for Class A, B and C shares between
Registrant and EKD
(b) Principal Underwriting Agreements for Class A, B and C shares between
Registrant and EKIS
(c) Principal Underwriting Agreement for Class Y shares between Registrant
and EKD
(d) Form of Dealer Agreements for Class A, B and C shares
11 Opinion and Consent of Sullivan & Worcester LLP
14 Consent of KPMG Peat Marwick LLP
17(a) Form of Proxy Card
-------------------
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
AGREEMENT made the 11th day of December, 1996, by and between KEYSTONE
STRATEGIC INCOME FUND, a Massachusetts business trust (the "Fund"), and KEYSTONE
INVESTMENT MANAGEMENT COMPANY, a Delaware corporation (the "Adviser").
WHEREAS, the Fund and the Adviser wish to enter into an Agreement setting
forth the terms on which the Adviser will perform certain services for the Fund.
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Fund and the Adviser agree as follows:
1. The Fund hereby employs the Adviser to manage and administer the
operation of the Fund, to supervise the provision of services to the Fund by
others, and to manage the investment and reinvestment of the assets of the Fund
in conformity with the Fund's investment objectives and restrictions as may be
set forth from time to time in the Fund's then current prospectus and statement
of additional information, if any, and other governing documents, all subject to
the supervision of the Board of Trustees of the Fund, for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
and agrees during such period, at its own expense, to render the services and to
assume the obligations set forth herein, for the compensation provided herein.
The Adviser shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
2. The Adviser shall place all orders for the purchase and sale of portfolio
securities for the account of the Fund with broker-dealers selected by the
Adviser. In executing portfolio transactions and selecting broker-dealers, the
Adviser will use its best efforts to seek best execution on behalf of the Fund.
In assessing the best execution available for any transaction, the Adviser shall
consider all factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker-dealer, and the reasonableness of the commission, if
any (all for the specific transaction and on a continuing basis). In evaluating
the best execution available, and in selecting the broker-dealer to execute a
particular transaction, the Adviser may also consider the brokerage and research
services (as those terms are used in Section 28(e) of the Securities Exchange
Act of 1934 (the "1934 Act") provided to the Fund and/or other accounts over
which the Adviser or an affiliate of the Adviser exercises investment
discretion. The Adviser is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund which is in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction if, but only if,
the Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer viewed in terms of that particular transaction or in terms of all
of the accounts over which investment discretion is so exercised.
3. The Adviser, at its own expense, shall furnish to the Fund office space
in the offices of the Adviser or in such other place as may be agreed upon by
the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Fund, for members of the Adviser's organization to serve without
salaries from the Fund as officers or, as may be agreed from time to time, as
agents of the Fund. The Adviser assumes and shall pay or reimburse the Fund for:
(1) the compensation (if any) of the Trustees of the Fund who are affiliated
with the Adviser or with its affiliates, or with any adviser retained by the
Adviser, and of all officers of the Fund as such, and (2) all expenses of the
Adviser incurred in connection with its services hereunder. The Fund assumes and
shall pay all other expenses of the Fund, including, without limitation: (1) all
charges and expenses of any custodian or depository appointed by the Fund for
the safekeeping of its 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 the Adviser or any of its
affiliates, or with any adviser retained by the Adviser; (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 Plan of Distribution adopted under Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"); (7) all taxes and trust fees
payable by the Fund to Federal, state or other governmental agencies; (8) all
costs of certificates representing shares of the Fund; (9) all fees and expenses
involved in registering and maintaining registrations of the Fund and of its
shares with the Securities and Exchange Commission (the "Commission") and
registering or qualifying its shares under state or other securities laws,
including, without limitation, the preparation and printing of registration
statements, prospectuses and statements of additional information for filing
with the Commission and other authorities; (10) expenses of preparing, printing
and mailing prospectuses and statements of additional information to
shareholders of the Fund; (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, trust and financial structure
and relations with its shareholders, registrations and qualifications of
securities under Federal, state and other laws, issues of securities, expenses
which the Fund has herein assumed, whether customary or not, and extraordinary
matters, including, without limitation, any litigation involving the Fund, its
Trustees, officers, employees or agents; (13) all charges and expenses of filing
annual and other reports with the Commission and other authorities; and (14) all
extraordinary expenses and charges of the Fund. In the event that the Adviser
provides any of these services or pays any of these expenses, the Fund will
promptly reimburse the Adviser therefor.
The services of the Adviser to the Fund hereunder are not to be deemed
exclusive, and the Adviser shall be free to render similar services to others.
4. As compensation for the Adviser's services to the Fund during the period
of this Agreement, the Fund will pay to the Adviser a fee at the annual rate of:
AGGREGATE NET ASSET VALUE
MANAGEMENT FEE OF THE SHARES OF THE FUND
- --------------------------------------------------------------------------------
2.0% of gross dividend and interest income plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
- --------------------------------------------------------------------------------
computed as of the close of business on each business day.
A pro rata portion of the Fund's fee shall be payable in arrears at the end
of each day or calendar month as the Adviser may from time to time specify to
the Fund. If and when this Agreement terminates, any compensation payable
hereunder for the period ending with the date of such termination shall be
payable upon such termination. Amounts payable hereunder shall be promptly paid
when due.
5. The Adviser may enter into an agreement to retain, at its own expense, a
firm or firms ("SubAdviser") to provide the Fund all of the services to be
provided by the Adviser hereunder, if such agreement is approved as required by
law. Such agreement may delegate to such SubAdviser all of Adviser's rights,
obligations and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the performance of
this Agreement, except a loss resulting from the Adviser's willful misfeasance,
bad faith, gross negligence or from reckless disregard by it of its obligations
and duties under this Agreement. Any person, even though also an officer,
Director, partner, employee, or agent of the Adviser, who may be or become an
officer, Trustee, employee or agent of the Fund, shall be deemed, when rendering
services to the Fund or acting on any business of the Fund (other than services
or business in connection with the Adviser's duties hereunder), to be rendering
such services to or acting solely for the Fund and not as an officer, Director,
partner, employee, or agent or one under the control or direction of the Adviser
even though paid by it. The Fund agrees to indemnify and hold the Adviser
harmless from all taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the Securities Act of
1933, the 1934 Act, the 1940 Act, and any state and foreign securities and blue
sky laws, as amended from time to time) and expenses, including (without
limitation) attorneys' fees and disbursements, arising directly or indirectly
from any action or thing which the Adviser takes or does or omits to take or do
hereunder provided that the Adviser shall not be indemnified against any
liability to the Fund or to its shareholders (or any expenses incident to such
liability) arising out of a breach of fiduciary duty with respect to the receipt
of compensation for services, willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its duties, or from
reckless disregard by it of its obligations and duties under this Agreement.
7. The Fund shall cause its books and accounts to be audited at least once
each year by a reputable independent public accountant or organization of public
accountants who shall render a report to the Fund.
8. Subject to and in accordance with the Declaration of Trust of the Fund,
the Articles of Incorporation of the Adviser and the governing documents of any
SubAdviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Fund or any Adviser are or may be interested in the Adviser
(or any successor thereof) as Directors and officers of the Adviser or its
affiliates, as stockholders of Keystone Investments, Inc. or otherwise; that
Directors, officers and agents of the Adviser and its affiliates or stockholders
of Keystone Investments, Inc. are or may be interested in the Fund or any
Adviser as Trustees, Directors, officers, shareholders or otherwise; that the
Adviser (or any such successor) is or may be interested in the Fund or any
SubAdviser as shareholder, or otherwise; and that the effect of any such adverse
interests shall be governed by said Declaration of Trust of the Fund, Articles
of Incorporation of the Adviser and governing documents of any SubAdviser.
9. This Agreement shall continue in effect after December 10, 1998, only so
long as (1) such continuance is specifically approved at least annually by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the Fund, and (2) such renewal has been approved by the
vote of a majority of Trustees of the Fund who are not interested persons, as
that term is defined in the 1940 Act, of the Adviser or of the Fund, cast in
person at a meeting called for the purpose of voting on such approval.
10. On sixty days' written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Fund or by vote of the holders of a majority of the outstanding
voting securities of the Fund; and on sixty days' written notice to the Fund,
this Agreement may be terminated at any time without the payment of any penalty
by the Adviser. This Agreement shall automatically terminate upon its assignment
(as that term is defined in the 1940 Act). Any notice under this Agreement shall
be given in writing, addressed and delivered, or mailed postage prepaid, to the
other party at the main office of such party.
11. This Agreement may be amended at any time by an instrument in writing
executed by both parties hereto or their respective successors, provided that
with regard to amendments of substance such execution by the Fund shall have
been first approved by the vote of the holders of a majority of the outstanding
voting securities of the Fund and by the vote of a majority of Trustees of the
Fund who are not interested persons (as that term is defined in the 1940 Act) of
the Adviser, any predecessor of the Adviser, or of the Fund, cast in person at a
meeting called for the purpose of voting on such approval. A "majority of the
outstanding voting securities of the Fund" shall have, for all purposes of this
Agreement, the meaning provided therefor in the 1940 Act.
12. Any compensation payable to the Adviser hereunder for any period other
than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
KEYSTONE STRATEGIC INCOME FUND
By: /s/ George S. Bissell
--------------------------------------
Name: GEORGE S. BISSELL
Title: Chairman of the Board
KEYSTONE INVESTMENT MANAGEMENT COMPANY
By: /s/ Rosemary D. Van Antwerp
--------------------------------------
Name: ROSEMARY D. VAN ANTWERP
Title: Senior Vice President
PRINCIPAL UNDERWRITING AGREEMENT
KEYSTONE AMERICA FUND FAMILY
CLASS A AND C SHARES
AGREEMENT effective this 1st day of January, 1997 by and between each
of the parties listed on Exhibit A attached hereto and made a part hereof, each
for itself and not jointly (each a "Fund"), and Evergreen Keystone Distributor,
Inc., a Delaware corporation ("Principal Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a principal
underwriter of the Class A and Class C shares of beneficial interest of the Fund
("Shares") as an independent contractor upon the terms and conditions
hereinafter set forth. Except as the Fund may from time to time agree, Principal
Underwriter will act as agent for the Fund and not as principal.
2. Principal Underwriter will use its best efforts to find purchasers
for the Shares, to promote distribution of the Shares and may obtain orders from
brokers, dealers or other persons for sales of Shares to them. No such broker,
dealer or other person shall have any authority to act as agent for the Fund;
such broker, dealer or other person shall act only as principal in the sale of
Shares.
3. Sales of Shares by Principal Underwriter shall be at the applicable
public offering price determined in the manner set forth in the prospectus
and/or statement of additional information of the Fund current at the time of
the Fund's acceptance of the order for Shares; provided that Principal
Underwriter also shall have the right to sell Shares at net asset value, if such
sale is permissible under and consistent with applicable statutes, rules,
regulations and orders. All orders shall be subject to acceptance by the Fund,
and the Fund reserves the right in its sole discretion to reject any order
received. The Fund shall not be liable to anyone for failure to accept any
order.
4. On all sales of Shares, the Fund shall receive the current net asset
value, and Principal Underwriter shall be entitled to receive commission
payments for sales of the Class A and C Shares (as set forth on Exhibit B
attached hereto and made a part hereof) sold on or after December 11, 1996 and
as set forth in the then current prospectus and/or statement of additional
information of the Fund and to receive the sales charges, including contingent
deferred sales charges, as set forth in the then current prospectus and/or
statement of additional information of the Fund for Shares sold on or after
December 11, 1996. In accordance with the assignment made between Evergreen
Keystone Investment Services, Inc. ("EKIS") and Principal Underwriter dated
December 11, 1996, Principal Underwriter is to be entitled to receive commission
payments for sales of the Class A and C Shares sold on or after December 1, 1996
but before December 11, 1996 by EKIS as set forth in the then current prospectus
and/or statement of additional information of the Fund and to receive the sales
charges, including contingent deferred sales charges, as set forth in the then
current prospectus and/or statement of additional information
18918
<PAGE>
2
of the Fund for Shares sold on or after December 1, 1996 but before December 11,
1996. For purposes of this Principal Underwriting Agreement, all Shares sold
after December 1, 1996 and for which the Principal Underwriter may receive
commissions and contingent deferred sales charges shall be deemed
"Post-Acquisition Shares." The determination of which shares of the Fund are
Post-Acquisition Shares shall be made in accordance with Schedule I attached to
the Principal Underwriting Agreement between each Fund which is a party to this
Agreement and EKIS dated December 11, 1996 and shall be the same as the
"Post-distributor Shares" defined therein, calculated as though the Distributor
Last Sale Cut-Off Date, as such term is defined in Schedule I, was November 30,
1996. Principal Underwriter may reallow all or a part of such commissions and
the sales charges to such brokers, dealers or other persons as Principal
Underwriter may determine.
5. The payment provisions of this Agreement shall be applicable to the
extent necessary to enable the Fund to comply with the obligation of the Fund to
pay Principal Underwriter in accordance with this Agreement in respect of Class
C Shares and shall remain in effect so long as any payments are required to be
made by the Fund pursuant to the irrevocable payment instruction under the
Master Sale Agreement between Principal Underwriter and Mutual Fund Funding
1994-1 dated as of December 6, 1996 (the "Master Sale Agreement").
6. Payment to the Fund for Shares shall be in New York or Boston
Clearing House funds received by Principal Underwriter within three (3) business
days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such ten-day period, the Fund reserves the right,
without further notice, forthwith to cancel its acceptance of any such order.
The Fund shall pay such issue taxes as may be required by law in connection with
the issue of the Shares.
7. Principal Underwriter shall not make in connection with any sale or
solicitation of a sale of the Shares any representations concerning the Shares
except those contained in the then current prospectus and/or statement of
additional information covering the Shares and in printed information approved
by the Fund as information supplemental to such prospectus and statement of
additional information. Copies of the then current prospectus and statement of
additional information will be supplied by the Fund to Principal Underwriter in
reasonable quantities upon request.
8. Principal Underwriter agrees to comply with the Business
Conduct Rules of the National Association of Securities Dealers, Inc.
9. The Fund appoints Principal Underwriter as its agent to accept
orders for redemptions and repurchases of Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
10. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in
18918
<PAGE>
3
connection therewith) which the Principal Underwriter, its officers, Directors
or any such controlling person may incur under the 1933 Act, under any other
statute, at common law or otherwise, arising out of or based upon
a) any untrue statement or alleged untrue statement of a
material fact contained in the Fund's registration statement, pros
pectus or statement of additional information (including amendments
and supplements thereto), or
b) any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement, prospectus
or statement of additional information necessary to make the statements
therein not misleading, provided, however, that insofar as losses,
claims, damages, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or
omission made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration statement, prospectus or statement of additional
information, such indemnification is not applicable. In no case shall
the Fund indemnify the Principal Underwriter or its controlling person
as to any amounts incurred for any liability arising out of or based
upon any action for which the Principal Underwriter, its officers and
Directors or any controlling person would otherwise be subject to
liability by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of the
reckless disregard of its obligations and duties under this Agreement.
11. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers, Trustees and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Trustees or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
a) may be based upon any wrongful act by the Principal
Underwriter or any of its employees or representatives, or
b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information (including
amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
or confirmed in writing to the Fund by the Principal Underwriter.
12. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by Principal
Underwriter for the purpose of qualifying the Shares for sale under the
so-called "blue sky" laws of any state or for registering Shares under the
18918
<PAGE>
4
1933 Act or the Fund under the Investment Company Act of 1940 ("1940 Act").
Principal Underwriter shall bear the expense of preparing, printing and
distributing advertising, sales literature, prospectuses and statements of
additional information. The Fund shall bear the expense of registering Shares
under the 1933 Act and the Fund under the 1940 Act, qualifying Shares for sale
under the so-called "blue sky" laws of any state, the preparation and printing
of prospectuses, statements of additional information and reports required to be
filed with the Securities and Exchange Commission and other authorities, the
preparation, printing and mailing of prospectuses and statements of additional
information to shareholders of the Fund and the direct expenses of the issue of
Shares.
13. To the extent required by the Fund's 12b-1 Plans, Principal
Underwriter shall provide to the Board of Trustees of the Fund in connection
with such 12b-1 Plans, not less than quarterly, a written report of the amounts
expended pursuant to such 12b-1 Plans and the purposes for which such
expenditures were made.
14. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated or continued as provided below, shall expire on June
30, 1998. This Agreement shall continue in effect after such term if its
continuance is specifically approved by a majority of the Trustees of the Fund
and a majority of the 12b-1 Trustees referred to in the 12b-1 Plans of the Fund
("Rule 12b-1 Trustees") at least annually in accordance with the 1940 Act and
the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment
of any penalty, by vote of a majority of any Rule 12b-1 Trustees or by a vote of
a majority of the Fund's outstanding Shares on not more than sixty (60) days
written notice to any other party to the Agreement; and shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
15. This Agreement shall be construed in accordance with the laws
of The Commonwealth of Massachusetts.
16. The Fund is a Massachusetts business trust established under a
Declaration of Trust, as it may be amended from time to time. The obligations of
the Fund are not personally binding upon, nor shall recourse be had against, the
private property of any of the Trustees, shareholders, officers, employees or
agents of the Fund, but only the property of the Fund shall be bound.
18918
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE BALANCED FUND II KEYSTONE
CAPITAL PRESERVATION AND INCOME FUND
KEYSTONE FUND FOR TOTAL RETURN
KEYSTONE FUND OF THE AMERICAS
KEYSTONE GLOBAL OPPORTUNITIES FUND
KEYSTONE GLOBAL RESOURCES AND
DEVELOPMENT FUND KEYSTONE GOVERNMENT
SECURITIES FUND KEYSTONE
INTERMEDIATE TERM BOND FUND KEYSTONE
LIQUID TRUST KEYSTONE OMEGA FUND
KEYSTONE SMALL COMPANY GROWTH FUND
II KEYSTONE STATE TAX FREE FUND
FLORIDA TAX FREE FUND
MASSACHUSETTS TAX FREE FUND
NEW YORK TAX FREE FUND
PENNSYLVANIA TAX FREE FUND
KEYSTONE STATE TAX FREE FUND SERIES II
CALIFORNIA TAX FREE FUND
MISSOURI TAX FREE FUND
KEYSTONE STRATEGIC INCOME FUND
KEYSTONE TAX FREE INCOME FUND
KEYSTONE WORLD BOND FUND
each for itself and not jointly
By:
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
By:________________________________
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B-2 SHARES
OF
KEYSTONE STRATEGIC INCOME FUND
AGREEMENT made effective this 1st day of January 1997 by and between
Keystone Strategic Income Fund, a Massachusetts business trust, ("Fund"), and
Evergreen Keystone Distributor, Inc., a Delaware corporation (the "Principal
Underwriter").
The Fund, individually and/or on behalf of its series, if any, referred
to above in the title of this Agreement, to which series, if any, this Agreement
shall relate, as applicable (the "Fund'"), may act as the distributor of certain
securities of which it is the issuer pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "1940 Act'"), Accordingly, it is hereby mutually agreed
as follows:
1. The Fund hereby appoints the Principal Underwriter a principal
underwriter of the Class B-2 shares of beneficial interest of the Fund ("B-2
Shares") as an independent contractor upon the terms and conditions hereinafter
set forth. The general term "Shares" as used herein has the same meaning as is
provided therefor in Schedule I hereto. Except as the Principal Underwriter and
the Fund may from time to time agree, the Principal Underwriter will act as
agent for the Fund and not as principal.
2. The Principal Underwriter will use its best efforts to find
purchasers for the B-2 Shares and to promote distribution of the B-2 Shares and
may obtain orders from brokers, dealers or other persons for sales of B-2 Shares
to them. No such dealer, broker or other person shall have any authority to act
as agent for the Fund; such dealer, broker or other person shall act only as
principal in the sale of B-2 Shares.
3. Sales of B-2 Shares by Principal Underwriter shall be at the public
offering price determined in the manner set forth in the Prospectus and/or
Statement of Additional Information of the Fund current at the time of the
Fund's acceptance of the order for B-2 Shares. All orders shall be subject to
acceptance by the Fund and the Fund reserves the right in its sole discretion to
reject any order received. The Fund shall not be liable to anyone for failure to
accept any order.
4. On all sales of B-2 Shares the Fund shall receive the current net
asset value. The Fund shall pay the Principal Underwriter Distribution Fees (as
defined in Section 14 hereof), as commissions for the sale of B-2 Shares and
other Shares, which shall be paid in conjunction with distribution fees paid to
Evergreen Keystone Investment Services Company ("EKISC") by other classes of
Shares of the Fund to the extent required in order to comply with Section 14
hereof, and shall pay over to the Principal Underwriter CDSCs (as defined in
Section 14 hereof) as set forth in the Fund's current Prospectus and Statement
of Additional Information, and as required by Section 14 hereof. The Principal
Underwriter shall also receive payments consisting of shareholder service fees
("Service Fees") at the rate of .25% per annum of the average daily net asset
value of the Class B-2 Shares. The Principal Underwriter may allow all or a part
of said Distribution Fees and CDSCs received by it (not paid to others as
hereinafter provided) to such brokers, dealers or other persons as Principal
Underwriter may determine.
5. Payment to the Fund for B-2 Shares shall be in New York or Boston
Clearing House funds received by the Principal Underwriter within three Business
Days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such period, the Fund reserves the right, without
further notice, forthwith to cancel its
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<PAGE>
acceptance of any such order. The Fund shall pay such issue taxes as may be
required by law in connection with the issue of the B-2 Shares.
6. The Principal Underwriter shall not make in connection with any sale
or solicitation of a sale of the B-2 Shares any representations concerning the
B-2 Shares except those contained in the then current Prospectus and/or
Statement of Additional Information covering the Shares and in printed
information approved by the Fund as information supplemental to such Prospectus
and Statement of Additional Information. Copies of the then current Prospectus
and Statement of Additional Information and any such printed supplemental
information will be supplied by the Fund to the Principal Underwriter in
reasonable quantities upon request.
7. The Principal Underwriter agrees to comply with the National
Association of Securities Dealers, Inc. ("NASD") Business Conduct Rule 2830 (d)
(2) (the "Business Conduct Rules") or any successor rule (which succeeds the
Rules of Fair Practice of the NASD defined in the Purchase and Sale Agreement,
dated as of May 31, 1995 (the "Citibank Purchase Agreement"), between Evergreen
Keystone Investment Services Company (formerly Keystone Investment Distributors
Company), Citibank, N.A. and Citicorp North America, Inc., as agent).
8. The Fund appoints the Principal Underwriter as its agent to accept
orders for redemptions and repurchases of B-2 Shares at values and in the manner
determined in accordance with the then current Prospectus and/or Statement of
Additional Information of the Fund.
9. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon:
a. any untrue statement or alleged untrue statement of a
material fact contained in the Fund's registration statement,
Prospectus or Statement of Additional Information (including amendments
and supplements thereto); or
b. any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement, Prospectus
or Statement of Additional Information necessary to make the statements
therein not misleading, provided, however, that insofar as losses,
claims, damages, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or
omission made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration statement, Prospectus or Statement of Additional
Information, such indemnification is not applicable. In no case shall
the Fund indemnify the Principal Underwriter or its controlling person
as to any amounts incurred for any liability arising out of or based
upon any action for which the Principal Underwriter, its officers and
Directors or any controlling person would otherwise be subject to
liability by reason of willful misfeasance, bad faith, or gross
negligence in the
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<PAGE>
performance of its duties or by reason of the reckless disregard of its
obligations and duties under this Agreement.
10. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers and Trustees and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Directors or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
(a) may be based upon any wrongful act by the Principal
Underwriter or any of its employees or representatives, or
(b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's registration
statement, Prospectus or Statement of Additional Information (including
amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
or confirmed in writing to the Fund by the Principal Underwriter.
11. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by the Principal
Underwriter for the purpose of qualifying the B-2 Shares for sale under the
so-called "blue sky'" laws of any state or for registering B-2 Shares under the
1933 Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). The
Principal Underwriter shall bear the expenses of preparing, printing and
distributing advertising, sales literature, and except as provided below,
prospectuses, and statements of additional information. The Fund shall bear the
expense of registering B-2 Shares under the 1933 Act and the Fund under the 1940
Act, qualifying B-2 Shares for sale under the so called "blue sky" laws of any
state, the preparation and printing of Prospectuses, Statements of Additional
Information and reports required to be filed with the Securities and Exchange
Commission and other authorities, the preparation, printing and mailing of
Prospectuses and Statements of Additional Information to holders of B-2 Shares,
and the direct expenses of the issue of B-2 Shares.
12. The Principal Underwriter shall, at the request of the Fund,
provide to the Board of Trustees or Directors (together herein called the
"Directors") of the Fund in connection with sales of B-2 Shares not less than
quarterly a written report of the amounts received from the Fund therefor and
the purpose for which such expenditures by the Fund were made.
13. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated or continued as provided below, shall expire after one
year. This Agreement shall continue in effect after such term if its continuance
is specifically approved by a majority of the outstanding voting securities of
Class B-2 of the Fund or by a majority of the Directors of the Fund and a
majority of the Directors who are not parties to this Agreement or "interested
persons", as defined in the 1940 Act, of any such party and who have no direct
or indirect financial interest in the operation of the Fund's Rule 12b-l plan
for Class B-2 Shares or in any agreements related to the plan at least annually
in accordance with the 1940 Act and the rules and regulations thereunder.
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<PAGE>
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Directors of the Fund, or a majority of
such Directors who are not parties to this Agreement or "interested persons", as
defined in the 1940 Act, of any such party and who have no direct or indirect
financial interest in the operation of the Fund's Rule 12b-1 plan for Class B-2
Shares or in any agreement related to the plan or by a vote of a majority of the
outstanding voting securities of Class B-2 on not more than sixty days written
notice to any other party to the Agreement; and shall terminate automatically in
the event of its assignment (as defined in the 1940 Act), which shall not
include assignment of the Principal Underwriter's Allocable Portion of
Distribution Fees (as hereinafter defined) and Allocable Portion of CDSCs
provided for hereunder and/or rights related to such Allocable Portions.
14. The provisions of this Section 14 shall be applicable to the extent
necessary to enable the Fund to comply with the obligation of the Fund to pay
the Principal Underwriter its Allocable Portion of Distribution Fees paid in
respect of B-2 Shares and also permit the Fund to pay, pursuant to the Principal
Underwriting Agreement dated as of January 1, 1997, between the Fund and EKISC
in respect of Class B-2 Shares, the Allocable Portion of Distribution Fees due
EKISC in respect of B-2 Shares and, pursuant to the Principal Underwriting
Agreement dated as of January 1, 1997 between the Fund and EKISC in respect of
Class B-1 Shares, the Allocable Portion of Distribution Fees due EKISC in
respect of B-1 Shares (together the "EKISC Underwriting Agreements"), and shall
remain in effect so long as any payments are required to be made by the Fund
pursuant to the irrevocable payment instructions pursuant to the Citibank
Purchase Agreement and the Master Sale Agreement between the Principal
Underwriter and Mutual Fund Funding 1994-1 dated as of December 6, 1996 (the
"Master Sale Agreement") (the "Irrevocable Payment Instructions")).
14.1 The Fund shall pay to the Principal Underwriter the Principal
Underwriter's Allocable Portion (as hereinafter defined) of a fee (the
"Distribution Fee") at the rate of .75% per annum of the average daily net asset
value of the Shares, subject to the limitation on the maximum aggregate amount
of such fees under the Business Conduct Rules as applicable to such Distribution
Fee on the date hereof.
14.2 The Principal Underwriter's Allocable Portion of Distribution Fees
paid by the Fund in respect of Shares shall mean the portion of the Asset Based
Sales Charge allocable to Distributor Shares (as defined in Schedule I hereto to
this Agreement) in accordance with Schedule I hereto. The Fund agrees to cause
its transfer agent (the "Transfer Agent") to maintain the records and arrange
for the payments on behalf of the Fund at the times and in the amounts and to
the accounts required by Schedule I hereto, as the same may be amended from time
to time. It is acknowledged and agreed that by virtue of the operation of
Schedule I hereto the Principal Underwriter's Allocable Portion of Distribution
Fees paid by the Fund in respect of Shares, may, to the extent provided in
Schedule I hereto, take into account Distribution Fees payable by the Fund in
respect of other existing and future classes and/or subclasses of shares of the
Fund which would be treated as "Shares" under Schedule I hereto. The Fund will
limit amounts paid to any subsequent principal underwriters of Shares to the
portion of the Asset Based Sales Charge paid in respect of Shares which is
allocable to Post-distributor Shares (as defined in Schedule I hereto) in
accordance with Schedule I hereto. The Fund's payments to the Principal
Underwriter in consideration of its services in connection with the sale of B-2
Shares shall be the Distribution Fees attributable to B-2 Shares which are
Distributor Shares (as defined in Schedule I hereto) and all other amounts
constituting the Principal Underwriter's Allocable Portion of Distribution Fees
shall be the Distribution Fees related to the sale of other Shares which are
Distributor Shares (as defined in Schedule I hereto).
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<PAGE>
The Fund shall cause its transfer agent and sub-transfer agents to
withhold from redemption proceeds payable to holders of Shares on redemption
thereof the contingent deferred sales charges payable upon redemption thereof as
set forth in the then current Prospectus and/or Statement of Additional
Information of the Fund ("CDSCs") and to pay over to the Principal Underwriter
the Principal Underwriter's Allocable Portion of said CDSCs paid in respect of
Shares which shall mean the portion thereof allocable to Distributor Shares (as
defined in Schedule I hereto) in accordance with Schedule I hereto.
14.3 The Principal Underwriter shall be considered to have completely
earned the right to the payment of its Allocable Portion of the Distribution Fee
and the right to payment over to it of its Allocable Portion of the CDSC in
respect of Shares as provided for hereby upon the completion of the sale of each
Commission Share (as defined in Schedule I hereto) taken into account as a
Distributor Share in computing the Principal Underwriter's Allocable Portion in
accordance with Schedule I hereto.
14.4 Except as provided in Section 14.5 hereof in respect of
Distribution Fees only, the Fund's obligation to pay the Principal Underwriter
the Distribution Fees and to pay over to the Principal Underwriter CDSCs
provided for hereby shall be absolute and unconditional and shall not be subject
to dispute, offset, counterclaim or any defense whatsoever (it being understood
that nothing in this sentence shall be deemed a waiver by the Fund of its right
separately to pursue any claims it may have against the Principal Underwriter
and enforce such claims against any assets (other than the Principal
Underwriter's right to its Allocable Portion of the Distribution Fees and CDSCs
(the "Collection Rights") of the Principal Underwriter).
14.5 Notwithstanding anything in this Agreement to the contrary, the
Fund shall pay to the Principal Underwriter its Allocable Portion of
Distribution Fees provided for hereby notwithstanding its termination as
Principal Underwriter for the Shares or any termination of this Agreement and
such payment of such Distribution Fees, and that obligation and the method of
computing such payment, shall not be changed or terminated except to the extent
required by any change in applicable law, including, without limitation, the
1940 Act, the Rules promulgated thereunder by the Securities and Exchange
Commission and the Business Conduct Rules, in each case enacted or promulgated
after December 1, 1996, or in connection with a Complete Termination (as
hereinafter defined). For the purposes of this Section 14.5, "Complete
Termination" means a termination of the Fund's Rule 12b-l plan for B-2 Shares
involving the cessation of payments of the Distribution Fees, and the cessation
of payments of distribution fees pursuant to every other Rule 12b-1 plan of the
Fund for every existing or future B-Class-of-Shares (as hereinafter defined) and
the Fund's discontinuance of the offering of every existing or future B-Class-of
Shares, which conditions shall be deemed satisfied when they are first complied
with hereafter and so long thereafter as they are complied with prior to the
date upon which all of the B-2 Shares which are Distributor Shares pursuant to
Schedule I hereto shall have been redeemed or converted. For purposes of this
Section 14.5, the term B-Class-of-Shares means each of the B-1 Class of Shares
of the Fund, the B-2 Class of Shares of the Fund and each other class of shares
of the Fund hereafter issued which would be treated as Shares under Schedule I
hereto or which has substantially similar economic characteristics to the B-1 or
B-2 Classes of Shares taking into account the total sales charge, CDSC or other
similar charges borne directly or indirectly by the holder of the shares of such
class. The parties agree that the existing C Class of Shares of the Fund does
not have substantially similar economic characteristics to the B-1 or B-2
Classes of Shares taking into account the total sales charge, CDSC or other
similar charges borne directly or indirectly by the holder of such shares. For
purposes of clarity the parties to this agreement hereby state that they intend
that a new installment load class of shares which may be authorized by
amendments to
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<PAGE>
Rule 6(c)-10 under the 1940 Act will be considered to be a B-Class-of-Shares if
it has economic characteristics substantially similar to the economic
characteristics of the existing B-1 or B-2 Classes of Shares taking into account
the total sales charge, CDSC or other similar charges borne directly or
indirectly by the holder of such shares and will not be considered to be a
B-Class-of-Shares if it has economic characteristics substantially similar to
the economic characteristics of the existing C Class of shares of the Fund
taking into account the total sales charge, CDSC or other similar charges borne
directly or indirectly by the holder of such shares.
14.6 The Principal Underwriter may assign, sell or otherwise transfer
any part of its Allocable Portions and obligations of the Fund related thereto
(but not the Principal Underwriter's obligations to the Fund provided for in
this Agreement, provided, however, the Principal Underwriter may delegate and
subcontract certain functions to other broker-dealers so long as it remains
employed by the Fund) to any person (an "Assignee") and any such assignment
shall be effective as to the Fund upon written notice to the Fund by the
Principal Underwriter. In connection therewith the Fund shall pay all or any
amounts in respect of its Allocable Portions directly to the Assignee thereof as
directed in a writing by the Principal Underwriter in the Irrevocable Payment
Instruction, as the same may be amended from time to time with the consent of
the Fund, and the Fund shall be without liability to any person if it pays such
amounts when and as so directed, except for underpayments of amounts actually
due, without any amount payable as consequential or other damages due to such
underpayment and without interest except to the extent that delay in payment of
Distribution Fees and CDSCs results in an increase in the maximum Sales Charge
allowable under the Business Conduct Rules, which increases daily at a rate of
prime plus one percent per annum.
14.7 The Fund will not, to the extent it may otherwise be empowered to
do so, change or waive any CDSC with respect to B-2 Shares, except as provided
in the Fund's current Prospectus or Statement of Additional Information without
the Principal Underwriter's or Assignee's consent, as applicable.
Notwithstanding anything to the contrary in this Agreement or any termination of
this Agreement or the Principal Underwriter as principal underwriter for the
Shares of the Fund, the Principal Underwriter shall be entitled to be paid its
Allocable Portion of the CDSCs whether or not the Fund's Rule 12b-1 plan for B-2
Shares is terminated and whether or not any such termination is a Complete
Termination, as defined above.
14.8 Notwithstanding anything contained herein in this Agreement to the
contrary, the Fund shall comply with its obligations under the EKISC
Underwriting Agreements and the attached Schedule I and any replacement
Agreement, provided that such replacement agreement does not increase the
Allocable Portion currently payable to EKISC, to pay to EKISC its Allocable
Portion (as defined in the EKISC Underwriting Agreement) of the Distribution
Fees (as defined in the EKISC Underwriting Agreement) in respect of Class B-2
Shares as required therein and to comply with its obligations under the
Irrevocable Payment Instructions (as defined in the Citibank Purchase Agreement,
as defined therein).
15. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
16. The Fund is a Massachusetts business trust established under a
Declaration of Trust, as it may be amended from time to time. The obligations of
the Fund are not personally binding upon, nor shall recourse be had against the
private property of any of the Trustees, shareholders, officers, employees
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<PAGE>
or agents of the Fund, but only the property of the Fund shall be bound.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE STRATEGIC INCOME FUND EVERGREEN KEYSTONE DISTRIBUTOR,
INC.
By:_______________________________________ By:_____________________
Title: Title:
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<PAGE>
EXHIBIT A TO PRINCIPAL UNDERWRITING AGREEMENT
DATED January 1, 1997 BETWEEN
KEYSTONE STRATEGIC INCOME FUND AND EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Keystone Strategic Income Fund (the "Fund") and Evergreen
Keystone Distributor, Inc. ("EKDI") agree that the Collection Rights of
EKDI, as such term is defined in the Principal Underwriting Agreement
dated as of January 1, 1997 between the Fund and EKDI (the
"Agreement"), paid by the Fund pursuant to the Agreement with respect
to Distributor Shares, as that term is defined in Schedule I to the
Agreement, sold on or after December 1, 1996 will be utilized by EKDI
as follows:
(a) to the extent that the total amount of Collection Rights recieved
by EKDI with respect to Distributor Shares of all Funds, as that term
is defined in Schedule I, does not exceed 4.25% (except that in the
case of Keystone Capital Preservation Fund, the amount shall be 3%) of
the aggregate net asset value at the time of sale of the Distributor
Shares sold on or after December 1, 1996, plus any interest and other
fees, costs and expenses that may be paid in accordance with the
financing of commissions paid to selling brokers regarding such
Distributor Shares of such Funds (the "Brokers Commission and
Expenses"), the entire amount of the Collection Rights with respect to
such Distributor Shares may only be used by the Principal Underwriter
for payment of the Brokers Commission and Expenses and may not be used
for any other purpose.
(b) to the extent that there is no longer any unrecovered Brokers
Commission and Expenses with respect to the Distributor Shares sold on
or after December 1, 1996 (including shares purchased in connection
with the reinvestment of dividends on such Distributor Shares as
determined in accordance with Sechedule I ) as provided in (a), above,
the Fund will pay the Principal Underwriter a fee in an amount up to
the remaining Collection Rights attributable to such Shares to
compensate Evergreen Keystone Investment Services, Inc., as marketing
services agent for the Principal Underwriter (the "Marketing Services
Agent").
The foregoing calculations shall be the responsibility of the Transfer
Agent and Administrator and not the resonsibility of the Principal Underwriter.
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SCHEDULE I
TO
PRINCIPAL UNDERWRITING AGREEMENT
RELATING TO CLASS B-2 SHARES
OF
KEYSTONE STRATEGIC INCOME FUND
TRANSFER AGENT PROCEDURES FOR DIFFERENTIATING
AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES
Amounts in respect of Asset Based Sales Charges (as hereinafter
defined) and CDSCs (as hereinafter defined) in respect of Shares (as hereinafter
defined) of each Fund (as hereinafter defined) shall be allocated between
Distributor Shares (as hereinafter defined) and Post-distributor Shares (as
hereinafter defined) of such Fund in accordance with the rules set forth in
clauses (B) and (C). Clause (B) sets forth the rules to be followed by the
Transfer Agent for each Fund and the record owner of each Omnibus Account (as
hereinafter defined) in maintaining records relating to Distributor Shares and
Post-distributor Shares. Clause (C) sets forth the rules to be followed by the
Transfer Agent for each Fund and the record owner of each Omnibus Account in
determining what portion of the Asset Based Sales Charge (as hereinafter
defined) payable in respect of each class of Shares of such Fund and what
portion of the CDSC (as hereinafter defined) payable by the holders of Shares of
such Fund is attributable to Distributor Shares and Post-distributor Shares,
respectively.
Notwithstanding anything herein to the contrary, no amounts relating
to the EKISC Allocable Portion (as defined in the EKISC Underwriting Agreements)
shall be allocated hereunder and no Shares attributable to EKISC pursuant to the
EKISC Underwriting Agreements shall constitute Distributor Shares or
Post-distributor Shares or otherwise be allocated to any person or entity except
as contemplated by the EKISC Underwriting Agreements and the Irrevocable Payment
Instructions.
(A) DEFINITIONS:
Generally, for purposes of this Schedule I, defined terms shall be used
with the meaning assigned to them in the Agreement, except that for purposes of
the following rules the following definitions are also applicable:
"AGREEMENT" shall mean the Principal Underwriting Agreement for Class
B-2 Shares of the Instant Fund dated as of January 1, 1997 between the Instant
Fund and the Distributor.
"ASSET BASED SALES CHARGE" shall have the meaning set forth in National
Association of Securities Dealers, Inc. ("NASD") Business Conduct Rule 2830 (d)
(2) or any successor rule (the "Business Conduct Rules) it being understood that
for purposes of this Schedule I such term does not include the Service Fee.
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"BUSINESS DAY" shall mean any day on which the banks and The New York
Stock Exchange are not authorized or required to close in New York City or the
State of North Carolina.
"CAPITAL GAIN DIVIDEND" shall mean, in respect of any Share of any
Fund, a Dividend in respect of such Share which is designated by such Fund as
being a "capital gain dividend" as such term is defined in Section 852 of the
Internal Revenue Code of 1986, as amended.
"CDSC" shall mean with respect to any Fund, the contingent deferred
sales charge payable, either directly or by withholding from the proceeds of the
redemption of the Shares of such Fund, by the shareholders of such Fund on any
redemption of Shares of such Fund in accordance with the Prospectus relating to
such Fund.
"COMMISSION SHARE" shall mean, in respect of any Fund, a Share of such
Fund issued under circumstances where a CDSC would be payable upon the
redemption of such Share if such CDSC is not waived or shall have not otherwise
expired.
"DATE OF ORIGINAL PURCHASE" shall mean, in respect of any Commission
Share of any Fund, the date on which such Commission Share was first issued by
such Fund; provided, that if such Share is a Commission Share and such Fund
issued the Commission Share (or portion thereof) in question in connection with
a Free Exchange for a Commission Share (or portion thereof) of another Fund, the
Date of Original Purchase for the Commission Share (or portion thereof) in
question shall be the date on which the Commission Share (or portion thereof) of
the other Fund was first issued by such other Fund (unless such Commission Share
(or portion thereof) was also issued by such other Fund in a Free Exchange, in
which case this proviso shall apply to that Free Exchange and this application
shall be repeated until one reaches a Commission Share (or portion thereof)
which was issued by a Fund other than in a Free Exchange).
"DISTRIBUTOR" shall mean Evergreen Keystone Distributor, Inc., its
successors and assigns.
"DISTRIBUTOR'S ACCOUNT" shall mean the account designated in the
Irrevocable Payment Instructions of the Distributor.
"DISTRIBUTOR INCEPTION DATE" shall mean, in respect of any Fund and
solely for the purpose of making the calculations contained herein, December 1,
1996.
"DISTRIBUTOR LAST SALE CUT-OFF DATE" shall mean, in respect of any
Fund, the date identified as the last sale of a Commission Share during the
period the Distributor served as principal underwriter under the Agreement.
"DISTRIBUTOR SHARES" shall mean, in respect of any Fund, all Shares of
such Fund the Month of Original Purchase of which occurs on or after the
Distributor Inception Date and on or prior to the Distributor Last Sale Cut-off
Date in respect of such Fund.
"DIVIDEND" shall mean, in respect of any Share of any Fund, any
dividend or other distribution by such Fund in respect of such Share.
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"FREE EXCHANGE" shall mean any exchange of a Commission Share (or
portion thereof) of one Fund (the "Redeeming Fund") for a Share (or portion
thereof) of another Fund (the "Issuing Fund"), under any arrangement which
defers the exchanging Shareholder's obligation to pay the CDSC in respect of the
Commission Share (or portion thereof) of the Redeeming Fund so exchanged until
the later redemption of the Share (or portion thereof) of the Issuing Fund
received in such exchange.
"FREE SHARE" shall mean, in respect of any Fund, each Share of such
Fund other than a Commission Share, including, without limitation: (i) Shares
issued in connection with the automatic reinvestment of Capital Gain Dividends
or Other Dividends by such Fund; (ii) Special Free Shares issued by such Fund;
and (iii) Shares (or portion thereof) issued by such Fund in connection with an
exchange whereby a Free Share (or portion thereof) of another Fund is redeemed
and the Net Asset Value of such redeemed Free Share (or portion thereof) is
invested in such Shares (or portion thereof) of such Fund.
"FUND" shall mean each of the regulated investment companies or series
or portfolios of regulated investment companies identified in Exhibit J to the
Master Sale Agreement, as the same may be amended from time to time in
accordance with the terms thereof.
"INSTANT FUND" shall mean Keystone Strategic Income Fund.
"ML OMNIBUS ACCOUNT" shall mean, in respect of any Fund, the Omnibus
Account maintained by Merrill Lynch, Pierce, Fenner & Smith as subtransfer
agent.
"MONTH OF ORIGINAL PURCHASE" shall mean, in respect of any Share of any
Fund, the calendar month in which such Share was first issued by such Fund;
PROVIDED, that if such Share is a Commission Share and such Fund issued the
Commission Share (or portion thereof) in question in connection with a Free
Exchange for a Commission Share (or portion thereof) of another Fund, the Month
of Original Purchase for the Commission Share (or portion thereof) in question
shall be the calendar month in which the Commission Share (or portion thereof)
of the other Fund was first issued by such other Fund (unless such Commission
Share (or portion thereof) was also issued by such other Fund in a Free
Exchange, in which case this proviso shall apply to that Free Exchange and this
application shall be repeated until one reaches a Commission Share (or portion
thereof) which was issued by a Fund other than in a Free Exchange); PROVIDED,
FURTHER, that if such Share is a Free Share and such Fund issued such Free Share
in connection with the automatic reinvestment of dividends in respect of other
Shares of such Fund, the Month of Original Purchase of such Free Share shall be
deemed to be The Month of Original Purchase of the Share in respect of which
such dividend was paid; PROVIDED, FURTHER, that if such Share is a Free Share
and such Fund issued such Free Share in connection with an exchange whereby a
Free Share (or portion thereof) of another Fund is redeemed and the Net Asset
Value of such redeemed Free Share (or portion thereof) is invested in a Free
Share (or portion thereof) of such Fund, the Month of Original Issue of such
Free Share shall be the Month of Original Issue of the Free Share of such other
Fund so redeemed (unless such Free Share of such other Fund was also issued by
such other Fund in such an exchange, in which case this proviso shall apply to
that exchange and this application shall be repeated until one reaches a Free
Share which was issued by a Fund other than in such an exchange); and PROVIDED,
FINALLY, that for purposes of this Schedule I each of the following periods
shall be treated as one calendar month for purposes of applying the rules of
this Schedule I to any Fund: (i) the period of time from and including the
Distributor Inception Date for such Fund to and including the last day of the
calendar month in which such Distributor Inception Date occurs; (ii) the period
of time commencing with the first day of the calendar month in which the
Distributor Last Sale Cutoff Date in respect of such Fund occurs to and
including such
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<PAGE>
Distributor Last Sale Cutoff Date; and (iii) the period of time commencing on
the day immediately following the Distributor Last Sale Cutoff Date in respect
of such Fund to and including the last day of the calendar month in which such
Distributor Last Sale Cut-off Date occurs.
"OMNIBUS ACCOUNT" shall mean any Shareholder Account the record owner
of which is a registered broker-dealer which has agreed with the Transfer Agent
to provide sub-transfer agent functions relating to each Sub-shareholder Account
within such Shareholder Account as contemplated by this Schedule I in respect of
each of the Funds.
"OMNIBUS ASSET BASED SALES CHARGE SETTLEMENT DATE" shall mean, in
respect of each Omnibus Account, the Business Day next following the twentieth
day of each calendar month for the calendar month immediately preceding such
date so long as the record owner is able to allocate the Asset Based Sales
Charge accruing in respect of Shares of any Fund as contemplated by this
Schedule I no more frequently than monthly; PROVIDED, that at such time as the
record owner of such Omnibus Account is able to provide information sufficient
to allocate the Asset Based Sales Charge accruing in respect of such Shares of
such Fund owned of record by such Omnibus Account as contemplated by this
Schedule I on a weekly or daily basis, the Omnibus Asset Based Sales Charge
Settlement Date shall be a weekly date as in the case of the Omnibus CDSC
Settlement Date or a daily date as in the case of Asset Based Sales Charges
accruing in respect of Shareholder Accounts other than Omnibus Accounts, as the
case may be.
"OMNIBUS CDSC SETTLEMENT DATE" shall mean, in respect of each Omnibus
Account, the third Business Day of each calendar week for the calendar week
immediately preceding such date so long as the record owner of such Omnibus
Account is able to allocate the CDSCs accruing in respect of any Shares of any
Fund as contemplated by this Schedule I for no more frequently than weekly;
PROVIDED, that at such time as the record owner of such Shares of such Fund
owned of record by such Omnibus Account is able to provide information
sufficient to allocate the CDSCs accruing in respect of such Omnibus Account as
contemplated by this Schedule I on a daily basis, the Omnibus CDSC Settlement
Date for such Omnibus Account shall be a daily date as in the case of CDSCs
accruing in respect of Shareholder Accounts other than Omnibus Accounts.
"ORIGINAL PURCHASE AMOUNT" shall mean, in respect of any Commission
Share of any Fund, the amount paid (i.e., the Net Asset Value thereof on such
date), on the Date of Original Purchase in respect of such Commission Share, by
such Shareholder Account or Sub-shareholder Account for such Commission Share;
PROVIDED, that if such Fund issued the Commission Share (or portion thereof) in
question in connection with a Free Exchange for a Commission Share (or portion
thereof) of another Fund, the Original Purchase Amount for the Commission Share
(or portion thereof) in question shall be the Original Purchase Amount in
respect of such Commission Share (or portion thereof) of such other Fund (unless
such Commission Share (or portion thereof) was also issued by such other Fund in
a Free Exchange, in which case this proviso shall apply to that Free Exchange
and this application shall be repeated until one reaches a Commission Share (or
portion thereof) which was issued by a Fund other than in a Free Exchange).
"OTHER DIVIDEND" shall mean in respect of any Share, any Dividend paid
in respect of such Share other than a Capital Gain Dividend.
"POST-DISTRIBUTOR SHARES" shall mean, in respect of any Fund, all
Shares of such Fund the Month of Original Purchase of which occurs after the
Distributor Last Sale Cut-off Date for such Fund.
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<PAGE>
"BUYER" shall mean Mutual Fund Funding, as Buyer under the Master Sale
Agreement, and its successors and assigns in such capacity.
"MASTER SALE AGREEMENT" shall mean that certain Master Sale Agreement
dated as of December 6, 1996 between Evergreen Keystone Distributors, Inc., as
Seller, and Mutual Fund Funding, as Buyer.
"SHARE" shall mean in respect of any Fund any share of the classes of
shares specified in Exhibit G to the Master Sale Agreement under the designation
"Keystone America Funds", as the same may be amended from time to time by notice
from the Distributor and the Buyer to the Fund and the Transfer Agent; PROVIDED,
that such term shall include, after the Distributor Last Sale Cut-off Date, a
share of a new class of shares of such Fund: (i) with respect to each record
owner of Shares which is not treated in the records of each Transfer Agent and
Sub-transfer Agent for such Fund as an entirely separate and distinct class of
shares from the classes of shares specified Exhibit G to the Master Sale
Agreement or (ii) the shares of which class may be exchanged for shares of
another Fund of the classes of shares specified in Exhibit G to the Master Sale
Agreement under the designation "Keystone America Funds" of any class existing
on or prior to the Distributor Last Sale Cut-off Date; or (iii) dividends on
which can be reinvested in shares of the classes specified on Exhibit G to the
Master Sale Agreement under the automatic dividend reinvestment options; or (iv)
which is otherwise treated as though it were of the same class as the class of
shares specified on Schedule II to the Irrevocable Payment Instruction.
"SHAREHOLDER ACCOUNT" shall have the meaning set forth in clause (B)(l
hereof.
"SPECIAL FREE SHARE" shall mean, in respect of any Fund, a Share (other
than a Commission Share) issued by such Fund other than in connection with the
automatic reinvestment of Dividends and other than in connection with an
exchange whereby a Free Share (or portion thereof) of another Fund is redeemed
and the Net Asset Value of such redeemed Share (or portion thereof) is invested
in a Share (or portion thereof) of such Fund.
"SUB-SHAREHOLDER ACCOUNT" shall have the meaning set forth in clause
(B)(1) hereof.
"SUB-TRANSFER AGENT" shall mean, in respect of each Omnibus Account,
the record owner thereof.
(B) RECORDS TO BE MAINTAINED BY THE TRANSFER AGENT FOR EACH FUND
AND THE RECORD OWNER OF EACH OMNIBUS ACCOUNT:
The Transfer Agent shall maintain Shareholder Accounts, and shall cause
each record owner of each Omnibus Account to maintain Sub-shareholder Accounts,
each in accordance with the following rules:
(1) SHAREHOLDER ACCOUNTS AND SUB-SHAREHOLDER ACCOUNTS. The Transfer
Agent shall maintain a separate account (a "Shareholder Account") for each
record owner of Shares of each Fund. Each Shareholder Account (other than
Omnibus Accounts) will represent a record owner of Shares of such Fund, the
records of which will be kept in accordance with this Schedule I. In the case of
an Omnibus Account, the Transfer Agent shall require that the record owner of
the Omnibus Account maintain a separate account (a "Sub-shareholder Account")
for each record owner of Shares which are reflected in the Omnibus Account, the
records of which will be kept in accordance with this Schedule I. Each such
Shareholder Account and Sub-shareholder Account shall relate solely to Shares of
such Fund
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<PAGE>
and shall not relate to any other class of shares of such Fund.
(2) COMMISSION SHARES. For each Shareholder Account (other than an
Omnibus Account), the Transfer Agent shall maintain daily records of each
Commission Share of such Fund which records shall identify each Commission Share
of such Fund reflected in such Shareholder Account by the Month of Original
Purchase of such Commission Share.
For each Omnibus Account, the Transfer Agent shall require that the
Sub-transfer Agent in respect thereof maintain daily records of such
Sub-shareholder Account which records shall identify each Commission Share of
such Fund reflected in such Sub-shareholder Account by the Month of Original
Purchase; PROVIDED, that until the Sub-transfer Agent in respect of the ML
Omnibus Account develops the data processing capability to conform to the
foregoing requirements, such Sub-transfer Agent shall maintain daily records of
Sub-shareholder Accounts which identify each Commission Share of such Fund
reflected in such Sub-shareholder Account by the Date of Original Purchase. Each
such Commission Share shall be identified as either a Distributor Share or a
Post-distributor Share based upon the Month of Original Purchase of such
Commission Share (or in the case of a Sub-shareholder Account within the ML
Omnibus Account, based upon the Date of Original Purchase).
(3) FREE SHARES. The Transfer Agent shall maintain daily records of
each Shareholder Account (other than an Omnibus Account) in respect of any Fund
so as to identify each Free Share (including each Special Free Share) reflected
in such Shareholder Account by the Month of Original Purchase of such Free
Share. In addition, the Transfer Agent shall require that each Shareholder
Account (other than an Omnibus Account) have in effect separate elections
relating to reinvestment of Capital Gain Dividends and relating to reinvestment
of Other Dividends in respect of any Fund. Either such Shareholder Account shall
have elected to reinvest all Capital Gain Dividends or such Shareholder Account
shall have elected to have all Capital Gain Dividends distributed. Similarly,
either such Shareholder Account shall have elected to reinvest all Other
Dividends or such Shareholder Account shall have elected to have all Other
Dividends distributed.
The Transfer Agent shall require that the Sub-transfer Agent in respect
of each Omnibus Account maintain daily records for each Sub-shareholder Account
in the manner described in the immediately preceding paragraph for Shareholder
Accounts (other than Omnibus Accounts); PROVIDED, that until the Sub-transfer
Agent in respect of the ML Omnibus Account develops the data processing
capability to conform to the foregoing requirements, such Sub-transfer Agent
shall not be obligated to conform to the foregoing requirements. Each
Sub-shareholder Account shall also have in effect Dividend reinvestment
elections as described in the immediately preceding paragraph.
The Transfer Agent and each Sub-transfer Agent in respect of an Omnibus
Account shall identify each Free Share as either a Distributor Share or a
Post-distributor Share based upon the Month of Original Purchase of such Free
Share; PROVIDED, that until the Sub-transfer Agent in respect of the ML Omnibus
Account develops the data processing capability to conform to the foregoing
requirements, the Transfer Agent shall require such Sub-transfer Agent to
identify each Free Share of a given Fund in the ML Omnibus Account as a
Distributor Share, or Post-distributor Share, as follows:
(a) Free Shares of such Fund which are outstanding on the
Distributor Last Sale Cutoff Date for such Fund shall be
identified as Distributor Shares.
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<PAGE>
(b) Free Shares of such Fund which are issued (whether or not in
connection with an exchange for a Free Share of another Fund)
to the ML Omnibus Account during any calendar month (or
portion thereof) after the Distributor Last Sale Cutoff Date
for such Fund shall be identified as Distributor Shares in a
number computed as follows:
A * (B/C)
where:
A = Free Shares of such Fund issued to the ML Omnibus
Account during such calendar month (or portion
thereof)
B = Number of Commission Shares and Free Shares of such
Fund in the ML Omnibus Account identified as
Distributor Shares and outstanding as of the close of
business in the last day of the immediately preceding
calendar month (or portion thereof)
C = Total number of Commission Shares and Free Shares
of such Fund in the ML Omnibus Account and
outstanding as of the close of business on the last
day of the immediately preceding calendar month (or
portion thereof).
(c) Free Shares of such Fund which are issued (whether or not in
connection with an exchange for a free share of another Fund)
to the ML Omnibus Account during any calendar month (or
portion thereof) after the Distributor Last Sale Cutoff Date
for such Fund shall be identified as Post-distributor Shares
in a number computed as follows:
(A * (B/C)
where:
A = Free Shares of such Fund issued to the ML Omnibus
Account during such calendar month (or portion
thereof)
B = Number of Commission Shares and Free Shares of such
Fund in the ML Omnibus Account identified as
Post-distributor Shares and outstanding as of the
close of business in the last day of the immediately
preceding calendar month (or portion thereof)
C = Total number of Commission Shares and Free Shares
of such Fund in the ML Omnibus Account and
outstanding as of the close of business on the last
day of the immediately preceding calendar month (or
portion thereof).
(d) Free Shares of such Fund which are redeemed (whether or not in
connection with an exchange for Free Shares of another Fund or
in connection with the conversion of such Shares into a Class
A Share of such Fund) from the ML Omnibus Account in any
calendar month (or portion thereof) after the Distributor Last
Sale Cut-off Date for such Fund shall be identified as
Distributor Shares in a number computed as follows:
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15
<PAGE>
A * (B/C)
where:
A = Free Shares of such Fund which are redeemed
(whether or not in connection with an exchange for
Free Shares of another Fund or in connection with the
conversion of such Shares into a class A share of
such Fund) from the ML Omnibus Account during such
calendar month (or portion thereof)
B = Free Shares of such Fund in the ML Omnibus Account
identified as Distributor Shares and outstanding as
of the close of business on the last day of the
immediately preceding calendar month.
C = Total number of Free Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month.
(e) Free Shares of such Fund which are redeemed (whether or not in
connection with an exchange for Free Shares of another Fund or
in connection with the conversion of such Shares into a class
A share of such Fund) from the ML Omnibus Account in any
calendar month (or portion thereof) after the Distributor Last
Sale Cutoff Date for such Fund shall be identified as
Post-distributor Shares in a number computed as follows:
A * (B/C)
where:
A = Free Shares of such Fund which are redeemed
(whether or not in connection with an exchange for
Free Shares of another Fund or in connection with the
conversion of such Shares into a class A share of
such Fund) from the ML Omnibus Account during such
calendar month (or portion thereof)
B = Free Shares of such Fund in the ML Omnibus Account
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of the
immediately preceding calendar month.
C = Total number of Free Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last to day of the immediately
preceding calendar month.
(4) APPRECIATION AMOUNT AND COST ACCUMULATION AMOUNT. The Transfer
Agent shall maintain on a daily basis in respect of each Shareholder Account
(other than Omnibus Accounts) a Cost Accumulation Amount representing the total
of the Original Purchase Amounts paid by such Shareholder Account for all
Commission Shares reflected in such Shareholder Account as of the close of
business on each day. In addition, the Transfer Agent shall maintain on a daily
basis in respect of each Shareholder Account (other than Omnibus Accounts)
sufficient records to enable it to compute, as of the date of any actual or
deemed redemption or Free Exchange of a Commission Share reflected in such
Shareholder
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<PAGE>
Account an amount (such amount an "Appreciation Amount") equal to the excess, if
any, of the Net Asset Value as of the close of business on such day of the
Commission Shares reflected in such Shareholder Account minus the Cost
Accumulation Amount as of the close of business on such day. In the event that a
Commission Share (or portion thereof) reflected in a Shareholder Account is
redeemed or under these rules is deemed to have been redeemed (whether in a Free
Exchange or otherwise), the Appreciation Amount for such Shareholder Account
shall be reduced, to the extent thereof, by the Net Asset Value of the
Commission Share (or portion thereof) redeemed, and if the Net Asset Value of
the Commission Share (or portion thereof) being redeemed equals or exceeds the
Appreciation Amount, the Cost Accumulation Amount will be reduced to the extent
thereof, by such excess. If the Appreciation Amount for such Shareholder Account
immediately prior to any redemption of a Commission Share (or portion thereof)
is equal to or greater than the Net Asset Value of such Commission Share (or
portion thereof) deemed to have been tendered for redemption, no CDSCs will be
payable in respect of such Commission Share (or portion thereof).
The Transfer Agent shall require that the Sub-transfer Agent in respect
of each Omnibus Account maintain on a daily basis in respect of each
Sub-shareholder Account reflected in such Omnibus Account a Cost Accumulation
Amount and sufficient records to enable it to compute, as of the date of any
actual or deemed redemption or Free Exchange of a Commission Share reflected in
such Sub-shareholder Account an Appreciation Amount in accordance with the
preceding paragraph and to apply the same to determine whether a CDSC is payable
(as though such Sub-shareholder Account were a Shareholder Account other than an
Omnibus Account); provided, that until the Sub-transfer Agent in respect of the
ML Omnibus Account develops the data processing capability to conform to the
foregoing requirements, such Sub-transfer Agent shall maintain for each
Sub-shareholder Account a separate Cost Accumulation Amount and a separate
Appreciation Amount for each Date of Original Purchase of any Commission Share
which shall be applied as set forth in the preceding paragraph as if each Date
of Original Purchase were a separate Month of Original Purchase.
(5) IDENTIFICATION OF REDEEMED SHARES. If a Shareholder Account (other
than an Omnibus Account) tenders a Share of a Fund for redemption (other than in
connection with an exchange of such Share for a Share of another Fund or in
connection with the conversion of such Share pursuant to a Conversion Feature),
such tendered Share will be deemed to be a Free Share if there are any Free
Shares reflected in such Shareholder Account immediately prior to such tender.
If there is more than one Free Share reflected in such Shareholder Account
immediately prior to such tender, such tendered Share will be deemed to be the
Free Share with the earliest Month of Original Purchase. If there are no Free
Shares reflected in such Shareholder Account immediately prior to such tender,
such tendered Share will be deemed to be the Commission Share with the earliest
Month of Original Purchase reflected in such Shareholder Account.
If a Sub-shareholder Account reflected in an Omnibus Account tenders a
Share for redemption (other than in connection with an Exchange of such Share
for a Share of another Fund or in connection with the conversion of such Share
pursuant to a Conversion Feature), the Transfer Agent shall require that the
record owner of each Omnibus Account supply the Transfer Agent sufficient
records to enable the Transfer Agent to apply the rules of the preceding
paragraph to such Sub-shareholder Account (as though such Sub-shareholder
Account were a Shareholder Account other than an Omnibus Account); provided,
that until the Sub-transfer Agent in respect of the ML Omnibus Account develops
the data processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be required to conform to the foregoing rules
regarding Free Shares (and the Transfer Agent shall account for such Free
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<PAGE>
Shares as provided in (3) above) but shall apply the foregoing rules to each
Commission Share with respect to the Date of Original Purchase of any Commission
Share as though each such Date were a separate Month of Original Purchase.
(6) IDENTIFICATION OF EXCHANGED SHARES. When a Shareholder Account
(other than an Omnibus Account) tenders Shares of one Fund (the "Redeeming
Fund") for redemption where the proceeds of such redemption are to be
automatically reinvested in shares of another Fund (the "Issuing Fund") to
effect an exchange (whether or not pursuant to a Free Exchange) into Shares of
the Issuing Fund: (1) such Shareholder Account will be deemed to have tendered
Shares (or portions thereof) of the Redeeming Fund with each Month of Original
Purchase represented by Shares of the redeeming Fund reflected in such
Shareholder Account immediately prior to such tender in the same proportion that
the number of Shares of the redeeming Fund with such Month of Original Purchase
reflected in such Shareholder immediately prior to such tender bore to the total
number of Shares of the Redeeming Fund reflected in such Shareholder Account
immediately prior to such tender, and on that basis the tendered Shares of the
Redeeming Fund will be identified as Distributor Shares or Post-distributor
Shares; (2) such Shareholder Account will be deemed to have tendered Commission
Shares (or portions thereof) and Free Shares (or portions thereof) of the
Redeeming Fund of each category (i.e., Distributor Shares or Post-distributor
Shares) in the same proportion that the number of Commission Shares or Free
Shares (as the case may be) of the Redeeming Fund in such category reflected in
such Shareholder Account bore to the total number of Shares of the Redeeming
Fund in such category reflected in such Shareholder Account immediately prior to
such tender, (3) the Shares (or portions thereof) of the Issuing Fund issued in
connection with such exchange will be deemed to have the same Months of Original
Purchase as the Shares (or portions thereof) of the Redeeming Fund so tendered
and will be categorized as Distributor Shares and Post-distributor Shares
accordingly, and (4) the Shares (or portions thereof) of each Category of the
Issuing Fund issued in connection with such exchange will be deemed to be
Commission Shares and Free Shares in the same proportion that the Shares of such
Category of the Redeeming Fund were Commission Shares and Free Shares.
The Transfer Agent shall require that each record owner of an Omnibus
Account maintain records relating to each Sub-shareholder Account in such
Omnibus Account sufficient to apply the foregoing rules to each such
Sub-shareholder Account (as though such Sub-shareholder Account were a
Shareholder Account other than an Omnibus Account); provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be required to conform to the foregoing rules
relating to Free Shares (and the Sub-transfer Agent shall account for such Free
Shares as provided in (3) above) and shall apply a first-in-first-out procedure
(based upon the Date of Original Purchase) to determine which Commission Shares
(or portions thereof) of a Redeeming Fund were redeemed in connection with an
exchange.
(7) IDENTIFICATION OF CONVERTED SHARES. The Transfer Agent records
maintained for each Shareholder Account (other than an Omnibus Account) will
treat each Commission Share of a Fund as though it were redeemed at its Net
Asset Value on the date such Commission Share converts into a Class A share of
such Fund in accordance with an applicable Conversion Feature applied with
reference to its Month of Original Purchase and will treat each Free Share of
such Fund with a given Month of Original Purchase as though it were redeemed at
its Net Asset Value when it is simultaneously converted to a Class A share at
the time the Commission Shares of such Fund with such Month of Original Purchase
are so converted.
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The Transfer Agent shall require that each record owner of an Omnibus
Account maintain records relating to each Sub-shareholder Account in such
Omnibus Account sufficient to apply the foregoing rules to each such
Sub-shareholder Account (as though such Sub-shareholder Account were a
Shareholder Account other than an Omnibus Account) ; PROVIDED, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall apply the foregoing rules to Commission Shares with
reference to the Date of Original Issue of each Commission Share (as though each
such date were a separate Month of Original Issue) and shall not be required to
apply the foregoing rules to Free Shares (and the Sub-transfer Agent shall
account for such Free Shares as provided in (3) above).
(C) ALLOCATIONS OF ASSET BASED SALE CHARGES AND CDSCS AMONG
DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES:
The Transfer Agent shall use the following rules to allocate the
amounts of Asset Based Sales Charges and CDSCs payable by each Fund in respect
of Shares between Distributor Shares and Post-distributor Shares:
(1) RECEIVABLES CONSTITUTING CDSCS: CDSCs will be treated as relating
to Distributor Shares or Post-distributor Shares depending upon the Month of
Original Purchase of the Commission Share the redemption of which gives rise to
the payment of a CDSC by a Shareholder Account.
The Transfer Agent shall cause each Sub-transfer Agent to apply the
foregoing rule to each Sub-shareholder Account based on the records maintained
by such Sub-transfer Agent; PROVIDED, that until the Sub-transfer Agent in
respect of the ML Omnibus Account develops the data processing capability to
conform to the foregoing requirements, such Sub-transfer Agent shall apply the
foregoing rules to each Sub-shareholder Account with respect to the Date of
Original Purchase of any Commission Share as though each such date were a
separate Month of Original Purchase.
(2) RECEIVABLES CONSTITUTING ASSET BASED SALES CHARGES:
The Asset Based Sales Charges accruing in respect of each Shareholder
Account (other than an Omnibus Account) shall be allocated to each Share
reflected in such Shareholder Account as of the close of business on such day on
an equal per share basis. For example, the Asset Based Sales Charges
attributable to Distributor Shares on any day shall be computed and allocated as
follows:
A * (B/C)
where:
A = Total amount of Asset Based Sales Charge accrued in respect
of such Shareholder Account (other than an Omnibus Account) on
such day.
B = Number of Distributor Shares reflected in such Shareholder
Account (other than an Omnibus Account) on the close of
business on such day
D:\JPW\LIEBER\LONESTAR\FINALDIS\KAFDIST\STRATEGI.KAF
19
<PAGE>
C = Total number of Distributor Shares and Post-distributor
Shares reflected in such Shareholder Account (other than an
Omnibus Account) and outstanding as of the close of business
on such day.
The Portion of the Asset Based Sales Charges of such Fund accruing in respect of
such Shareholder Account for such day allocated to Post-distributor Shares will
be obtained using the same formula but substituting for "B" the number of
Post-distributor Shares, as the case may be, reflected in such Shareholder
Account and outstanding on the close of business on such day. The foregoing
allocation formula may be adjusted from time to time by notice to the Fund and
the transfer agent for the Fund from the Seller and the Buyer.
The Transfer Agent shall, based on the records maintained by the record
owner of such Omnibus Account, allocate the Asset Based Sales Charge accruing in
respect of each Omnibus Account on each day among all Sub-shareholder Accounts
reflected in such Omnibus Account on an equal per share basis based upon the
total number of Distributor Shares and Post-distributor Shares reflected in each
such Sub-shareholder Account as of the close of business on such day. In
addition, the Transfer Agent shall apply the foregoing rules to each
Sub-shareholder Account (as though it were a Shareholder Account other than an
Omnibus Account), based on the records maintained by the record owner, to
allocate the Asset Based Sales Charge so allocated to any Sub-shareholder
Account among the Distributor Shares and Post-distributor Shares reflected in
each such Sub-shareholder Account in accordance with the rules set forth in the
preceding paragraph; PROVIDED, that until the Sub-transfer Agent in respect of
the ML Omnibus Account develops the data processing capacity to apply the rules
of this Schedule I as applicable to Sub-shareholder Accounts other than ML
Omnibus Accounts, the Transfer Agent shall allocate the Asset Based Sales Charge
accruing in respect of Shares of any Fund in the ML Omnibus Account during any
calendar month (or portion thereof) among Distributor Shares and
Post-distributor Shares as follows:
(a) The portion of such Asset Based Sales Charge allocable to
Distributor Shares shall be computed as follows:
A * ((B + C)/2)
((D + E)/2)
where:
A = Total amount of Asset Based Sales Charge accrued
during such calendar month (or portion thereof) in
respect of Shares of such Fund in the ML Omnibus
Account
B = Shares of such Fund in the ML Omnibus Account and
identified as Distributor Shares and outstanding as
of the close of business on the last day of the
immediately preceding calendar month (or portion
thereof), times Net Asset Value per Share as of such
time
C = Shares of such Fund in the ML Omnibus Account and
identified as Distributor Shares and outstanding as
of the close of business on the last day of such
calendar month (or portion thereof), times Net Asset
Value per Share as of such time
D:\JPW\LIEBER\LONESTAR\FINALDIS\KAFDIST\STRATEGI.KAF
20
<PAGE>
D = Total number of Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month (or portion thereof), times Net Asset
Value per Share as of such time.
E = Total number of Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of such calendar month (or
portion thereof), times Net Asset Value per Share as
of such time.
(b) The portion of such Asset Based Sales Charge allocable to
Post-distributor Shares shall be computed as follows:
A * ((B + C)/2)
((D + E)/2)
where:
A = Total amount of Asset Based Sales Charge accrued
during such calendar month (or portion thereof) in
respect of Shares of such Fund in the ML Omnibus
Account
B = Shares of such Fund in the ML Omnibus Account and
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of the
immediately preceding calendar month (or portion
thereof), times Net Asset Value per Share as of such
time
C = Shares of such Fund in the ML Omnibus Account and
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of such
calendar month (or portion thereof), times Net Asset
Value per Share as of such time
D = Total number of Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month (or portion thereof), times Net Asset
Value per Share as of such time.
E = Total number of Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of such calendar month (or
portion thereof), times Net Asset Value per Share as
of such time.
(3) PAYMENTS ON BEHALF OF EACH FUND.
On the close of business on each day, or to the extent the parties agree less
frequently, the Transfer Agent shall cause payment to be made of the amount of
the Asset Based Sales Charge and CDSCs accruing on such day in respect of the
Shares of such Fund owned of record by Shareholder Accounts (other than Omnibus
Accounts) by two separate wire transfers, directly from accounts of such Fund as
follows:
1. The Asset Based Sales Charge and CDSCs accruing in respect
of Shareholder Accounts other than Omnibus Accounts and
allocable to Distributor Shares in accordance with the
preceding rules shall be paid to the Distributor's Account,
unless the Distributor otherwise instructs the Fund in any
irrevocable payment instruction; and
D:\JPW\LIEBER\LONESTAR\FINALDIS\KAFDIST\STRATEGI.KAF
21
<PAGE>
2. The Asset Based Sales Charges and CDSCs accruing in respect
of Shareholder Accounts other than Omnibus Accounts and
allocable to Post-distributor Shares in accordance with the
preceding rules shall be paid in accordance with direction
received from any future distributor of Shares of the Instant
Fund.
On each Omnibus CDSC Settlement Date, the Transfer Agent for each Fund
shall cause the applicable Sub-transfer Agent to cause payment to be made of the
amount of the CDSCs accruing during the period to which such Omnibus CDSC
Settlement Date relates in respect of the Shares of such Fund owned of record by
each Omnibus Account by two separate wire transfers directly from the account of
such Fund maintained by such Transfer Agent, as follows:
1. The CDSCs accruing in respect of such Omnibus Account and
allocable to Distributor Shares in accordance with the
preceding rules shall he paid to the Distributor's Account,
unless the Distributor otherwise instructs the Fund in any
irrevocable payment instruction; and
2. The CDSCs accruing in respect of such Omnibus Account and
allocable to Post-distributor Shares in accordance with the
preceding rules shall be paid in accordance with direction
received from any future distributor of Shares of the Instant
Fund.
On each Omnibus Asset Based Sales Charge Settlement Date the Transfer
Agent for each Fund shall cause payment to be made of the amount of the Asset
Based Sales Charge accruing for the period to which such Omnibus Asset Based
Sales Charge Settlement Date relates in respect of the Shares of such Fund owned
of record by each Omnibus Account by two separate wire transfers directly from
accounts of such Fund as follows:
1. The Asset Based Sales Charge accruing in respect of such
Omnibus Account and allocable to Distributor Shares shall be
paid to the Distributor's Collection Account, unless the
Distributor otherwise instructs the Fund in any irrevocable
payment instruction; and
2. The Asset Based Sales Charge accruing in respect of such
Omnibus Account and allocable to Post-Distributor Shares shall
be paid in accordance with direction received from any future
distributor of Shares of the Instant Fund.
D:\JPW\LIEBER\LONESTAR\FINALDIS\KAFDIST\STRATEGI.KAF
22
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS Y SHARES OF
KEYSTONE STRATEGIC INCOME FUND
AGREEMENT made this 10th day of December, 1996 by and between Keystone
Strategic Income Fund, a Massachusetts business trust ("Fund"), and Keystone
Investment Distributors Company, a Delaware corporation ("Principal
Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a principal
underwriter of the Class Y shares of beneficial interest of the Fund ("Shares")
as an independent contractor upon the terms and conditions hereinafter set
forth. Except as the Fund may from time to time agree, Principal Underwriter
will act as agent for the Fund and not as principal.
2. Principal Underwriter will use its best efforts to find purchasers
for the Shares, to promote distribution of the Shares and may obtain orders from
brokers, dealers or other persons for sales of Shares to them. No such brokers,
dealers or other persons shall have any authority to act as agent for the Fund;
such brokers, dealers or other persons shall act only as principal in the sale
of Shares.
3. Sales of Shares by Principal Underwriter shall be at the applicable
public offering price determined in the manner set forth in the prospectus
and/or statement of additional information of the Fund current at the time of
the Fund's acceptance of the order for Shares; provided that Principal
Underwriter also shall have the right to sell Shares at net asset value, if such
sale is permissible under and consistent with applicable statutes, rules,
regulations and orders. All orders shall be subject to acceptance by the Fund,
and the Fund reserves the right, in its sole discretion, to reject any order
received. The Fund shall not be liable to anyone for failure to accept any
order.
4. On all sales of Shares, the Fund shall receive the
current net asset value.
5. Payment to the Fund for Shares shall be in New York or Boston
Clearing House funds received by Principal Underwriter within ten (10) business
days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such ten-day period, the Fund reserves the right,
without further notice, forthwith to cancel its acceptance of any such order.
The Fund shall pay such issue taxes as may be required by law in connection with
the issuance of the Shares.
18100
<PAGE>
6. Principal Underwriter shall not make in connection with any sale or
solicitation of a sale of the Shares any representations concerning the Shares
except those contained in the then current prospectus and/or statement of
additional information covering the Shares and in printed information approved
by the Fund as information supplemental to such prospectus and statement of
additional information. Copies of the then current prospectus and statement of
additional information and any such printed supplemental information will be
supplied by the Fund to Principal Underwriter in reasonable quantities upon
request.
7. Principal Underwriter agrees to comply with the
Business Conduct of the National Association of Securities
Dealers, Inc.
8. The Fund appoints Principal Underwriter as its agent to accept
orders for redemptions and repurchases of Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
9. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon
a) any untrue statement or alleged untrue statement
of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information
(including amendments and supplements thereto), or
b) any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement, prospectus
or statement of additional information necessary to make the statements
therein not misleading, provided, however, that insofar as losses,
claims, damages, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or
omission made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration
2
18100
<PAGE>
statement, prospectus or statement of additional information, such
indemnification is not applicable. In no case shall the Fund indemnify
the Principal Underwriter or its controlling person as to any amounts
incurred for any liability arising out of or based upon any action for
which the Principal Underwriter, its officers and Directors or any
controlling person would otherwise be subject to liability by reason of
willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of the reckless disregard of its obligations
and duties under this Agreement.
10. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers, Trustees and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Trustees or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
a) may be based upon any wrongful act by the
Principal Underwriter or any of its employees or
representatives, or
b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information (including
amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
or confirmed in writing to the Fund by the Principal Underwriter.
11. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by Principal
Underwriter for the purpose of qualifying the Shares for sale under the
so-called "blue sky" laws of any state or for registering Shares under the 1933
Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). Principal
Underwriter shall bear the expense of preparing, printing and distributing
advertising, sales literature, prospectuses and statements of additional
information. The Fund shall bear the expense of registering Shares under the
1933 Act and the Fund under the 1940 Act, qualifying Shares for sale under the
so-called "blue sky" laws of any state, the preparation and printing of
prospectuses, statements of additional information and reports
3
18100
<PAGE>
required to be filed with the Securities and Exchange Commission and other
authorities, the preparation, printing and mailing of prospectuses and
statements of additional information to shareholders of the Fund, and the direct
expenses of the issuance of Shares.
12. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated or continued as provided below, shall expire after two
years. This Agreement shall continue in effect after such term if its
continuance is specifically approved by a majority of the Trustees of the Fund
and a majority of any 12b-1 Trustees referred to in any 12b-1 Plan of the Fund
("Rule 12b-1 Trustees") at least annually in accordance with the 1940 Act and
the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of any Rule 12b-1 Trustees or by a vote of a
majority of the Fund's outstanding Shares on not more than sixty (60) days
written notice to any other party to the Agreement; and shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
13. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE STRATEGIC INCOME FUND
By:
Rosemary D. Van Antwerp
Senior Vice President and
Secretary
KEYSTONE INVESTMENT DISTRIBUTORS
COMPANY
By:
Ralph J. Spuehler, Jr.
President
4
18100
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS Y SHARES OF
KEYSTONE STRATEGIC INCOME FUND
AGREEMENT made this 11th day of December, 1996 by and between Keystone
Strategic Income Fund, a Massachusetts business trust ("Fund"), and Evergreen
Keystone Distributor, Inc., a Dela
ware corporation ("Principal Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a principal
underwriter of the Class Y shares of beneficial interest of the Fund ("Shares")
as an independent contractor upon the terms and conditions hereinafter set
forth. Except as the Fund may from time to time agree, Principal Underwriter
will act as agent for the Fund and not as principal.
2. Principal Underwriter will use its best efforts to find purchasers
for the Shares, to promote distribution of the Shares and may obtain orders from
brokers, dealers or other persons for sales of Shares to them. No such brokers,
dealers or other persons shall have any authority to act as agent for the Fund;
such brokers, dealers or other persons shall act only as principal in the sale
of Shares.
3. Sales of Shares by Principal Underwriter shall be at the applicable
public offering price determined in the manner set forth in the prospectus
and/or statement of additional information of the Fund current at the time of
the Fund's acceptance of the order for Shares; provided that Principal
Underwriter also shall have the right to sell Shares at net asset value, if such
sale is permissible under and consistent with applicable statutes, rules,
regulations and orders. All orders shall be subject to acceptance by the Fund,
and the Fund reserves the right, in its sole discretion, to reject any order
received. The Fund shall not be liable to anyone for failure to accept any
order.
4. On all sales of Shares, the Fund shall receive the
current net asset value.
5. Payment to the Fund for Shares shall be in New York or Boston
Clearing House funds received by Principal Underwriter within ten (10) business
days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such ten-day period, the Fund reserves the right,
without further notice, forthwith to cancel its acceptance of any such order.
The Fund shall pay such issue taxes as may be required by law in connection with
the issuance of the Shares.
18100
<PAGE>
6. Principal Underwriter shall not make in connection with any sale or
solicitation of a sale of the Shares any representations concerning the Shares
except those contained in the then current prospectus and/or statement of
additional information covering the Shares and in printed information approved
by the Fund as information supplemental to such prospectus and statement of
additional information. Copies of the then current prospectus and statement of
additional information and any such printed supplemental information will be
supplied by the Fund to Principal Underwriter in reasonable quantities upon
request.
7. Principal Underwriter agrees to comply with the
Business Conduct of the National Association of Securities
Dealers, Inc.
8. The Fund appoints Principal Underwriter as its agent to accept
orders for redemptions and repurchases of Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
9. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon
a) any untrue statement or alleged untrue statement
of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information
(including amendments and supplements thereto), or
b) any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement, prospectus
or statement of additional information necessary to make the statements
therein not misleading, provided, however, that insofar as losses,
claims, damages, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or
omission made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration
2
18100
<PAGE>
statement, prospectus or statement of additional information, such
indemnification is not applicable. In no case shall the Fund indemnify
the Principal Underwriter or its controlling person as to any amounts
incurred for any liability arising out of or based upon any action for
which the Principal Underwriter, its officers and Directors or any
controlling person would otherwise be subject to liability by reason of
willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of the reckless disregard of its obligations
and duties under this Agreement.
10. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers, Trustees and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Trustees or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
a) may be based upon any wrongful act by the
Principal Underwriter or any of its employees or
representatives, or
b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information (including
amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
or confirmed in writing to the Fund by the Principal Underwriter.
11. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by Principal
Underwriter for the purpose of qualifying the Shares for sale under the
so-called "blue sky" laws of any state or for registering Shares under the 1933
Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). Principal
Underwriter shall bear the expense of preparing, printing and distributing
advertising, sales literature, prospectuses and statements of additional
information. The Fund shall bear the expense of registering Shares under the
1933 Act and the Fund under the 1940 Act, qualifying Shares for sale under the
so-called "blue sky" laws of any state, the preparation and printing
3
18100
<PAGE>
of prospectuses, statements of additional information and reports required to be
filed with the Securities and Exchange Commission and other authorities, the
preparation, printing and mailing of prospectuses and statements of additional
information to shareholders of the Fund, and the direct expenses of the issuance
of Shares.
12. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated or continued as provided below, shall expire after two
years. This Agreement shall continue in effect after such term if its
continuance is specifically approved by a majority of the Trustees of the Fund
and a majority of any 12b-1 Trustees referred to in any 12b-1 Plan of the Fund
("Rule 12b-1 Trustees") at least annually in accordance with the 1940 Act and
the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of any Rule 12b-1 Trustees or by a vote of a
majority of the Fund's outstanding Shares on not more than sixty (60) days
written notice to any other party to the Agreement; and shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
13. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
14. The Fund is a Massachusetts business trust established under a
Declaration of Trust, as it may be amended from time to time. The obligations of
the Fund are not personally binding upon, nor shall recourse be had against, the
private property of any of the Trustees, shareholders, officers, employees or
agents of the Fund, but only the property of the Fund shall be bound.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE STRATEGIC INCOME FUND
By:
EVERGREEN KEYSTONE DISTRIBUTOR,
INC.
By:
4
18100
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
To Whom It May Concern:
You currently have a dealer agreement ("Agreement") with Evergreen
Keystone Distributor, Inc. ("Company"). Effective January 1, 1997 the
Agreement is amended and restated in its entirety as set forth below.
The Company, principal underwriter, invites you to participate in the
distribution of shares, including separate classes of shares, ("Shares") of
the Keystone Fund Family, the Keystone America Fund Family, the Evergreen Fund
Family and to the extent applicable their separate investment series
(collectively "Funds" and each individually a "Fund") designated by us which
are currently or hereafter underwritten by the Company, subject to the
following terms:
1. You will offer and sell Shares of the Funds at the public offering price
with respect to the applicable class described in the then current prospectus
and/or statement of additional information ("Prospectus") of the Fund whose
Shares you offer. You will offer Shares only on a forward pricing basis, i.e.
orders for the purchase, repurchase or exchange of Shares accepted by you
prior to the close of the New York Stock Exchange and placed with us the same
day prior to the close of our business day, 5:00 p.m. Eastern Time, shall be
confirmed at the closing price for that business day. You agree to place
orders for Shares only with us and at such closing price. In the event of a
difference between verbal and written price confirmation, the written
confirmations shall be considered final. Prices of a Fund's Shares are
computed by and are subject to withdrawal by each Fund in accordance with its
Prospectus. You agree to place orders with us only through your central order
department unless we accept your written Power of Attorney authorizing others
to place orders on your behalf. This Agreement on your part runs to us and the
respective Fund and is for the benefit and enforceable by each.
2. In the distribution and sale of Shares, you shall not have authority to act
as agent for the Fund, the Company or any other dealer in any respect in such
transactions. All orders are subject to acceptance by us and become effective
only upon confirmation by us. The Company reserves the unqualified right not
to accept any specific order for the purchase or exchange of Shares.
3. In addition to the distribution services provided by you with respect to a
Fund you may be asked to render administrative, account maintenance and other
services as necessary or desirable for shareholders of such Fund ("Shareholder
Services").
4. Notwithstanding anything else contained in this Agreement or in any other
agreement between us, the Company hereby acknowledges and agrees that any
information received from you concerning your customer in the course of this
arrangement is confidential. Except as requested by the customer or as
required by law and except for the respective Fund, its officers, directors,
employees, agents or service providers, the Company will not provide nor
permit access to such information by any person or entity, including any First
Union Corporation bank or First Union Brokerage Services, Inc.
5. So long as this Agreement remains in effect, we will pay you commissions on
sales of Shares of the Funds and service fees for Shareholder Services, in
accordance with the Schedule of Commissions and Service Fees ("Schedule")
attached hereto and made a part hereof, which Schedule may be modified from
time to time or rescinded by us, in either case without prior notice. You have
no vested right to receive any continuing service fees, other fees, or other
commissions which we may elect to pay to you from time to time on Shares
previously sold by you or by any person who is not a broker or dealer actually
engaged in the investment banking or securities business. You will receive
commissions in accordance with the attached Schedule on all purchase
transactions in shareholder accounts (excluding reinvestment of income
dividends and capital gains distributions) for which you are designated as
Dealer of Record except where we determine that any such purchase was made
with the proceeds of a redemption or repurchase of Shares of the same Fund or
another Fund, whether or not the transaction constitutes the exercise of the
exchange privilege. Commissions will be paid to you twice a month. You will
receive service fees for shareholder accounts for which you are designated
Dealer of Record as provided in the Schedule. You hereby represent that
receipt of such service fees by you will be disclosed to your customers.
You hereby authorize us to act as your agent in connection with all
transactions in shareholder accounts in which you are designated as Dealer of
Record. All designations of Dealer of Record and all authorizations of the
Company to act as your agent shall cease upon the termination of this
Agreement or upon the shareholder's instruction to transfer his or her account
to another Dealer of Record.
6. Payment for all Shares purchased from us shall be made to the Company and
shall be received by the Company within three business days after the
acceptance of your order or such shorter time as may be required by law. If
such payment is not received by us, we reserve the right, without prior
notice, forthwith to cancel the sale, or, at our option, to sell such Shares
back to the respective Fund in which case we may hold you responsible for any
loss, including loss of profit, suffered by us or by such Fund resulting from
your failure to make payment as aforesaid.
7. You agree to purchase Shares of the Funds only from us or from your
customers. If you purchase Shares from us, you agree that all such purchases
shall be made only to cover orders already received by you from your
customers, or for your own bonafide investment without a view to resale. If
you purchase Shares from your customers, you agree to pay such customers the
applicable net asset value per Share less any contingent deferred sales charge
("CDSC") that would be applicable under the Prospectus ("repurchase price").
8. You will sell Shares only (a) to your customers at the prices described in
paragraph 2 above; or (b) to us as agent for a Fund at the repurchase
price. In such a sale to us, you may act either as principal for your own
account or as agent for your customer. If you act as principal for your own
account in purchasing Shares for resale to us, you agree to pay your
customer not less nor more than the repurchase price which you receive from
us. If you act as agent for your customer in selling Shares to us, you
agree not to charge your customer more than a fair commission for handling
the transaction. You shall not withhold placing with us orders received
from your customers so as to profit yourself as a result of such
withholding.
10. We will not accept from you any conditional orders for Shares.
11. If any Shares sold to you under the terms of this Agreement are
repurchased by a Fund, or are tendered for redemption, within seven business
days after the date of our confirmation of the original purchase by you, it is
agreed that you shall forfeit your right to any commissions on such sales even
though the shareholder may be charged a CDSC by the Fund.
We will notify you of any such repurchase or redemption within the next
ten business days after the date on which the certificate or written request
for redemption is delivered to us or to the Fund, and you shall forthwith
refund to us the full amount of any commission you received on such sale. We
agree, in the event of any such repurchase or redemption, to refund to the
Fund any commission we retained on such sale and, upon receipt from you of the
commissions paid to you, to pay such commissions forthwith to the Fund.
12. Shares sold to you hereunder shall not be issued until payment has been
received by the Fund concerned. If transfer instructions are not received from
you within 15 days after our acceptance of your order, the Company reserves
the right to instruct the transfer agent for the Fund concerned to register
Shares sold to you in your name and notify you of such. You agree to hold
harmless and indemnify the Company, the Fund and its transfer agent for any
loss or expense resulting from such registration.
13. You agree to comply with any compliance standards that may be furnished to
you by us regarding when each class of Shares of a Fund may appropriately be
sold to particular customers.
14. No person is authorized to make any representations concerning Shares of a
Fund except those contained in the Prospectus and in sales literature issued
by us supplemental to such Prospectus. In purchasing Shares from us you shall
rely solely on the representations contained in the appropriate Prospectus and
in such sales literature. We will furnish additional copies of such
Prospectuses and sales literature and other releases and information issued by
us in reasonable quantities upon request. You agree that you will in all
respects duly conform with all laws and regulations applicable to the sales of
Shares of the Funds and will indemnify and hold harmless the Funds, their
directors and trustees and the Company from any damage or expenses on account
of any wrongful act by you, your representatives, agents or sub-agents in
connection with any orders or solicitation or orders of Shares of the Funds by
you, your representatives, agents or sub-agents.
15. Each party hereto represents that it is (1) a member of the National
Association of Securities Dealers, Inc., and agrees to notify the other should
it cease to be a member of such Association and agrees to the automatic
termination of this Agreement at that time or (2) excluded from the definition
of broker-dealer under the Securities Exchange Act of 1934. It is further
agreed that all rules or regulations of the Association now in effect or
hereafter adopted, including its Business Conduct Rule 2830(d), which are
binding upon underwriters and dealers in the distribution of the securities of
open-end investment companies, shall be deemed to be a part of this Agreement
to the same extent as if set forth in full herein.
16. You will not offer the Funds for sale in any State where they are not
qualified for sale under the blue sky laws and regulations of such State or
where you are not qualified to act as a dealer except for States in which they
are exempt from qualification.
17. This Agreement supersedes and cancels any prior agreement with respect to
the sales of Shares of any of the Funds underwritten by the Company. The
Agreement may be amended by us at any time upon written notice to you.
18. This amendment to the Agreement shall be effective on January 1, 1997 and
all sales hereunder are to be made, and title to Shares of the Funds shall
pass in The Commonwealth of Massachusetts. This Agreement shall be interpreted
in accordance with the laws of The Commonwealth of Massachusetts.
19. All communications to the Company should be sent to the above address. Any
notice to you shall be duly given if mailed or telegraphed to you at the
addressed specified by you.
20. Either part may terminate this Agreement at any time by written notice to
the other party.
- --------------------------- EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Dealer or Broker Name
- --------------------------- /s/ Robert A. Hering
Address
ROBERT A. HERING, President
<PAGE>
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC. ROBERT A. HERING
230 PARK AVENUE President
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
Dear Financial Professional:
This Schedule of Commissions and Service Fees ("Schedule") supersedes any
previous Schedules, is hereby made part of our dealer agreement ("Agreement")
with you effective January 1, 1997 and will remain in effect until modified or
rescinded by us. Capitalized terms used in this Schedule and not defined
herein have the same meaning as such terms have in the Agreement. All
commission rates and service fee rates set forth in this Schedule may be
modified by us from time to time without prior notice.
I. KEYSTONE FUNDS
KEYSTONE QUALITY BOND FUND (B-1) KEYSTONE MID-CAP GROWTH FUND (S-3)
KEYSTONE DIVERSIFIED BOND FUND (B-2) KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
KEYSTONE HIGH INCOME BOND FUND (B-4) KEYSTONE INTERNATIONAL FUND INC.
KEYSTONE BALANCED FUND (K-1) KEYSTONE PRECIOUS METALS HOLDINGS, INC.
KEYSTONE STRATEGIC GROWTH FUND (K-2) KEYSTONE TAX FREE FUND
KEYSTONE GROWTH AND INCOME FUND (S-1) (COLLECTIVELY "KEYSTONE FUNDS")
1. COMMISSIONS FOR THE KEYSTONE FUNDS (OTHER THAN KEYSTONE PRECIOUS METALS
HOLDINGS, INC.)
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Shares of such Keystone Funds rtds d such er tv amrr
rdKeystone Fundat the rate of 4.0% of the aggregate public offering price of
such Shares as described in the Fund's Prospectus ("Offering Price") when sold
in an eligible sale.
2. COMMISSIONS FOR KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Except as otherwise provided for in our Agreement, we will pay you
commissions on your sale of Shares of Keystone Precious Metals Holdings, Inc.
as the rate of the Offering Price when sold in an eligible sale as follows:
AMOUNT OF PURCHASE COMMISSION AMOUNT OF PURCHASE COMMISSION
Less than $100,000 4% $250,000-$499,999 1%
$100,000-$249,999 2% $500,000 and above 0.5%
3. SERVICE FEES
We will pay you service fees based on the aggregate net asset value of
Shares of the Keystone Funds (other than Keystone Precious Metals Holdings,
Inc.) you have sold on or after June 1, 1983 and of Keystone Precious Metals
Holdings, Inc. you have sold on or after November 19, 1984, which remain
issued and outstanding on the books of such Funds on the fifteenth day of the
third month of each calendar quarter (March 15, June 15, September 15 and
December 15, each hereinafter a "Service Fee Record Date") and which are
registered in the names of customers for whom you are dealer of record
("Eligible Shares"). Such service fees will be calculated quarterly at the
rate of 0.0625% per quarter of the aggregate net asset value of all such
Eligible Shares (approximately 0.25% annually) on the Service Fee Record Date;
provided, however, that in any calendar quarter in which service fees earned
by you on Eligible Shares of all Funds (except Keystone Liquid Trust Class A
Shares) are less than $50.00 in the aggregate, no service fees will be paid to
you nor will such amounts be carried over for payment in a future quarter.
Service fees will be payable within five business days after the Service Fee
Record Date. Service fees will only be paid by us to the extent that such
amounts have been paid to us by the Funds.
4. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
<TABLE>
<CAPTION>
II. KEYSTONE AMERICA FUNDS AND EVERGREEN FUNDS
KEYSTONE AMERICA FUNDS
<S> <C>
KEYSTONE GOVERNMENT SECURITIES FUND KEYSTONE OMEGA FUND
KEYSTONE STATE TAX FREE FUND KEYSTONE SMALL COMPANY GROWTH FUND - II
KEYSTONE STATE TAX FREE FUND - SERIES II KEYSTONE FUND FOR TOTAL RETURN
KEYSTONE STRATEGIC INCOME FUND KEYSTONE BALANCED FUND - II
KEYSTONE TAX FREE INCOME FUND (COLLECTIVELY "KEYSTONE EQUITY AND LONG TERM INCOME FUNDS")
KEYSTONE WORLD BOND FUND KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
KEYSTONE FUND OF THE AMERICAS KEYSTONE INTERMEDIATE TERM BOND FUND
KEYSTONE GLOBAL OPPORTUNITIES FUND (COLLECTIVELY "KEYSTONE INTERMEDIATE INCOME FUNDS")
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. KEYSTONE LIQUID TRUST
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND
EVERGREEN FUNDS
EVERGREEN U.S. GOVERNMENT FUND EVERGREEN AMERICAN RETIREMENT FUND
EVERGREEN HIGH GRADE TAX FREE FUND EVERGREEN FOUNDATION FUND
EVERGREEN FLORIDA MUNICIPAL BOND FUND EVERGREEN TAX STRATEGIC FOUNDATION FUND
EVERGREEN GEORGIA MUNICIPAL BOND FUND EVERGREEN UTILITY FUND
EVERGREEN NEW JERSEY MUNICIPAL BOND FUND EVERGREEN TOTAL RETURN FUND
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND EVERGREEN SMALL CAP EQUITY INCOME FUND
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND (COLLECTIVELY "EVERGREEN EQUITY AND LONG TERM INCOME FUNDS")
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND EVERGREEN MONEY MARKET FUND
EVERGREEN FUND EVERGREEN TAX EXEMPT MONEY MARKET FUND
EVERGREEN U.S. REAL ESTATE EQUITY FUND EVERGREEN TREASURY MONEY MARKET FUND
EVERGREEN LIMITED MARKET FUND EVERGREEN PENNSYLVANIA TAX FREE MONEY MARKET FUND
EVERGREEN AGGRESSIVE GROWTH FUND (COLLECTIVELY "EVERGREEN MONEY MARKET FUNDS")
EVERGREEN INTERNATIONAL EQUITY FUND EVERGREEN SHORT-INTERMEDIATE BOND FUND
EVERGREEN GLOBAL LEADERS FUND EVERGREEN INTERMEDIATE-TERM BOND FUND
EVERGREEN EMERGING MARKETS FUND EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
EVERGREEN GLOBAL REAL ESTATE EQUITY FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND
EVERGREEN BALANCED FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND -- CALIFORNIA
EVERGREEN GROWTH & INCOME FUND (COLLECTIVELY "EVERGREEN INTERMEDIATE INCOME AND
EVERGREEN VALUE FUND MONEY MARKET FUNDS")
</TABLE>
A. CLASS A SHARES
1. COMMISSIONS
Except as otherwise provided in our Agreement, in paragraph 2 below or in
connection with certain types of purchases at net asset value which are
described in the Prospectuses for the Keystone America Funds and the Evergreen
Funds, we will pay you commissions on your sales of Shares of such Funds in
accordance with the following sales charge schedules* on sales where we
receive a commission from the shareholder:
KEYSTONE AMERICA AND EVERGREEN EQUITY AND LONG TERM INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 4.75% 4.25%
$50,000-$99,999 4.50% 4.25%
$100,000-$249,999 3.75% 3.25%
$250,000-$499,999 2.50% 2.00%
$500,000-$999,999 2.00% 1.75%
Over $1,000,000 None See paragraph 2
KEYSTONE AMERICA AND EVERGREEN INTERMEDIATE INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 3.25% 2.75%
$50,000-$99,999 3.00% 2.75%
$100,000-$249,999 2.50% 2.25%
$250,000-$499,999 2.00% 1.75%
$500,000-$999,999 1.50% 1.25%
Over $1,000,000 None See paragraph 2
KEYSTONE LIQUID TRUST AND EVERGREEN MONEY MARKET FUNDS
No sales charge for any amount of purchase.
2. COMMISSIONS FOR CERTAIN TYPES OF PURCHASES
With respect to (a) purchases of Class A Shares in the amount of $1 million
or more and/or (b) purchases of Class A Shares made by a corporate or certain
other qualified retirement plan or a non-qualified deferred compensation plan
or a Title I tax sheltered annuity or TSA Plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan"), (each such
purchase a "NAV Purchase"), we will pay you commissions as follows:
<TABLE>
<CAPTION>
a. Purchases described in 2(a) above
AMOUNT OF COMMISSION AS A PERCENTAGE
PURCHASE OF OFFERING PRICE
<S> <C>
$1,000,000-$2,999,999 1.00% of the first $2,999,999, plus
$3,000,000-$4,999,999 0.50% of the next $2,000,000, plus
$5,000,000 0.25% of amounts equal to or over $5,000,000
b. Purchases described in 2(b) above .50% of amount of purchase (subject to recapture
upon early redemption)
</TABLE>
* These sales charge schedules apply to purchases made at one time or pursuant
to Rights of Accumulation or Letters of Intent. Any purchase which is made
pursuant to Rights of Accumulation or Letter of Intent is subject to the
terms described in the Prospectus(es) for the Fund(s) whose Shares are being
purchased.
3. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of up to the entire sales charge to certain
dealers. Such incentives may, at our discretion, be limited to dealers who
allow their individual selling representatives to participate in such
additional commissions.
4. SERVICE FEES FOR EVERGREEN FUNDS (OTHER THAN EVERGREEN MONEY MARKET FUNDS)
AND KEYSTONE AMERICA FUNDS (OTHER THAN KEYSTONE STATE TAX FREE FUND,
KEYSTONE STATE TAX FREE FUND - SERIES II, KEYSTONE CAPITAL PRESERVATION AND
INCOME FUND AND KEYSTONE LIQUID TRUST)
a. Keystone America Funds Only. Until March 31, 1997, we will pay you
service fees based on the aggregate net asset value of Shares of such Funds
you have sold which remain issued and outstanding on the books of such Funds
on the fifteenth day of the third month of each calendar quarter (March 15,
June 15, September 15 and December 15, each hereinafter a "Service Fee Record
Date") and which are registered in the names of customers for whom you are
dealer of record ("Eligible Shares"). Such service fees will be calculated
quarterly at the rate of 0.0625% per quarter of the aggregate net asset value
of all such Eligible Shares (approximately 0.25% annually) on the Service Fee
Record Date; provided, however, that in any calendar quarter in which total
service fees earned by you on Eligible Shares of all Keystone Funds (except
Keystone Liquid Trust Class A Shares) are less than $50.00 in the aggregate,
no service fees will be paid to you nor will such amounts be carried over for
payment in a future quarter. Service fees will be paid within five days after
the Service Fee Record Date. Service fees will only be paid by us to the
extent that such amounts have been paid to us by the Funds.
b. Evergreen Funds and Keystone America Funds (after March 31, 1997). We
will pay you service fees based on the average daily net asset value of Shares
of such Funds you have sold which are issued and outstanding on the books of
such Funds during each calendar quarter and which are registered in the names
of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0625% per quarter
of the daily average net asset value of all such Eligible Shares
(approximately 0.25% annually) during such quarter; provided, however, that in
any calendar quarter in which total service fees earned by you on Eligible
Shares of all Funds (except Keystone Liquid Trust Class A Shares) are less
than $50.00 in the aggregate, no service fees will be paid to you nor will
such amounts be carried over for payment in a future quarter. Service fees
will be paid by the twentieth day of the month before the end of the
respective quarter. Service fees will only be paid by us to the extent that
such amounts have been paid to us by the Funds.
5. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees based on the aggregate
net asset value of Shares of such Funds you have sold which remain issued and
outstanding on the books of the Funds on the fifteenth day of the third month
of each calendar quarter (March 15, June 15, September 15 and December 15,
each hereinafter a "Service Fee Record Date") and which are registered in the
names of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0375% per quarter
of the aggregate net asset value of all such Eligible Shares (approximately
0.15% annually) on the Service Fee Record Date; provided, however, that in any
calendar quarter in which total service fees earned by you on Eligible Shares
of all Funds (except Keystone Liquid Trust Class A Shares) are less than
$50.00 in the aggregate, no service fees will be paid to you nor will such
amounts be carried over for payment in a future quarter. Service fees will be
paid within five days after the Service Fee Record Date. Service fees will
only be paid by us to the extent that such amounts have been paid to us by the
Funds.
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that the quarterly rate will be 0.0375%
(approximately 0.15% annually).
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(b) above on Shares sold on or after July 1, 1997.
6. SERVICE FEES FOR KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(a) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
7. SERVICE FEES FOR KEYSTONE LIQUID TRUST
We will pay you service fees based on the aggregate net asset value of all
Shares of such Fund you have sold which remain issued and outstanding on the
books on the Fund on the fifteenth day of the third month of each calendar
quarter (March 15, June 15, September 15 and December 15, each hereinafter a
"Service Fee Record Date") and which are registered in the names of customers
for whom you are dealer of record ("Eligible Shares"). Such service fees will
be calculated at the rates set forth below and based on the aggregate net
asset value of all such Eligible Shares on the Service Fee Record Date;
provided, however, that no such service fees will be paid to you for any
quarter if the aggregate net asset value of such Eligible Shares on the last
business day of the quarter is less than $2 million; and provided further,
however, that service fees will only be paid to us to the extent that such
amounts have been paid to us by the Fund. Service fees will be paid within 5
days after the Service Fee Record Date. The quarterly rates at which such
service fees are payable and the net asset value to which such rates will be
applied are set forth below:
ANNUAL QUARTERLY AGGREGATE NET ASSET
RATE PAYMENT RATE VALUE OF SHARES
0.00000% 0.00000% of the first $1,999,999, plus
0.15000% 0.03750% of the next $8,000,000, plus
0.20000% 0.05000% of the next $15,000,000, plus
0.25000% 0.06250% of the next $25,000,000, plus
0.30000% 0.07500% of amounts over $50,000,000
8. SERVICE FEES FOR EVERGREEN MONEY MARKET FUNDS
We will pay you service fees calculated as provided in section II (A)(4)(b)
except that the quarterly rate will be 0.075% (approximately 0.30% annually.)
<PAGE>
B. CLASS B SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Class B Shares of the Keystone America Funds and the
Evergreen Funds at the rate of 4.00% of the aggregate Offering Price of such
Shares, when sold in an eligible sale.
2. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions, to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
3. SERVICE FEES FOR EVERGREEN FUNDS AND KEYSTONE AMERICA FUNDS (OTHER THAN
KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE FUND - SERIES II)
a. Keystone America Funds - Until March 31, 1997, we will pay you service
fees calculated as provided in section II (A)(4)(a) above.
b. Evergreen Funds and Keystone America Funds (after March 31. 1997). We
will pay you service fees calculated as provided in section II (A)(4)(b)
above.
4. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(a) above.
b. After March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(b) above.
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(c) above.
C. CLASS C SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as provided in our Agreement, we will pay you initial commissions on
your sales of Class C Shares of the Keystone America and the Evergreen Funds
at the rate of 0.75% of the aggregate Offering Price of such Shares sold in
each eligible sale.
We will also pay you commissions based on the average daily net asset value
of Shares of such Funds you have sold which have been on the books of the
Funds for a minimum of 14 months from the date of purchase (plus any
reinvested distributions attributable to such Shares), which have been issued
and outstanding on the books of such Funds during the calendar quarter and
which are registered in the names of customers for whom you are dealer of
record ("Eligible Shares"). Such commissions will be calculated quarterly at
the rate of 0.1875% per quarter of the average daily net asset value of all
such Eligible Shares (approximately 0.75% annually) during such quarter. Such
commissions will be paid by the twentieth day of the month before the end of
the respective quarter. Such commissions will continue to be paid to you
quarterly so long as aggregate payments do not exceed applicable NASD
limitations and other governing regulations.
2. SERVICE FEES
We will pay you a full year's service fee in advance on your sales of Class
C Shares of such Funds at the rate of 0.25% of the aggregate net asset value
of such Shares.
We will pay you service fees based on the average daily net asset value of
Shares of such Funds you have sold which have been on the books of the Funds
for a minimum of 14 months from the date of purchase (plus any reinvested
distributions attributable to such Shares), which have been issued and
outstanding during the respective quarter and which are registered in the
names of customers for whom you are the dealer of record ("Eligible Shares").
Such service fees will be calculated quarterly at the rate of 0.0625% per
quarter of the average daily net asset value of all such Eligible Shares
(approximately 0.25% annually); provided, however, that in any calendar
quarter in which total service fees earned by you on Eligible Shares of Funds
(except Keystone Liquid Trust Class A Shares) are less than $50.00 in the
aggregate, no service fees will be paid to you nor will such amounts be
carried over for payment in a future quarter. Service fees will be paid by the
twentieth day of the month before the end of the respective quarter. Service
fees other than those paid in advance will only be paid by us to the extent
that such amounts have been paid to us by the Funds.
April 11, 1997
Keystone Strategic Income Fund
200 Berkeley Street
Boston, Massachusetts 02116
Keystone World Bond Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Keystone World Bond Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain tax consequences of the
proposed acquisition of assets of Keystone World Bond Fund ("Selling Fund"), a
portfolio of Keystone World Bond Fund, a Massachusetts business trust, by
Keystone Strategic Income Fund ("Acquiring Fund"), a Massachusetts business
trust, in exchange for voting shares of Acquiring Fund (the "Reorganization").
In rendering our opinion, we have reviewed and relied upon the form of
Agreement and Plan of Reorganization (the "Reorganization Agreement") between
Acquiring Fund and Keystone World Bond Fund on behalf of Selling Fund which is
enclosed with the related draft Prospectus/Proxy Statement dated April 11, 1997.
We have relied, without independent verification, upon the factual statements
made therein, and assume that there will be no change in material facts
disclosed therein between the date of this letter and the date of closing of the
Reorganization. We further assume that the Reorganization will be carried out in
accordance with the Reorganization Agreement. We have also relied upon the
following representations, each of which has been made to us by officers of
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 2
Acquiring Fund or of Keystone World Bond Fund on behalf of Selling
Fund:
A. The Reorganization will be consummated substantially as described in
the Reorganization Agreement.
B. Acquiring Fund will acquire from Selling Fund at least 90% of the
fair market value of the net assets and at least 70% of the fair market value of
the gross assets held by Selling Fund immediately prior to the Reorganization.
For purposes of this representation, assets of Selling Fund used to pay
reorganization expenses, cash retained to pay liabilities, and redemptions and
distributions (except for regular and normal distributions) made by Selling Fund
immediately preceding the transfer which are part of the plan of reorganization,
will be considered as assets held by Selling Fund immediately prior to the
transfer.
C. To the best of the knowledge of management of Selling Fund, there is
no plan or intention on the part of the shareholders of Selling Fund to sell,
exchange, or otherwise dispose of a number of Acquiring Fund shares received in
the Reorganization that would reduce the former Selling Fund shareholders'
ownership of Acquiring Fund shares to a number of shares having a value, as of
the date of the Reorganization (the "Closing Date"), of less than 50 percent of
the value of all of the formerly outstanding shares of Selling Fund as of the
same date. For purposes of this representation, Selling Fund shares exchanged
for cash or other property will be treated as outstanding Selling Fund shares on
the Closing Date. There are no dissenters' rights in the Reorganization, and no
cash will be exchanged for Selling Fund shares in lieu of fractional shares of
Acquiring Fund. Moreover, shares of Selling Fund and shares of Acquiring Fund
held by Selling Fund shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Reorganization will be considered in making this
representation.
D. Selling Fund has not redeemed and will not redeem the shares of any
of its shareholders in connection with the Reorganization except to the extent
necessary to comply with its legal obligation to redeem its shares.
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 3
E. The management of Acquiring Fund has no plan or intention to redeem
or reacquire any of the Acquiring Fund shares to be received by Selling Fund
shareholders in connection with the Reorganization, except to the extent
necessary to comply with its legal obligation to redeem its shares.
F. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Selling Fund which will be acquired by Acquiring
Fund in the Reorganization, except for dispositions made in the ordinary course
of business, and to the extent necessary to enable Acquiring Fund to comply with
its legal obligation to redeem its shares.
G. Following the Reorganization, Acquiring Fund will continue the
historic business of Selling Fund in a substantially unchanged manner as part of
the regulated investment company business of Acquiring Fund, or will use a
significant portion of Selling Fund's historic business assets in a business.
H. There is no intercorporate indebtedness between Acquiring Fund and
Selling Fund.
I. Acquiring Fund does not own, directly or indirectly, and has not
owned in the last five years, directly or indirectly, any shares of Selling
Fund. Acquiring Fund will not acquire any shares of Selling Fund prior to the
Closing Date.
J. Acquiring Fund will not make any payment of cash or of property
other than shares to Selling Fund or to any shareholder of Selling Fund in
connection with the Reorganization.
K. Pursuant to the Reorganization Agreement, the shareholders of
Selling Fund will receive solely Acquiring Fund voting shares in exchange for
their voting shares of Selling Fund.
L. The fair market value of the Acquiring Fund shares to be received by
the Selling Fund shareholders will be approximately equal to the fair market
value of the Selling Fund shares surrendered in exchange therefor.
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 4
M. Subsequent to the transfer of Selling Fund's assets to Acquiring
Fund pursuant to the Reorganization Agreement, Selling Fund will distribute the
shares of Acquiring Fund, together with other assets it may have, in final
liquidation as expeditiously as possible.
N. Selling Fund is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of ss. 368(a)(3)(A) of the Internal Revenue
Code of 1986, as amended (the "Code").
O. Selling Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
P. Acquiring Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
Q. The sum of the liabilities of Selling Fund to be assumed by
Acquiring Fund and the expenses of the Reorganization does not exceed twenty
percent of the fair market value of the assets of Selling Fund.
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 5
R. The foregoing representations are true on the date of this letter
and will be true on the date of closing of the Reorganization.
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, it is our opinion that for federal
income tax purposes:
1. The acquisition by Acquiring Fund of substantially all of the assets
of Selling Fund solely in exchange for voting shares of Acquiring Fund and
assumption of certain specified liabilities of Selling Fund followed by the
distribution by Selling Fund of said Acquiring Fund shares to the shareholders
of Selling Fund in exchange for their Selling Fund shares will constitute a
reorganization within the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring
Fund and Selling Fund will each be "a party to a reorganization" within the
meaning of ss. 368(b) of the Code.
2. No gain or loss will be recognized to Selling Fund upon the transfer
of substantially all of its assets to Acquiring Fund solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of certain
specified liabilities of Selling Fund, or upon the distribution of such
Acquiring Fund voting shares to the shareholders of Selling Fund in exchange for
all of their Selling Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Selling Fund (including any cash retained initially by
Selling Fund to pay liabilities but later transferred) solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of any liabilities
of Selling Fund.
4. The basis of the assets of Selling Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Selling Fund
immediately prior to the transfer, and the holding period of the assets of
Selling Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Selling Fund.
5. The shareholders of Selling Fund will recognize no gain or loss upon
the exchange of all of their Selling Fund shares solely for Acquiring Fund
voting shares. Gain, if any, will be realized by Selling Fund shareholders who
in exchange for their Selling Fund
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 6
shares receive other property or money in addition to Acquiring Fund shares, and
will be recognized, but not in excess of the amount of cash and the value of
such other property received. If the exchange has the effect of the distribution
of a dividend, then the amount of gain recognized that is not in excess of the
ratable share of undistributed earnings and profits of Selling Fund will be
treated as a dividend.
6. The basis of the Acquiring Fund voting shares to be received by the
Selling Fund shareholders will be the same as the basis of the Selling Fund
shares surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Selling Fund shareholders will include the period during which
the Selling Fund shares surrendered in exchange therefor were held, provided the
Selling Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in the
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP
April 11, 1997
Keystone Strategic Income Fund
200 Berkeley Street
Boston, Massachusetts 02116
Keystone World Bond Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: ACQUISITION OF ASSETS OF KEYSTONE WORLD BOND FUND
Ladies and Gentlemen:
You have asked for our opinion as to certain tax consequences of the
proposed acquisition of assets of Keystone World Bond Fund ("Selling Fund"), a
portfolio of Keystone World Bond Fund, a Massachusetts business trust, by
Keystone Strategic Income Fund ("Acquiring Fund"), a Massachusetts business
trust, in exchange for voting shares of Acquiring Fund (the "Reorganization").
In rendering our opinion, we have reviewed and relied upon the form of
Agreement and Plan of Reorganization (the "Reorganization Agreement") between
Acquiring Fund and Keystone World Bond Fund on behalf of Selling Fund which is
enclosed with the related draft Prospectus/Proxy Statement dated April 11, 1997.
We have relied, without independent verification, upon the factual statements
made therein, and assume that there will be no change in material facts
disclosed therein between the date of this letter and the date of closing of the
Reorganization. We further assume that the Reorganization will be carried out in
accordance with the Reorganization Agreement. We have also relied upon the
following representations, each of which has been made to us by officers of
Acquiring Fund or of Keystone World Bond Fund on behalf of Selling Fund:
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 2
A. The Reorganization will be consummated substantially as described in
the Reorganization Agreement.
B. Acquiring Fund will acquire from Selling Fund at least 90% of the
fair market value of the net assets and at least 70% of the fair market value of
the gross assets held by Selling Fund immediately prior to the Reorganization.
For purposes of this representation, assets of Selling Fund used to pay
reorganization expenses, cash retained to pay liabilities, and redemptions and
distributions (except for regular and normal distributions) made by Selling Fund
immediately preceding the transfer which are part of the plan of reorganization,
will be considered as assets held by Selling Fund immediately prior to the
transfer.
C. To the best of the knowledge of management of Selling Fund, there is
no plan or intention on the part of the shareholders of Selling Fund to sell,
exchange, or otherwise dispose of a number of Acquiring Fund shares received in
the Reorganization that would reduce the former Selling Fund shareholders'
ownership of Acquiring Fund shares to a number of shares having a value, as of
the date of the Reorganization (the "Closing Date"), of less than 50 percent of
the value of all of the formerly outstanding shares of Selling Fund as of the
same date. For purposes of this representation, Selling Fund shares exchanged
for cash or other property will be treated as outstanding Selling Fund shares on
the Closing Date. There are no dissenters' rights in the Reorganization, and no
cash will be exchanged for Selling Fund shares in lieu of fractional shares of
Acquiring Fund. Moreover, shares of Selling Fund and shares of Acquiring Fund
held by Selling Fund shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Reorganization will be considered in making this
representation.
D. Selling Fund has not redeemed and will not redeem the shares of any
of its shareholders in connection with the Reorganization except to the extent
necessary to comply with its legal obligation to redeem its shares.
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 3
E. The management of Acquiring Fund has no plan or intention to redeem
or reacquire any of the Acquiring Fund shares to be received by Selling Fund
shareholders in connection with the Reorganization, except to the extent
necessary to comply with its legal obligation to redeem its shares.
F. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Selling Fund which will be acquired by Acquiring
Fund in the Reorganization, except for dispositions made in the ordinary course
of business, and to the extent necessary to enable Acquiring Fund to comply with
its legal obligation to redeem its shares.
G. Following the Reorganization, Acquiring Fund will continue the
historic business of Selling Fund in a substantially unchanged manner as part of
the regulated investment company business of Acquiring Fund, or will use a
significant portion of Selling Fund's historic business assets in a business.
H. There is no intercorporate indebtedness between Acquiring Fund and
Selling Fund.
I. Acquiring Fund does not own, directly or indirectly, and has not
owned in the last five years, directly or indirectly, any shares of Selling
Fund. Acquiring Fund will not acquire any shares of Selling Fund prior to the
Closing Date.
J. Acquiring Fund will not make any payment of cash or of property
other than shares to Selling Fund or to any shareholder of Selling Fund in
connection with the Reorganization.
K. Pursuant to the Reorganization Agreement, the shareholders of
Selling Fund will receive solely Acquiring Fund voting shares in exchange for
their voting shares of Selling Fund.
L. The fair market value of the Acquiring Fund shares to be received by
the Selling Fund shareholders will be approximately equal to the fair market
value of the Selling Fund shares surrendered in exchange therefor.
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 4
M. Subsequent to the transfer of Selling Fund's assets to Acquiring
Fund pursuant to the Reorganization Agreement, Selling Fund will distribute the
shares of Acquiring Fund, together with other assets it may have, in final
liquidation as expeditiously as possible.
N. Selling Fund is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of ss. 368(a)(3)(A) of the Internal Revenue
Code of 1986, as amended (the "Code").
O. Selling Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
P. Acquiring Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
Q. The sum of the liabilities of Selling Fund to be assumed by
Acquiring Fund and the expenses of the Reorganization does not exceed twenty
percent of the fair market value of the assets of Selling Fund.
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 5
R. The foregoing representations are true on the date of this letter
and will be true on the date of closing of the Reorganization.
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, it is our opinion that for federal
income tax purposes:
1. The acquisition by Acquiring Fund of substantially all of the assets
of Selling Fund solely in exchange for voting shares of Acquiring Fund and
assumption of certain specified liabilities of Selling Fund followed by the
distribution by Selling Fund of said Acquiring Fund shares to the shareholders
of Selling Fund in exchange for their Selling Fund shares will constitute a
reorganization within the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring
Fund and Selling Fund will each be "a party to a reorganization" within the
meaning of ss. 368(b) of the Code.
2. No gain or loss will be recognized to Selling Fund upon the transfer
of substantially all of its assets to Acquiring Fund solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of certain
specified liabilities of Selling Fund, or upon the distribution of such
Acquiring Fund voting shares to the shareholders of Selling Fund in exchange for
all of their Selling Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Selling Fund (including any cash retained initially by
Selling Fund to pay liabilities but later transferred) solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of any liabilities
of Selling Fund.
4. The basis of the assets of Selling Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Selling Fund
immediately prior to the transfer, and the holding period of the assets of
Selling Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Selling Fund.
5. The shareholders of Selling Fund will recognize no gain or loss upon
the exchange of all of their Selling Fund shares solely for Acquiring Fund
voting shares. Gain, if any, will be realized by Selling Fund shareholders who
in exchange for their Selling Fund
<PAGE>
Keystone Strategic Income Fund
Keystone World Bond Fund
April 11, 1997
Page 6
shares receive other property or money in addition to Acquiring Fund shares, and
will be recognized, but not in excess of the amount of cash and the value of
such other property received. If the exchange has the effect of the distribution
of a dividend, then the amount of gain recognized that is not in excess of the
ratable share of undistributed earnings and profits of Selling Fund will be
treated as a dividend.
6. The basis of the Acquiring Fund voting shares to be received by the
Selling Fund shareholders will be the same as the basis of the Selling Fund
shares surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Selling Fund shareholders will include the period during which
the Selling Fund shares surrendered in exchange therefor were held, provided the
Selling Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in the
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Strategic Income Fund
We consent to the use of our reports incorporated herein by reference and
to the references to our firm under the caption "FINANCIAL STATEMENTS AND
EXPERTS" in the prospectus/proxy statement.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 14, 1997
KEYSTONE WORLD BOND FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 14, 1997
The undersigned, revoking all Proxies heretofore given, hereby appoints
[Name], [Name], and [Name] or any of them as Proxies of the undersigned, with
full power of substitution, to vote on behalf of the undersigned all shares of
Keystone World Bond Fund that the undersigned is entitled to vote at the special
meeting of shareholders of Keystone World Bond Fund to be held at 3:00 p.m. on
Monday, July 14, 1997, at the offices of Keystone Investment Management Company,
26th Floor, 200 Berkeley Street, Boston, Massachusetts 02116 and at any
adjournments thereof, as fully as the undersigned would be entitled to vote if
personally present, as follows:
To approve an Agreement and Plan of Reorganization whereby Keystone
Strategic Income Fund will (i) acquire all of the assets of Keystone World Bond
Fund in exchange for Shares of Keystone Strategic Income Fund; and (ii) assume
_______________ liabilities of Keystone World Bond Fund, substantially as
described in the accompanying Prospectus/Proxy Statement.
____________ FOR ____________ AGAINST ____________ ABSTAIN
19465
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF KEYSTONE WORLD BOND FUND.
THE BOARD OF TRUSTEES OF KEYSTONE WORLD BOND FUND RECOMMENDS A VOTE FOR THE
PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL IF
NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY
ADJOURNMENTS THEREOF.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 199_
Signature(s):
Signature (of joint owner,
if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign full corporate name and
your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
