<PAGE>
KEYSTONE GOVERNMENT
SECURITIES FUND
PROSPECTUS NOVEMBER 28, 1994
AS SUPPLEMENTED JUNE 1, 1995
Keystone Government Securities Fund (formerly named Keystone America
Government Securities Fund) (the "Fund") is a mutual fund that seeks the highest
possible level of current income, consistent with the safety of principal and
maintenance of liquidity, by investing at least 65% of its assets in securities
issued by or guaranteed as to principal and interest by the full faith and
credit of the United States ("U.S.") government. The Fund may also invest up to
35% of its assets in securities issued by U.S. government agencies or
instrumentalities that are not guaranteed as to principal and interest by the
U.S. government and in certain money market instruments, including commercial
paper, bank obligations and corporate obligations. The Fund's net asset value
per share will fluctuate in response to changes in the market value of its
portfolio securities.
Generally, the Fund offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in the Fund's fee
table, "How to Buy Shares," "Alternative Sales Options," "Contingent Deferred
Sales Charge and Waiver of Sales Charges," "Distribution Plans," and "Fund
Shares."
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
KEYSTONE GOVERNMENT SECURITIES FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
Additional information about the Fund, including information about securities
ratings, is contained in a statement of additional information dated November
28, 1994, as supplemented June 1, 1995, which has been filed with the Securities
and Exchange Commission and is incorporated by reference into this prospectus.
For a free copy, or for other information about the Fund, write to the address
or call the telephone number listed below.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 5
Investment Objective and Policies 5
Investment Restrictions 7
Risk Factors 7
Pricing Shares 8
Dividends and Taxes 9
Fund Management and Expenses 10
How to Buy Shares 12
Alternative Sales Options 13
Contingent Deferred Sales Charge and Waiver of Sales Charges 17
Distribution Plans 18
How to Redeem Shares 19
Shareholder Services 21
Performance Data 23
Fund Shares 23
Additional Information 24
Additional Investment Information (i)
Exhibit A A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FEE TABLE
KEYSTONE GOVERNMENT SECURITIES FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plans"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
--------- --------- ---------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> .................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES\<F6>
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.25% 0.25% 0.25%
12b-1 Fees ........................................ 0.25% 1.00%<F7> 1.00%<F7>
Other Expenses .................................... 0.50% 0.50% 0.50%
---- ---- ----
Total Fund Operating Expenses ..................... 1.00% 1.75% 1.75%
==== ==== ====
EXAMPLES<F8> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $57.00 $78.00 $100.00 $164.00
Class B ................................................................... $68.00 $85.00 $115.00 N/A
Class C ................................................................... $28.00 $55.00 $ 95.00 $206.00
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $57.00 $78.00 $100.00 $164.00
Class B ................................................................... $18.00 $55.00 $ 95.00 N/A
Class C ................................................................... $18.00 $55.00 $ 95.00 $206.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
<FN>
<F1>Class B shares purchased on or after June 1, 1995 convert tax free to Class
A shares after eight years. See "Class B Shares" for more information.
<F2>Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
<F3>The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Class A Shares."
<F4>Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge at the time of purchase, but may be subject to a
contingent deferred sales charge. See the "Class A Shares" and "Contingent
Deferred Sales Charge and Waiver of Sales Charges" sections of this
prospectus for an explanation of the charge.
<F5>There is no fee for exchange orders received by the Fund directly from a
shareholder over the Keystone Automated Response Line ("KARL"). (For a
description of KARL, see "Shareholder Services".)
<F6>Expense ratios are for the Fund's fiscal year ended July 31, 1994 after
giving effect to the reimbursement by Keystone Investment Management Company
("Keystone") of expenses in accordance with certain voluntary expense
limits. Absent voluntary expense limitations, expense ratios for the Fund's
Class A, B and C shares would have been 1.35%, 2.12% and 2.12%,
respectively.
<F7>Long term shareholders may pay more than the economic equivalent of the
maximum front end sales charges permitted by the National Association of
Securities Dealers, Inc. ("NASD").
<F8>The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE GOVERNMENT SECURITIES FUND -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
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 included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 13, 1987
(COMMENCEMENT
YEAR ENDED JULY 31, OF OPERATIONS)
---------------------------------------------------------------------------------------- TO JULY 31,
1994<F6> 1993 1992 1991 1990 1989 1988 1987
------- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD ....... $10.450 $10.580 $10.180 $10.010 $10.110 $ 9.740 $10.220 $10.000
Income from
investment
operations
Investment
income -- net .. 0.571 0.683 0.682 0.756 0.760 0.753 0.748 0.140
Realized gains
(losses) on
investments --
net .......... (0.630) 0.461 0.549 0.170 (0.104) 0.352 (0.400) 0.220
------ ----- ----- ----- ------ ----- ------ -----
Total income
(deficit) from
investment
operations ... (0.059) 1.144 1.231 0.926 0.656 1.105 0.348 0.360
------ ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from
investment
income -- net (0.571) (0.683) (0.689) (0.756) (0.756) (0.735) (0.828) (0.140)
Distributions in
excess of
investment
income -- net<F1> (0.023) (0.061) (0.042) 0 0 0 0 0
Tax basis return
of capital ..... (0.057) 0 0 0 0 0 0 0
Distributions
from realized
gains on
investments --
net .......... 0 (0.530) (0.100) 0 0 0 0 0
Distributions in
excess of
realized gains
on investments
-- net<F1> (0.260) 0 0 0 0 0 0 0
------ ----- ----- ----- ----- ----- ----- -----
Total
distributions . (0.911) (1.274) (0.831) (0.756) (0.756) (0.735) (0.828) (0.140)
------ ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE,
END OF PERIOD $ 9.480 $10.450 $10.580 $10.180 $10.010 $10.110 $ 9.740 $10.220
======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN<F2> (0.71%) 11.51% 12.45% 9.62% 6.84% 11.89% 3.55% 3.60%<F4>
RATIOS/SUPPLEMENTAL
DATA
Ratios to
average net
assets:
Operating and
management
expenses<F3> 1.00% 1.41% 1.93% 1.92% 1.91% 1.90% 1.30% 1.00%<F5>
Investment
income --
net ........ 5.97% 6.49% 6.44% 7.46% 7.61% 7.68% 7.29% 5.74%<F5>
Portfolio
turnover rate . 230% 189% 93% 72% 58% 171% 206% 60%
Net assets, end
of period
(thousands) ... $38,541 $50,594 $47,892 $55,597 $61,744 $68,493 $73,757 $ 3,479
<FN>
<F1>Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments -- net." From July 31, 1990 until
the date of adoption of the Statement of Position, distribution amounts
exceeding book basis net investment income were charged to paid-in capital.
<F2>Excluding applicable sales charges.
<F3>Figures are net of expense reimbursement by Keystone in connection with the
voluntary expense limitation. The "Ratio of operating and management
expenses to average net assets" would have been 1.35% and 1.73% for the
years ended July 31, 1994 and 1993, respectively.
<F4>Total return reflects investment activity from inception of investment
operations on April 14, 1987.
<F5>Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
<F6>Calculation based on average shares outstanding.
</FN>
</TABLE>
FINANCIAL HIGHLIGHTS
KEYSTONE GOVERNMENT SECURITIES FUND
CLASS B SHARES AND CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
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 is taken from the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
------------------------------------------- -------------------------------------------
FEBRUARY 1, 1993 FEBRUARY 1, 1993
(DATE OF INITIAL (DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO YEAR ENDED PUBLIC OFFERING) TO
JULY 31, 1994<F6> JULY 31, 1993 JULY 31, 1994<F6> JULY 31, 1993
---------------- ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD .................. $10.450 $10.320 $10.460 $10.320
Income from investment operations
Investment income -- net .............. 0.494 0.254 0.495 0.247
Realized gain (losses) on investments --
net .................................. (0.628) 0.223 (0.629) 0.240
------ ----- ------ -----
Total income (deficit) from investment
operations ........................... (0.134) 0.477 (0.134) 0.487
------ ----- ------ -----
LESS DISTRIBUTIONS
Dividends from investment income -- net (0.494) (0.254) (0.495) (0.247)
Distributions in excess of investment
income -- net<F1> ................... (0.025) (0.093) (0.024) (0.001)
Tax basis return of capital ........... (0.057) 0 (0.057) 0
Distributions in excess of realized
gains (losses) on investments
-- net <F1>........................... (0.260) 0 (0.260) 0
------ ----- ------ -----
Total distributions (0.836) (0.347) (0.836) (0.347)
------ ----- ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.480 $10.450 $ 9.490 $10.460
======= ======= ======= =======
TOTAL RETURN <F2>...................... (1.44%) 4.69% (1.44%) 4.79%<F4>
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating and management expenses<F3> 1.75% 1.72% 1.75% 1.71%<F5>
Investment income -- net ............ 5.32% 5.46% 5.32% 5.31%
Portfolio turnover rate .............. 230% 189% 230% 189%
Net assets, end of period (thousands) . $15,386 $ 9,223 $17,505 $13,286
<FN>
<F1>Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments -- net." For the fiscal year ended
July 31, 1993, distributions in excess of book basis net income were charged
to paid-in capital.
<F2>Excluding applicable sales charges.
<F3>Figures are net of expense reimbursement by Keystone in connection with the
voluntary expense limitation. The "Ratio of operating and management
expenses to average net assets" would have been 2.12% for the year ended
July 31, 1994 for both Class B and Class C, and 2.28% for Class B and 2.17%
for Class C, for the period ended February 1, 1993 (Date of Initial Public
Offering) to July 31, 1993.
<F4>Annualized total return for the period February 1, 1993 (Date of Initial
Public Offering) to July 31, 1993.
<F5>Annualized for the period February 1, 1993 (Date of Initial Public Offering)
to July 31, 1993.
<F6>Calculation based on average shares outstanding.
</FN>
</TABLE>
<PAGE>
THE FUND
The Fund is an open-end, diversified management investment company commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust on
October 24, 1986. The Fund is one of twenty funds managed by Keystone
Management, Inc. ("Keystone Management"), its investment manager, and is one of
thirty funds advised by Keystone Investment Management Company (formerly named
Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment adviser.
Keystone and Keystone Management are, from time to time, also collectively
referred to as "Keystone."
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks the highest possible level of current income, consistent with
the safety of principal and maintenance of liquidity, by investing primarily in
securities issued by or guaranteed as to principal and interest by the full
faith and credit of the U.S. government.
PRINCIPAL INVESTMENTS
Securities in which the Fund will invest include Government National Mortgage
Association ("GNMA") certificates, U.S. Treasury securities and such other
securities as are issued by or guaranteed as to principal and interest by the
full faith and credit of the U.S. government. (Such securities are herein
collectively referred to as "U.S. Government Guaranteed Securities.") The Fund
may invest in U.S. Government Guaranteed Securities denominated in foreign
currencies. The Fund may also invest in certain money market instruments, and
certain other securities issued by U.S. government agencies or
instrumentalities. (Such securities are herein collectively referred to as
"Other Eligible Securities.") (See "Other Eligible Securities.") Under ordinary
circumstances, the Fund expects to invest at least 65% of its assets in U.S.
Government Guaranteed Securities.
While the Fund may invest in securities of any maturity, it is currently
expected that, under normal circumstances, the Fund will not hold securities
with maturities of more than 30 years or less than 5 years (other than certain
money market securities).
U.S. GOVERNMENT GUARANTEED SECURITIES. U.S. Government Guaranteed Securities
include U.S. Treasury securities as well as other securities, including GNMA
certificates, which are issued by or guaranteed with respect to both principal
and interest by the full faith and credit of the U.S. government.
U.S. TREASURY SECURITIES. U.S. Treasury securities are debt obligations issued
by the U.S. Treasury on behalf of the U.S. government to provide some of the
funds needed to finance its activities. Treasury securities come in the form of
Treasury bills, notes and bonds. Treasury bills ("T-bills") are issued on a
discount basis and mature within one year or less from the date of issue.
Treasury notes and bonds are intermediate and long-term obligations,
respectively, and entitle the holder to periodic interest payments from the U.S.
Treasury. Treasury securities could also include so-called Treasury STRIPS.
STRIPS involve the separation by the U.S. Treasury of the corpus (face amount)
of the bond or note from the coupon (interest portion). The U.S. Treasury
redeems the bond or note corpus (zero coupon bond or note) for the face value
thereof at maturity and redeems the stripped coupon (interest portion) beginning
at the date specified thereon.
GNMA CERTIFICATES. The mortgage loans that back the GNMA certificates are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations and are either insured by the Federal Housing Administration
("FHA") or Farmers Home Administration ("FmHA") or guaranteed by the Veterans
Administration ("VA").
A "pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA
(a government corporation within the U.S. Department of Housing and Urban
Development) the timely payment of interest and principal on each mortgage is
guaranteed by the full faith and credit of the U.S. government. While the timely
payment of principal and interest is guaranteed, the market value of the GNMA
certificate is not. When interest rates rise, the value of a GNMA certificate
held in the Fund may decrease as does the value of other debt instruments.
However, when interest rates decline, the value of the certificate may not
increase as much as that of other debt securities because of the prepayment
features of GNMA certificates.
As mortgage-backed securities, GNMA certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the loan rather
than returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate. If
a GNMA certificate is purchased for the Fund at a premium, the premium would be
lost in the event prepayment occurs. Upon receipt, principal payments will be
used by the Fund to purchase additional GNMA certificates, other U.S. Government
Guaranteed Securities or Other Eligible Securities at the prevailing market
interest rate, which may be less than the rate of interest on the underlying
GNMA certificate.
In addition to its investments in GNMA certificates, the Fund may also invest
in certain other types of collateralized mortgage obligations ("CMOs") as well
as inverse floating rate CMOs ("inverse floaters") and interest only ("IO") and
principal only ("PO") stripped mortgage obligations, all of whose underlying
securities are U.S. Government Guaranteed Securities. See "Additional Investment
Information".
OTHER ELIGIBLE SECURITIES
The Fund may invest up to 35% of its total assets in certain securities issued
by U.S. government agencies or instrumentalities even though such securities are
not guaranteed as to principal and interest by the U.S. government. Securities
issued or guaranteed by U.S. government agencies or instrumentalities include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board and Federal National Mortgage
Association.
Some obligations of U.S. government agencies and instrumentalities, such as
securities of Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines (under standards established by the Board of 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 Inter-American Development Bank or issues insured by the Federal Deposit
Insurance Corporation.
In addition, the Fund may invest up to 35% of its total assets in the
following types of money market instruments: (1) commercial paper, including
master demand notes, that at the date of investment is rated A-1, the highest
grade given by Standard & Poor's Corporation ("S&P"), PRIME-1, the highest grade
given by Moody's Investors Service, Inc. ("Moody's") or, if not rated by such
services, is issued by a company that at the date of investment has an
outstanding issue rated A or better by S&P or Moody's; (2) obligations,
including certificates of deposit and bankers' acceptances, of banks or savings
and loan associations having at least $1 billion in assets as of the date of
their most recently published financial statements which are members of the
Federal Deposit Insurance Corporation, including U.S. branches of foreign banks
and foreign branches of U.S. banks; and (3) corporate obligations that at the
date of investment are rated A or better by S&P or Moody's.
In addition, the Fund may enter into repurchase and reverse repurchase
agreements, purchase and sell securities on a when issued and delayed delivery
basis and purchase or sell securities on a forward commitment basis, write
covered call and put options and purchase call and put options to close out
existing positions and may employ new investment techniques with respect to such
options. The Fund may also enter into currency and other financial futures
contracts and related options transactions for hedging purposes and not for
speculation, and may employ new investment techniques with respect to such
futures contracts and related options.
In addition to its investments in IOs, POs and inverse floating rate CMOs,
forwards, futures and options, the Fund may also invest in certain other types
of derivative instruments, including interest rate swaps, and caps and floors.
These vehicles can also be combined to create more complex products called
hybrid derivatives or structured securities.
For further information about the types of investments and investment
techniques available to the Fund, including the risks associated therewith, see
the section of this prospectus entitled "Additional Investment Information" and
the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its investment
objectives since there is uncertainty in every investment.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The investment objective of the Fund is fundamental and may not be changed
without the vote of a majority of the Fund's outstanding shares (as defined in
the Investment Company Act of 1940 ("1940 Act"), (which means the lesser of (1)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares).
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the vote of a 1940 Act majority of the Fund's outstanding
shares. These restrictions and certain other fundamental and non-fundamental
restrictions are set forth in the statement of additional information. Unless
otherwise stated, all references to the Fund's assets are in terms of current
market value.
Generally, the Fund may not do the following: (1) with respect to 75% of its
total assets, invest more than 5% of its total assets in the securities of any
one issuer (other than U.S. Government Securities); and (2) borrow money, except
that the Fund may 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 and may
enter into reverse repurchase agreements.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid, securities which may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the investment on its books
and (2) limiting its holdings of such securities to 15% of net assets.
As a matter of practice, the Fund treats reverse repurchase agreements as
borrowings for purposes of compliance with the limitations of the 1940 Act.
Reverse repurchase agreements will be taken into account along with borrowings
from banks for purposes of the 5% limit set forth in the second investment
restriction above.
RISK FACTORS
Investing in the Fund involves the risk common to investing in any security,
i.e., the net asset value of a share of the Fund can increase or decrease in
response to changes in economic conditions, interest rates and the market's
perception of the underlying portfolio securities of the Fund.
By itself, the Fund does not constitute a balanced investment program. You
should take into account your own investment objectives as well as your other
investments when considering the purchase of shares of any investment company.
While the securities in which the Fund may principally invest are issued by or
guaranteed as to principal and interest by the full faith and credit of the U.S.
government, the market value of such securities is not guaranteed. To the extent
that investments are made in Other Eligible Securities, such investments,
despite favorable credit ratings, are subject to some risk of default.
Investment yields on relatively short-term investments are subject to
substantial and rapid fluctuation. Specifically, the market value of traditional
fixed income debt securities generally will vary inversely with changes in
interest rates. For example, in the case of an investment in a traditional fixed
income debt security, if interest rates increase after the security is
purchased, the security, if sold prior to maturity, may return less than its
cost. The market value of derivatives or structured securities may vary
depending upon the manner in which the investments have been structured and may
fluctuate much more rapidly and to a much greater extent. As a result, the value
of such investments may change at a rate in excess of the rate at which
traditional fixed income securities change and, depending on the structure of
the derivative, would change in a manner opposite to the change in the market
value of a traditional fixed income security. See "Additional Investment
Information" for a further discussion of the risks inherent in the use of
derivatives.
Current yield levels should not be considered representative of yields for any
future period of time. Moreover, should many shareholders change from this Fund
to some other investment at about the same time, the Fund might have to sell
portfolio securities at a time when it would be disadvantageous to do so and at
a lower price than if such securities were held to maturity.
If and when the Fund invests in zero coupon bonds, the Fund does not expect to
have enough zero coupon bonds to have a material effect on dividends. The Fund
has undertaken to a state securities authority to disclose that zero coupon
securities pay no interest to holders prior to maturity, and that the interest
on these securities is reported as income to the Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income producing securities with cash used to
make such distributions, and its current income ultimately may be reduced as a
result.
PRICING SHARES
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's portfolio
securities do not affect the current net asset value of its shares. The Exchange
is currently closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is arrived at by determining the value
of the Fund's assets, subtracting its liabilities and dividing the result by the
number of its shares outstanding.
The Fund values U.S. government securities, other than Treasury bills, on the
basis of valuations provided by a pricing service approved by the Fund's Board
of Trustees, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities,
various relationships between securities and yield to maturity in determining
value.
The Fund values short-term investments that are purchased with maturities of
sixty days or less at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market; short-term investments maturing in more
than sixty days for which market quotations are readily available are valued at
current market value; and short-term investments instruments maturing in more
than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market and in any case reflects fair value as
determined by the Fund's Board of Trustees. All other investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined in good faith according to procedures established by the
Fund's Board of Trustees.
DIVIDENDS AND TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code (the "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year. Any
taxable dividend declared in October, November or December to shareholders of
record in such month and paid by the following January 31 will be includable in
the taxable income of the shareholder as if paid on December 31 of the year in
which the dividend was declared. If the Fund qualifies and if it distributes all
of its net investment income and net capital gains, if any, to shareholders, it
will be relieved of any federal income tax liability.
The Fund will make distributions from its net investment income annually and
net capital gains, if any, at least annually. Shareholders receive Fund
distributions in the form of additional shares of that class of shares upon
which the distribution is based or, at the shareholder's option, in cash. Fund
distributions in the form of additional shares are made at net asset value
without the imposition of a sales charge.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front end sales charge, while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B and Class C shares will generally be higher, and income
distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares.
Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains dividends are taxable as
ordinary income, and net long-term dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, such loss will be treated for tax
purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received. The Fund advises its shareholders annually as to the
federal tax status of all distributions made during the year.
Only certain states allow income received from direct U.S. government
obligations to be tax-exempt when received directly as dividends from investment
companies. Further, some of the states that allow such exemption require that
there be a certain minimum percentage of investment income derived from direct
U.S. government obligations. The Fund will inform shareholders of the percentage
of income that is derived from direct U.S. government obligations.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Board of Trustees, Keystone Management, located
at 200 Berkeley Street, Boston, Massachusetts 02116-5034, serves as investment
manager to the Fund and is responsible for the overall management of the Fund's
business and affairs.
INVESTMENT MANAGER
Keystone Management, the Fund's investment manager, organized in 1989, is a
wholly-owned subsidiary of Keystone, and its directors and principal executive
officers have been affiliated with Keystone, a seasoned investment adviser, for
a number of years. Keystone Management also serves as investment manager to most
of the other funds in the Keystone America Fund Family and to certain other
funds in the Keystone Family of Funds.
Pursuant to its Investment Management Agreement with the Fund (the "Management
Agreement"), Keystone Management has delegated its investment management
functions, except for certain administrative and management services, to
Keystone and has entered into an Investment Advisory Agreement with Keystone
(the "Advisory Agreement") under which Keystone provides investment advisory and
management services to the Fund. Services performed by Keystone Management
include (1) performing research and planning with respect to (a) the Fund's
qualification as a regulated investment company under Subchapter M of the
Internal Revenue Code, (b) tax treatment of the Fund's portfolio investments,
(c) tax treatment of special corporate actions (such as reorganizations), (d)
state tax matters affecting the Fund, and (e) the Fund's distributions of income
and capital gains; (2) preparing the Fund's federal and state tax returns; (3)
providing services to the Fund's shareholders in connection with federal and
state taxation and distributions of income and capital gains; and (4) storing
documents relating to the Fund's activities.
The Fund currently pays Keystone Management a fee for its services at the
annual rate set forth below:
Aggregate
Net Asset Value
Management of the Shares
Fee Income 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 each business day and paid daily.
During the year ended July 31, 1994, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of $354,031,
which represented 0.66% of the Fund's average net assets on an annualized basis.
Of such amount paid to Keystone Management, $300,926 was paid to Keystone for
its services to the Fund.
The Management Agreement continues in effect from year to year only so long
as such continuance is specifically approved at least annually by the Fund's
Board of Trustees or by vote of a majority of the outstanding shares of the
Fund. In either case, the terms of the Management Agreement and continuance
thereof must be approved by the vote of a majority of Independent Trustees in
person at a meeting called for the purpose of voting on such approval. The
Management Agreement may be terminated, without penalty, on 60 days' written
notice by the Fund or Keystone Management or may be terminated by a vote of
shareholders of the Fund. The Management Agreement will terminate automatically
upon its assignment.
INVESTMENT ADVISER
Keystone, the Fund's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly- owned subsidiary of Keystone
Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone Investments"), 200
Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current and
former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee representing 85% of the management fee received by Keystone
Management under the Management Agreement.
The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Fund's Board
of Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund, Keystone Management or Keystone or by a vote of shareholders of the Fund.
The Advisory Agreement will terminate automatically upon its assignment.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company
Institute.
FUND EXPENSES
The Fund pays all of its expenses. In addition to the investment advisory and
management fees discussed above, the principal expenses that the Fund is
expected to pay include, but are not limited to, expenses relating to certain
Trustees; expenses associated with its transfer, dividend disbursing and
shareholder servicing agent, its custodian, its independent auditors and legal
counsel to its Trustees; fees payable to government agencies, including
registration and qualification fees of the Fund and its shares under federal and
state securities laws; and certain extraordinary expenses. In addition, each
class will pay all of the expenses attributable to it. Such expenses are
currently limited to Distribution Plan expenses. The Fund also pays its
brokerage commissions, interest charges and taxes. For the fiscal year ended
July 31, 1994, the Fund's Class A shares paid 1.00% of average net assets in
expenses. For the six months ended July 31, 1994, the Fund's Class B and Class C
shares each paid, on an annualized basis, 1.75% of net assets in expenses.
For the Fund's fiscal year ending July 31, 1995, Keystone has voluntarily
limited expenses of Class A shares to 1.00% annually and each of Class B and
Class C shares to 1.75% annually. Thereafter, a redetermination of whether to
continue these expense limits and, if so, at what rates, will be made. Keystone
will not be required to make any reimbursement to the extent such reimbursement
would result in the Fund's inability to qualify as a regulated investment
company under the Code. In accordance with these voluntary expense limitations,
for the fiscal year ended July 31, 1994, Keystone reimbursed the Fund, $156,708,
$49,754, and $68,958, respectively, for the Fund's Class A, Class B and Class C
shares. Keystone does not intend to seek repayment for these amounts.
Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan fees, are not included in the calculation of the state expense
limitations. This limitation may be modified or eliminated in the future.
During the year ended July 31, 1994, the Fund paid or accrued to Keystone
Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend
disbursing agent, $17,945 for certain accounting and printing services and paid
KIRC $145,790 for shareholder services. KIRC is a wholly-owned subsidiary of
Keystone.
PORTFOLIO MANAGER
Christopher P. Conkey has been the Fund's portfolio manager since 1987. He is
a Keystone Senior Vice President and Group Head with over 11 years of investment
experience.
SECURITIES TRANSACTIONS
Under policies established by the Fund's Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may follow a policy of considering as a factor the number of shares of
the Fund sold by such broker-dealer. In addition, broker-dealers executing
portfolio transactions from time to time may be affiliated with the Fund,
Keystone, the Fund's principal underwriter or their affiliates.
The Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising the Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
The portfolio turnover rate will vary from year to year. For the fiscal year
ended July 31, 1993, the portfolio turnover rate for the Fund's Class A, Class
B, and Class C shares was 189%. For the fiscal year ended July 31, 1994, the
portfolio turnover rate for the Fund's Class A, Class B, and Class C shares was
230%. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. The Fund pays brokerage commissions in connection with the writing of
options and effecting the closing purchase or sale transactions, as well as for
some purchases and sales of portfolio securities.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund by
mailing to the Fund c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121, a
completed account application and a check payable to the Fund. You may also open
an account by telephoning 1-800- 343-2898 to obtain the number of an account to
which you can wire or electronically transfer funds, wiring or electronically
transfering $1,000 or more and sending in a completed account application.
Subsequent investments in Fund shares in any amount may be made by check, by
wiring Federal funds or by an electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by Principal Underwriter (generally as of the close of
the Exchange on that day) plus, in the case of Class A shares, the applicable
sales charge. Orders received by dealers or other firms prior to the close of
the Exchange and received by Principal Underwriter prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day.
Orders for shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined (generally
the next business day's offering price) plus, in the case of the Class A shares,
the applicable sales charge. The Fund reserves the right to determine the net
asset value more frequently than once a day if deemed desirable. Dealers and
other financial services firms are obligated to transmit orders promptly.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free
1-800-343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Generally, the Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a deferred sales charge when they are redeemed except
as follows: Class A shares purchased on or after April 10, 1995 (1) in an amount
equal to or exceeding $1,000,000 or (2) by a corporate qualified retirement plan
or a non-qualified deferred compensation plan sponsored by a corporation having
100 or more eligible employees (a "Qualifying Plan"), in either case without a
front end sales charge, will be subject to a contingent deferred sales charge
for the 24 month period following the date of purchase. Certain Class A shares
purchased prior to April 10, 1995 may be subject to a deferred sales charge upon
redemption during the one year period following the date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a deferred sales charge if they are
redeemed. Class B shares purchased on or after June 1, 1995 are subject to a
deferred sales charge upon redemption during the 72 month period following the
month of purchase. Class B shares purchased prior to June 1, 1995 are subject to
a deferred sales charge upon redemption during the four calendar years following
purchase. Class B shares purchased on or after June 1, 1995 that have been
outstanding for eight years following the month of purchase will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 will retain their
existing conversion rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its Distribution Plan, pays an annual
service fee of 0.25% of the Fund's average daily net assets attributable to that
class. In addition to the 0.25% service fee, the Class B and C Distribution
Plans provide for the payment of an annual distribution fee of up to 0.75% of
the average daily net assets attributable to their respective classes. As a
result, income distributions paid by the Fund with respect to Class B and Class
C shares will generally be less than those paid with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the intended length of investment.
The Fund will not normally accept any purchase of Class B shares in the
amount of $250,000 or more, and will not normally accept any purchase of Class C
shares in the amount of $1,000,000 or more.
-------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 ..................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ........ 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ........ 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ...... 1.50% 1.52% 1.50%
- ---------
*Rounded to the nearest one-hundredth percent.
</TABLE>
---------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan will be at net
asset value without the imposition of a front-end sales charge (each such
purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay
broker/dealers or others concessions based on (1) the investor's cumulative
purchases during the one-year period beginning with the date of the initial NAV
Purchase and (2) the investor's cumulative purchases during each subsequent
one-year period beginning with the first NAV Purchase following the end of the
prior period. For such purchases, concessions will be paid at the following
rate: 0.50% of the investment amount up to $4,999,999; plus 0.25% of the
investment amount over $4,999,999.
Class A shares acquired on or after April 10, 1995 in an NAV Purchase are
subject to a contingent deferred sales charge of 0.50% upon redemption during
the 24 month period commencing on the date the shares were originally purchased.
Certain Class A shares purchased without a front-end sales charge prior to April
10, 1995 are subject to a contingent deferred sales charge of 0.25% upon
redemption during the one year period commencing on the date such shares were
originally purchased.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.25% of
the average daily net asset value of Class A shares maintained by such recipient
outstanding on the books of the Fund for specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are included in a broker dealer managed fee based program (a wrap account)
with broker dealers who have entered into special agreements with the Principal
Underwriter. Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds. See Exhibit A to this
prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after a change in the registered representative's employment, where the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front end sales charge, or (2)
was at some time subject to, but did not actually pay, a contingent deferred
sales charge with respect to the redemption proceeds.
In addition, since January 1, 1995 through December 31, 1995 and upon prior
notification to the Principal Underwriter, Class A shares may be purchased at
net asset value by clients of registered representatives within six months after
the redemption of shares of any registered open-end investment company not
distributed or managed by Keystone or its affiliates, where the amount invested
represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front end sales
charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund,
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers) as
service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipients outstanding on the books of
the Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value without an initial sales charge.
With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period following month of purchase .............. 5.00%
Second twelve month period following month of purchase ............ 4.00%
Third twelve month period following month of purchase .............. 3.00%
Fourth twelve month period following month of purchase ............. 3.00%
Fifth twelve month period following month of purchase .............. 2.00%
Sixth twelve month period following month of purchase .............. 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charges and Waiver of
Sales Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years following the month of purchase will automatically convert to
Class A shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. Class B shares purchased
prior to June 1, 1995 will similarly convert to Class A shares at the end of
seven calendar years after the year of purchase. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to KIRC.) The Class B shares so converted will no longer be subject
to the higher expenses borne by Class B shares. Because the net asset value per
share of the Class A shares may be higher or lower than that of the Class B
shares at the time of conversion, although the dollar value will be the same, a
shareholder may receive more or fewer Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Trustees will consider
what action, if any, is appropriate and in the best interests of the Class B
shareholders.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) (1) as commissions for Fund
shares sold and (2) as shareholder service fees. Amounts paid or accrued to the
Principal Underwriter under (1) and (2) in the aggregate may not exceed the
annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
equal to 4.00% of the price paid for each Fund share sold plus the first year's
service fee in advance in the amount of 0.25% of the price paid for each Class B
share sold. Beginning approximately 12 months after the purchase of a Class B
share, the broker or other party will receive service fees at an annual rate of
0.25% of the average daily net asset value of such Class B share maintained by
the recipient outstanding on the books of the Fund for specified periods. See
"Distribution Plans" below.
With respect to the Fund's Class B shares only, for the period June 1, 1995 to
August 31, 1995, the Principal Underwriter will reallow an increased commission
equal to 4.75% of the price paid for each Class B share sold to those
broker/dealers or others who allow their individual selling representatives to
participate in the additional 0.75% commission.
CLASS C SHARES
Class C shares are offered only through dealers who have special distribution
agreements with the Principal Underwriter. Class C shares are offered at net
asset value, without an initial sales charge. With certain exceptions, the Fund
may impose a deferred sales charge of 1.00% on shares redeemed within one year
after the date of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The deferred sales charge is
retained by the Principal Underwriter. See "Contingent Deferred Sales Charges
and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the distribution of Class C shares. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) (1) as commissions for Fund
shares sold and (2) as shareholder service fees. Amounts paid or accrued to the
Principal Underwriter under (1) and (2) in the aggregate may not exceed the
annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
in the amount of 0.75% of the price paid for each Class C share sold, plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class C share sold, and, beginning approximately fifteen months after
purchase, a commission at an annual rate of 0.75% (subject to NASD rules -- see
"Distribution Plans") plus service fees at the annual rate of 0.25%,
respectively, of the average daily net asset value of each Class C share
maintained by the recipients outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE
AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of purchase
of such shares. No contingent deferred sales charge is imposed when you redeem
amounts derived from (1) increases in the value of your account above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) certain shares with respect to which the Fund did not pay a commission
on issuance, including shares acquired through reinvestment of dividend income
and capital gains distributions; (3) certain Class A shares held for more than
one or two years, as the case may be, from the date of purchase; (4) Class B
shares held more than four consecutive calendar years or more than 72 months
after the month of purchase, as the case may be; or (5) Class C shares held for
more than one year from the date of purchase. Upon request for redemption,
shares not subject to the contingent deferred sales charge will be redeemed
first. Thereafter, shares held the longest will be the first to be redeemed.
The Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with the Principal Underwriter and to a bank or trust company acting
as a trustee for a single account.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder;
(2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified
under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3)
automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2
years old; (4) involuntary redemptions of accounts having an aggregate net asset
value of less than $1,000; (5) automatic withdrawals under an automatic
withdrawal plan of up to 1 1/2% per month of the shareholder's initial account
balance; (6) withdrawals consisting of loan proceeds to a retirement plan
participant; (7) financial hardship withdrawals made by a retirement plan
participant; or (8) withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan participant.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of the Fund. In addition, dealers may, from time to time, receive
additional cash payments. The Principal Underwriter may provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency, such as the NASD. Dealers to whom substantially the entire sales charge
on Class A shares is reallowed may be deemed to be underwriters as that term is
defined under the Securities Act of 1933.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to dealers which satisfy certain criteria established
from time to time by the Principal Underwriter. These conditions relate to
increasing sales of shares of the Keystone funds over specified periods and
certain other factors. Such payments may, depending on the dealer's satisfaction
of the required conditions, be periodic and may be up to 0.25% of the value of
shares sold by such dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed by dealers for the sale of shares as described above) to banks
and other financial services firms that facilitate transactions in shares of the
Fund for their clients.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that a Fund may pay annually in distribution costs
for the sale of its shares and shareholder service fees. The NASD limits annual
expenditures to 1% of the aggregate average daily net asset value of its shares,
of which 0.75% may be used to pay such distribution costs and 0.25% may be used
to pay shareholder service fees. The NASD also limits the aggregate amount that
the Fund may pay for such distribution costs to 6.25% of gross share sales since
the inception of the 12b-1 Distribution Plan, plus interest at the prime rate
plus 1% on such amounts (less any deferred sales charges paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund. The Principal Underwriter intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect would
be to extend the period of time during which the Fund incurs the maximum amount
of costs allowed by a Distribution Plan. If a Distribution Plan is terminated,
the Principal Underwriter will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class.
Unreimbursed Class B and Class C Distribution Plan expenses at July 31, 1994
were $1,036,351 (9.0% of net class assets), and $1,265,877 (6.0% of net class
assets), respectively.
For the year ended July 31, 1994, the Fund paid the Principal Underwriter
$108,729, $142,654, and $187,448, respectively, pursuant to its Class A, Class
B, and Class C Distribution Plans.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net asset value upon written
order by you to the Fund, c/o KIRC and presentation to the Fund of a properly
endorsed share certificate (if certificates have been issued). Your signature
(s) on the written order and certificates must be guaranteed as described below.
In order to redeem by telephone or to engage in telephone transactions
generally, you must complete the authorization in your account application.
Proceeds for shares redeemed on telephonic order will be deposited by wire or
EFT only to the bank account designated in your account application.
The redemption value equals the net asset value per share then determined and
may be more or less than your cost depending upon changes in the value of the
Fund's portfolio securities between purchase and redemption.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take up to 15 days or
more. Any delay may be avoided by purchasing shares either with a certified
check or by Federal Reserve or bank wire of funds or by EFT. Although the
mailing of a redemption check, wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed promptly after good
payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable contingent deferred sales
charge (as described above), will be made within seven days thereafter except as
discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from dealers and will calculate the net asset value on the
same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. If imposed, the deferred sales
charge is retained by the Principal Underwriter. The Principal Underwriter
charges no fees for this service. Your broker-dealer, however, may charge a
service fee.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSON ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may waive this
requirement, but may also require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute your
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. You must complete the
Telephone Redemption section of the application to enjoy telephone redemption
privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property. The Fund has obligated itself under the 1940 Act,
however, to redeem for cash all shares presented for redemption by any one
shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share. Shareholders receiving such securities would incur brokerage costs when
these securities are sold.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch tone telephone, 24 hours a day, seven days a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange shares
of the Fund for shares of certain other Keystone America Funds and Keystone
Liquid Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone
America Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of
other Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares acquired in an NAV Purchase or otherwise without a front
end sales charge,
(2) Class B shares that have been held for less than 72 months or four years,
as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone fund for a $10 fee by writing or
calling Keystone. The exchange fee is waived for individual investors who make
an exchange using KARL. Shares purchased by check are eligible for exchange
after 15 days. If the shares being tendered for exchange have been held for less
than four years and are still subject to a deferred sales charge, such charge
will carry over to the shares being acquired in the exchange transaction. The
Fund reserves the right to terminate this exchange offer or to change its terms,
including the right to change the service charge for any exchange.
Orders to exchange a certain class of shares of the Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
KLT shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Fund prior to 4:00 p.m. on any day
the funds are open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone account. Once proper authorization is given, your bank account will be
debited to purchase shares in the Fund. You will receive confirmation from the
Principal Underwriter for every transaction.
To change the amount or terminate a Keystone America Money Line service
(which could take up to 30 days), you must write to KIRC and include your
account numbers.
RETIREMENT PLANS
The Fund has various pension plans and profit-sharing plans available to
investors, including Individual Retirement Accounts ("IRAs"); Rollover IRAs;
Simplified Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans
("TSAs"); 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans, Pension and
Target Benefit Plans; Money Purchase Pension Plans; and Salary-Reduction Plans.
For details, including fees and application forms, call toll free 1-
800-247-4075 or write to KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Because of the effect of the
applicable sales charge, a Class A investor should not make continuous purchases
of the Fund's shares while participating in an Automatic Withdrawal Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the net asset value of the selected class is relatively low and
fewer shares being purchased when the fund's net asset value is relatively high,
which may result in a lower average cost per share than a less systematic
investment approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund. If you are a Class A investor and paid a sales
charge on your initial purchase, the shares purchased will be eligible for
Rights of Accumulation and the sales charge applicable to the purchase will be
determined accordingly. In addition, the value of shares purchased will be
included in the total amount required to fulfill a Letter of Intent. If a sales
charge was not paid on the initial purchase, a sales charge will be imposed at
the time of subsequent purchases, and the value of shares purchased will become
eligible for Rights of Accumulation and Letters of Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on the application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time, the Fund may advertise "total return" and "current yield".
ALL DATA IS BASED ON HISTORICAL EARNINGS AND IS NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. Total return and current yield are computed separately for each
class of shares of the Fund. Total return refers to average annual compounded
rates of return over specified periods determined by comparing the initial
amount invested in a particular class to the ending redeemable value of that
amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares when advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc., Standard & Poor's Corporation,
Ibbotson Associates or other industry publications.
FUND SHARES
Generally, the Fund currently issues three classes of shares that participate
proportionately based on their relative net asset values in dividends and
distributions and have equal voting, liquidation and other rights except that
(1) expenses related to the distribution of each class of shares or other
expenses that the Board of Trustees may designate as class expenses from time to
time are borne solely by each class; (2) each class of shares has exclusive
voting rights with respect to its Distribution Plan; (3) each class has
different exchange privileges; and (4) each class generally has a different
designation. When issued and paid for, the shares will be fully paid and
nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are transferable, redeemable and freely assignable
as collateral. There are no sinking fund provisions. The Fund is authorized to
issue additional series or classes of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by series or class. The Fund does not have
annual meetings. The Fund will have special meetings from time to time as
required under its Declaration of Trust and under the 1940 Act. As provided in
the Declaration of Trust of the Fund, shareholders have the right to remove
Trustees by an affirmative vote of two-thirds of the outstanding shares. A
special meeting of the shareholders will be held when 10% of the outstanding
shares request a meeting. Shareholders may be eligible for shareholder
communication assistance in connection with the special meeting.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves as the
Fund's transfer agent and dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon written notice to those shareholders, the Fund intends, when an
annual report or semi-annual report of the Fund is required to be furnished, to
mail one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and the Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by the Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days notice). Notes acquired by the Fund may have maturities of more than one
year, provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals which normally will
not exceed 31 days, but may extend up to one year. The notes are deemed to have
a maturity equal to the longer of the period remaining to the next interest rate
adjustment or the demand notice period. Because these types of notes are direct
lending arrangements between the lender and borrower, such instruments are not
normally traded and there is no secondary market for these notes, although they
are redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, Keystone considers, under
standards established by the Board of Trustees, earning power, cash flow and
other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund will invest in them only
if the issuer meets the criteria established for commercial paper.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
credit-worthy. Such persons must be registered as U.S. government securities
dealers with appropriate regulatory organizations. Under such agreements, the
bank, primary dealer or other financial institution agrees upon entering into
the contract to repurchase the security at a mutually agreed upon date and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period. Under a repurchase agreement, the seller must maintain the value of the
securities subject to the agreement at not less than the repurchase price, such
value being determined on a daily basis by marking the underlying securities to
their market value. Although the securities subject to the repurchase agreement
might bear maturities exceeding a year, the Fund only intends to enter into
repurchase agreements that provide for settlement within a year and usually
within seven days. Securities subject to repurchase agreements will be held by
the Fund's custodian or in the Federal Reserve book entry system. The Fund does
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and
losses, including (1) possible declines in the value of the underlying
securities during the period while the Fund seeks to enforce its rights thereto;
(2) possible subnormal levels of income and lack of access to income during this
period; and (3) expenses of enforcing its rights. The Board of Trustees has
established procedures to evaluate the creditworthiness of each party with whom
the Fund enters into repurchase agreements by setting guidelines and standards
of review for Keystone and monitoring Keystone's actions with regard to
repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets such as
U.S. government securities or other high grade debt securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
the Fund is obligated to repurchase may decline below the repurchase price.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. The staff of the Securities and Exchange
Commission has taken the position that the 1940 Act treats reverse repurchase
agreements as being included in the percentage limit on borrowings imposed on a
Fund.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when issued
and delayed delivery basis. When issued or delayed delivery transactions arise
when securities or currencies are purchased or sold by the Fund with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. When the Fund engages in when issued and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the sale. Failure to do so may result in the Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. No payment or delivery is made by the Fund,
however, until it receives payment or delivery from the other party to the
transaction. The Fund will maintain a separate account of liquid assets equal to
the value of such purchase commitments until payment is made. When issued and
delayed delivery agreements are subject to risks from changes in value based
upon changes in the level of interest rates, currency rates and other market
factors, both before and after delivery. The Fund does not accrue any income on
such securities or currencies prior to their delivery. To the extent the Fund
engages in when issued and delayed delivery transactions, it will do so for the
purpose of acquiring portfolio securities or currencies consistent with its
investment objective and policies and not for the purpose of investment
leverage. The Fund currently does not intend to invest more than 5% of its
assets in when issued or delayed delivery transactions.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers or dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if, as a result, the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made, however, to borrowers deemed to be of good standing, under
standards approved by the Board of Trustees, when the income to be earned from
the loan justifies the attendant risks.
DERIVATIVES
The Fund may use derivatives while seeking to achieve, its investment
objective. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond indices and stock indices.
Derivatives can be used to earn income or protect against risk, or both. For
example, one party with unwanted risk may agree to pass that risk to another
party who is willing to accept the risk, the second party being motivated, for
example, by the desire either to earn income in the form of a fee or premium
from the first party, or to reduce its own unwanted risk by attempting to pass
all or part of that risk to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes, although the Fund generally uses derivatives
primarily as direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options as well as forwards for hedging purposes. Derivatives are a
valuable tool which, when used properly, can provide significant benefit to Fund
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Fund. However, the Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments-- options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created. Further information regarding options, futures, forwards and swaps,
is provided later in this section and is provided in the Fund's statement of
additional information.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Indexed Commercial Paper" and
"Structured Securities" below. The term "derivative" is also sometimes used to
describe securities involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments are passed
through to the owner of, or that collateralize, the securities. See "Mortgage
Related Securities," "Collateralized Mortgage Obligations," "Adjustable Rate
Mortgage Securities," "Stripped Mortgage Securities," "Mortgage Securities --
Special Considerations," and "Other Asset-Backed Securities" and the Fund's
statement of additional information.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, the Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. The Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Fund may only write "covered" options. This means that so long as the Fund
is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities that are available
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. The Fund does not expect, however, that this will occur.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and, by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously written
put or call options of the same series.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Fund generally will write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular option at any
particular time, and, for some options, no secondary market may exist. In such
event, it might not be possible to effect a closing transaction in a particular
option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair the Fund's ability to
use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options in which the Fund will trade are generally
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to the Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the Securities and Exchange Commission is of the view that the
premiums that the Fund pays for the purchase of unlisted options and the value
of securities used to cover unlisted options written by the Fund are considered
to be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its policies on illiquid securities.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into securities,
currency or index-based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies is an agreement to buy or sell securities or currencies
at a specified price during a designated month. A futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. The Fund does not make payment or deliver securities upon entering into a
futures contract. Instead, it puts down a margin deposit, which is adjusted to
reflect changes in the value of the contract and which continues until the
contract is terminated.
The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the contract will tend to rise when the value of
the underlying securities or currencies declines and to fall when the value of
such securities or currencies increases. Thus, the Fund sells futures contracts
in order to offset a possible decline in the value of its securities or
currencies. If a futures contract is purchased by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. The Fund intends to purchase futures contracts in order to fix what is
believed by Keystone to be a favorable price and rate of return for securities
or favorable exchange rate for currencies the Fund intends to purchase.
The Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by the Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case, it would continue to bear market
risk on the transaction.
Although futures and related options transactions are intended to enable the
Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates, exchange rates or market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone correctly predicts interest or exchange rate movements, a hedge could
be unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund. Keystone will attempt to minimize these risks through careful selection
and monitoring of the Fund's futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Fund may invest in U.S. Government Guaranteed
Securities denominated in foreign currencies. Thus, the value of Fund shares
will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell. The
Fund intends to use these contracts to hedge the U.S. dollar value of a security
it already owns, particularly if the Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund.
Although the Fund does not currently intend to do so, the Fund may also purchase
and sell options related to foreign currencies. The Fund does not intend to
enter into foreign currency transactions for speculation or leverage.
INTEREST RATE TRANSACTIONS (SWAPS, CAPS AND FLOORS).
If the Fund enters into interest rate swap, cap or floor transactions, it
expects to do so primarily for hedging purposes, which may include preserving a
return or spread on a particular investment or portion of its portfolio or
protecting against an increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these transactions
in a speculative manner.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). Interest rate caps and floors
are similar to options in that the purchase of an interest rate cap or floor
entitles the purchaser, to the extent that a specified index exceeds (in the
case of a cap) or falls below (in the case of a floor) a predetermined interest
rate, to receive payments of interest on a contractually- based principal
("notional") amount from the party selling the interest rate cap or floor. The
Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or liabilities, and will usually enter into interest rate swaps on a net
basis (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments).
The swap market has grown substantially in recent years, with a large number
of banks and investment banking firms acting as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become more established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions also involve the delivery of securities or other
underlying assets and principal. Accordingly, the risk of loss to the Fund from
interest rate transactions is limited to the net amount of interest payments
that the Fund is contractually obligated to make.
COLLATERALIZED MORTGAGE OBLIGATIONS.
The Fund may also invest in fixed rate and adjustable rate collateralized
mortgage obligations ("CMOs"), including CMOs with rates that move inversely to
market rates that are issued by and guaranteed as to principal and interest by
the U.S. government, its agencies or instrumentalities. The principal
governmental issuer of CMOs is Federal National Mortgage Association ("FNMA").
In addition, Federal Home Loan Mortgage Corporation ("FHLMC") issues a
significant number of CMOs. The Fund will not invest in CMOs that are issued by
private issuers. CMOs are debt obligations collateralized by mortgage securities
in which the payment of the principal and interest is supported by the credit,
of, or guaranteed by, the U.S. government or an agency or instrumentality of the
U.S. government. The secondary market for CMOs is actively traded.
COMs are structured by redirecting the total payment of principal and interest
on the underlying mortgage securities used as collateral to create classes with
different interest rates, maturities and payment schedules. Instead of interest
and principal payments on the underlying mortgage securities being passed
through or paid pro rata to each holder (e.g., the Fund), each class of a CMO is
paid from and secured by a separate priority payment of the cash flow generated
by the pledged mortgage securities.
Most CMO issues have at least four classes. Classes with an earlier maturity
receive priority on payments to assure the early maturity. After the first class
is redeemed, excess cash flow not necessary to pay interest on the remaining
classes is directed to the repayment of the next maturing class until that class
is fully redeemed. This process continues until all classes of the CMO issue
have been paid in full. Among the CMO classes available are floating
(adjustable) rate classes, which have characteristics similar to ARMS, and
inverse floating rate classes whose coupons vary inversely with the rate of some
market index. The Fund may purchase any class of CMO other than the residual
(final) class.
An inverse floating rate CMO, i.e., an "inverse floater," bears an interest
rate that resets in the opposite direction of the change in a specified interest
rate index. As market interest rates rise, the interest rate of the inverse
floater goes down, and vice versa. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. Inverse
floaters tend to exhibit greater price volatility than fixed-rate bonds of
similar maturity and credit quality. The interest rates on inverse floaters may
be significantly reduced, even to zero, if interest rates rise. Moreover, the
secondary market for inverse floaters may be limited in rising interest rate
environments.
ADJUSTABLE RATE MORTGAGE SECURITIES. Another type of mortgage-related security,
known as adjustable-rate mortgage securities ("ARMS"), bears interest at a rate
determined by reference to a predetermined interest rate or index. There are two
main categories of rates or indices: (1) rates based on the yield on U.S.
Treasury securities, and (2) indices derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Some rates and
indices closely mirror changes in market interest rate levels, while others tend
to lag changes in market rate levels and tend to be somewhat less volatile.
ARMS may be secured by adjustable-rate mortgages or fixed-rate mortgages. ARMS
secured by fixed-rate mortgages generally have lifetime caps on the coupon rates
of the securities. To the extent that general interest rates increase faster
than the interest rates on the ARMS, these ARMS will decline in value. The
adjustable-rate mortgages that secure ARMS will frequently have caps that limit
the maximum amount by which the interest rate or the monthly principal and
interest payments on the mortgages may increase. These payment caps can result
in negative amortization (i.e., an increase in the balance of the mortgage
loan). Furthermore, since many adjustable-rate mortgages only reset on an annual
basis, the values of ARMS tend to fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable-rate mortgages.
STRIPPED MORTGAGE SECURITIES. Stripped mortgage-related securities ("SMRS") are
mortgage-related securities that are usually structured with two classes of
securities collateralized by a pool of mortgages or a pool of mortgaged-backed
bonds or pass-through securities, with each class receiving different
proportions of the principal and interest payments from the underlying assets. A
common type of SMRS has one class of interest-only securities ("IOs") receiving
all of the interest payments from the underlying assets, while the other class
of securities, principal-only securities ("POs"), receives all of the principal
payments from the underlying assets. IOs and POs are extremely sensitive to
interest rate changes and are more volatile than mortgage-related securities
that are not stripped. IOs tend to decrease in value as interst rates decrease,
while POs generally increase in value as interest rates decrease. If prepayments
of the underlying mortgages are greater than anticipated, the amount of interest
earned on the overall pool will decrease due to the decreasing principal balance
of the assets. Changes in the values of IOs and POs can be substantial and occur
quickly, such as occurred in the first half of 1994 when the value of many POs
dropped precipitously due to increase in interest rates. For this reason the
Fund does not rely on IOs and POs as the principal means of furthering its
investment objective.
Determinations of the liquidity of SMRS issued by the U.S. government, its
agencies and instrumentalities will be made by ascertaining whether such
securities can be disposed of within seven days in the ordinary course of
business at the value used in the calculation of the Fund's net asset value per
share. In the event the Fund purchases Stripped Mortgage Securities determined
to be illiquid, such Stripped Mortgage Securities, together with investments in
other illiquid securities, will be limited to 15% of the Fund's assets. In any
event, the Fund currently intends to invest no more than 15% of its net assets
in IOs and to limit investment in POs so that its PO holdings do not exceed its
IO holdings by more than 5%.
MORTGAGE-RELATED SECURITIES -- SPECIAL CONSIDERATIONS. The value of
mortgage-related securities is affected by a number of factors. Unlike
traditional debt securities, which have fixed maturity dates, mortgage-related
securities may be paid earlier than expected as a result of prepayment of the
underlying mortgages. If property owners make unscheduled prepayments of their
mortgage loans, these prepayments will result in the early payment of the
applicable mortgage-related securities. In that event the Fund may be unable to
invest the proceeds from the early payment of the mortgage-related securities in
an investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities causes
these securities to experience significantly greater price and yield volatility
than experienced by traditional fixed-income securities. The occurrence of
mortgage prepayments is affected by the level of general interest rates, general
economic conditions and other social and demographic factors. During periods of
falling interest rates, the rate of mortgage prepayments tends to increase,
thereby tending to decrease the life of mortgage-related securities. During
periods of rising interest rates, the rate of mortgage prepayments usually
decreases, thereby tending to increase the life of mortgage-related securities.
If the life of a mortgage-related security is inaccurately predicted, the Fund
may not be able to realize the rate of return it expected.
As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest rates
relative to the yield provided by such securities. Such adverse effect is
especially possible with fixed-rate mortgage securities. If the yield available
on other investments rises above the yield of the fixed-rate mortgage securities
as a result of general increases in interest rate levels, the value of the
mortgage-related securities will decline. Although the negative effect could be
lessened if the mortgage-related securities were to be paid earlier (thus
permitting the Fund to reinvest the prepayment proceeds in investments yielding
the higher current interest rate), as described above the rate of mortgage
prepayments and earlier payment of mortgage-related securities generally tends
to decline during a period of rising interest rates.
Although the value of ARMS may not be affected by rising interest rates as much
as the value of fixed-rate mortgage securities is affected by rising interest
rates, ARMS may still decline in value as a result of rising interest rates.
Although, as described above, the yield on ARMS varies with changes in the
applicable interest rate or index, there is often a lag between increases in
general interest rates and increases in the yield on ARMS as a result of
relatively infrequent interest rate reset dates. In addition, adjustable-rate
mortgages and ARMS often have interest rate or payment caps that limit the
ability of the adjustable-rate mortgages or ARMS to fully reflect increases in
the general level of interest rates.
OTHER ASSET-BACKED SECURITIES. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card receivables,
home equity loans, equipment leases and trade receivables, are being securitized
in structures similar to the structures used in mortgage securitizations. These
asset-backed securities are subject to risks associated with changes in interest
rates and prepayment of underlying obligations similar to the risks of
investment in mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively burdensome
to perfect the interest of the security issuer in the underlying collateral and
the underlying collateral may become damaged or stolen.
STRUCTURED SECURITIES. Structured securities represent interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations or foreign government securities.
This type of restructuring involves the deposit with or purchase by an entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of structured securities backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured securities to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to structured securities is dependent on the extent of the cash
flow on the underlying instruments. Because structured securities typically
involve no credit enhancement, their credit risk generally will be equivalent to
that of the underlying instruments. Structured securities of a given class may
be either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured securities typically have higher yields and
present greater risks than unsubordinated structured securities.
BRADY BONDS. Brady Bonds are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the
over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations that
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments, but generally are not collateralized. Brady
Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge Schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the Fund's
Class A shares, a Purchaser is entitled to accumulate current purchases with the
current value of previously purchased Class A shares of the Fund and Class A
shares of certain other eligible funds that are still held in (or exchanged for
shares of and are still held in) the same or another eligible fund ("Eligible
Fund(s)"). The Eligible Funds are the Keystone America Funds and Keystone Liquid
Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a
reduced sales charge on a purchase of Class A shares of the Fund alone or in
combination with purchases of Class A shares of any of the other Eligible Funds
by completing the Letter of Intent section of the application. By so doing, the
Purchaser agrees to invest within a thirteen-month period a specified amount
which, if invested at one time, would qualify for a reduced sales charge. Each
purchase will be made at a public offering price applicable to a single
transaction of the dollar amount specified on the application, as described in
this prospectus. The Letter of Intent does not obligate the Purchaser to
purchase, nor the Fund to sell, the amount indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary), 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by KIRC. Any redemptions made by the Purchaser during the
thirteen- month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
GSF-P 6/95 [Recycle Logo]
8.2M
KEYSTONE
PHOTO:
STARS &
STRIPES
GOVERNMENT
SECURITIES FUND
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE GOVERNMENT SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
November 28, 1994
As Supplemented June 1, 1995
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Government Securities Fund (formerly Keystone America Government Securities
Fund) (the "Fund") dated November 28, 1994, as supplemented June 1, 1995. A copy
of the prospectus may be obtained from Keystone Investment Distributors Company
(formerly named Keystone Distributors, Inc.) (the "Principal Underwriter"), the
Fund's principal underwriter, 200 Berkeley Street, Boston, Massachusetts
02116-5034.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Policies 2
Investment Restrictions 6
Dividends and Taxes 9
Valuation of Securities 10
Sales Charges 11
Distribution Plans 15
Investment Manager 18
Investment Adviser 21
Trustees and Officers 23
Principal Underwriter 26
Brokerage 28
Declaration of Trust 30
Standardized Total Return
and Yield Quotations 31
Additional Information 32
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-13
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company
commonly known as a mutual fund. The Fund seeks the highest possible level of
current income, consistent with the safety of principal and maintenance of
liquidity, by investing primarily in securities issued by or guaranteed as to
principal and interest by the full faith and credit of the United States
("U.S.") government. The Fund was formed as a Massachusetts business trust on
October 24, 1986. The Fund is managed by Keystone Management, Inc. ("Keystone
Management"), its investment manager, and advised by Keystone Investment
Management Company (formerly named Keystone Custodian Funds, Inc.) ("Keystone"),
its investment adviser.
The essential information about the Fund is contained in its
prospectus. This statement of additional information provides additional
information about the Fund that may be of interest to some investors.
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INVESTMENT POLICIES
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Securities in which the Fund will invest include: Government National
Mortgage Association ("GNMA") certificates, U.S. Treasury securities and other
securities issued by or guaranteed as to principal and interest by the full
faith and credit of the U.S. government. (Such securities are herein
collectively referred to as "U.S. Government Guaranteed Securities.") The Fund
may invest up to 35% of its assets in securities issued by agencies or
instrumentalities of the U.S. government that are not guaranteed by the U.S.
government and in certain money market instruments; invest in foreign securities
and purchase securities denominated in foreign currencies; may enter into
repurchase and reverse repurchase agreements, purchase and sell securities and
currencies on a when issued and delayed delivery basis and write covered put and
call options (collectively, "Other Eligible Securities"). While the Fund may
purchase put options, it currently does not intend to do so. The Fund also may
engage in currency and other financial futures contracts and related options
transactions for hedging purposes and not for speculation and may employ new
investment techniques with respect to such futures contracts and related
options. It is intended that, under ordinary circumstances, at least 65% of the
Fund's investments will be in U.S. Government Securities.
U.S. GOVERNMENT GUARANTEED SECURITIES
U.S. Government Guaranteed Securities include U.S. Treasury securities
as well as other securities (including GNMA certificates) that are issued by or
guaranteed with respect to both principal and interest by the full faith and
credit of the U.S. government.
U.S. TREASURY SECURITIES
U.S. Treasury securities are debt obligations issued by the U.S.
Treasury on behalf of the U.S. government to provide some of the funds needed to
finance its activities. Treasury securities come in the form of Treasury bills,
notes and bonds. Treasury bills ("T"-bills) are issued on a discount basis and
mature within one year from the date of issue. Treasury notes and bonds are
intermediate and long term obligations, respectively, and entitle the holder to
periodic payment of interest from the U.S. Treasury. Treasury securities could
also include so-called Treasury STRIPS ("STRIPS"). STRIPS involve the separation
by the U.S. Treasury of the corpus (face amount) of the bond or note from the
coupon (interest portion). The U.S. Treasury redeems the bond or note corpus
(zero coupon bond or note) for the face value thereof at maturity and redeems
the stripped coupon (interest portion) beginning at the date specified thereon.
GNMA CERTIFICATES
GNMA certificates are mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans (issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations) are either
insured by the Federal Housing Administration ("FHA"), Farmers' Home
Administration ("FMHA") or guaranteed by the Veterans Administration ("VA"). A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. government. While the
timely payment of principal and interest is guaranteed, the market value of the
GNMA certificate is not. When interest rates rise, the value of a GNMA
certificate held in the Fund may decrease (as does the value of other debt
instruments). When interest rates decline, however, the value of the certificate
may not increase as much as that of other debt securities because of the
prepayment features of GNMA certificates. GNMA certificates differ from bonds in
that principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments,
including prepayments (net of fees paid to the issuer and GNMA), are passed
through to the holder of the certificate. If a GNMA certificate is purchased for
the Fund at a premium, the premium would be lost in the event prepayment occurs.
Upon receipt, principal payments will be used by the Fund to purchase additional
GNMA certificates, other U.S. Guaranteed Government Securities or Other Eligible
Securities at the prevailing market interest rate, which may be less than the
rate of interest on the underlying GNMA certificate.
GNMA GUARANTEE
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a group (or pool) of
mortgages insured by the FHA or FMHA, or guaranteed by the VA. The GNMA
guarantee is backed by the full faith and credit of the U.S. government. GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES
The average life of GNMA certificates is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greatest part of principal invested well before the
maturity of the mortgages in the pool. (Note: Due to the GNMA guarantee,
foreclosures impose no risk to principal investment.)
Because prepayment rates of individual mortgage pools will vary widely,
it is not possible to accurately predict the average life of a particular issue
of GNMA certificates. However, statistics published by the FHA are normally used
as an indicator of the expected average life of GNMA certificates. These
statistics indicate that the average life of single-family dwelling mortgages
with 25-30 years maturities, the type of mortgages backing the vast majority of
GNMA certificates, is approximately 12 years. For this reason, it is standard
practice to treat GNMA certificates as 30-year mortgage-backed securities that
prepay fully in the twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES
The coupon rate of interest of GNMA certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the
certificates, but only by the amount of the fee paid to GNMA and the issuer. For
the most common type of mortgage pool, containing single family dwelling
mortgages, GNMA receives an annual fee of 0.06 of 1% of the outstanding
principal for providing its guarantee, and the issuer is paid an annual fee of
0.44 of 1% for assembling the mortgage pool and for passing through monthly
payments of interest and principal to certificate holders.
For the following reasons, the coupon rate by itself is not indicative
of the yield that will be earned on the certificates:
1. certificates may be issued at a premium or discount, rather than at
par;
2. after issuance, certificates may trade in the secondary market at a
premium or discount;
3. interest is earned monthly, rather than semi-annually as for
traditional bonds, and monthly compounding has the effect of raising the
effective yield earned on GNMA certificates; and
4. the actual yield of each GNMA certificate is influenced by the
prepayment experience of the mortgage pool underlying the certificate; i.e., if
mortgagors pay off their mortgages early, the principal returned to certificate
holders may be reinvested at more or less favorable rates.
In determining yields for GNMA certificates, the standard practice is
to assume that the certificates will have a 12-year life. Compared on this
basis, GNMA certificates have historically yielded roughly 0.25 of 1% more than
high grade corporate bonds and 0.50 of 1% more than U.S. government and U.S.
government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
MARKET FOR GNMA CERTIFICATES
Since the inception of the GNMA mortgage-backed securities program in
1970, the amount of GNMA certificates outstanding has grown rapidly. The size of
the market and the active participation in the secondary market by securities
dealers and many types of investors make the GNMA certificate a highly liquid
instrument. Prices of GNMA certificates are readily available from securities
dealers and depend on, among other things, the level of market rates, the
certificate's coupon rate and the prepayment experience of the pool of mortgages
backing the certificate.
OTHER ELIGIBLE SECURITIES
The Fund may also invest in securities issued or guaranteed by U.S.
government agencies or instrumentalities, including securities issued or
guaranteed by the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal
Land Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines under standards established by the Fund's 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 Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
In addition, the Fund may invest in the following money market
instruments: (1) commercial paper, including master demand notes, that at the
date of investment is rated A-1 the highest grade given, by Standard & Poor's
Corporation ("S&P") or P-1, the highest grade given, by Moody's Investors
Service, Inc. ("Moody's") or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks having at least $1 billion in deposits as of the
date of their most recently published financial statements that are members of
the Federal Deposit Insurance Corporation, including U.S. branches of foreign
banks and foreign branches of U.S. banks; and (3) corporate obligations that at
the date of investment are rated A or better by S&P or Moody's.
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INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------
The investment restrictions set forth below are fundamental and may not
be changed without the vote of a majority of the Fund's outstanding voting
shares. 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;
4. borrow money or enter into reverse repurchase agreements,
except that the Fund may enter into reverse repurchase agreements or 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
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 purchase or hold debt
securities 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 if more than 25% of its total assets would be
invested in securities of issuers 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 10% of its total assets in securities with legal or
contractual restrictions on resale or in securities for which market quotations
are not readily available or in repurchase agreements maturing in more than
seven days;
10. 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;
11. purchase securities of other investment companies except in
connection with a merger, consolidation, reorganization, purchase of assets or
similar transaction;
12. purchase or sell commodities or commodity contracts or real estate,
except that the Fund may purchase securities 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
13. 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.
As a matter of practice the Fund treats reverse repurchase agreements
as borrowings for purposes of compliance with the limitations of the Investment
Company Act of 1940 (the "1940 Act"). Reverse repurchase agreements will be
taken into account along with borrowings from banks for purposes of the 5% limit
set forth in the fourth fundamental investment restriction above.
Although not fundamental restrictions or policies requiring a
shareholders vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund will not (1) write, purchase or
sell puts, calls or combinations thereof, except that it may write covered put
and call options and purchase put and call options on U.S. Government Guaranteed
Securities or Other Eligible Securities; and (2) invest in interests in oil, gas
or other mineral exploration or development programs, except publicly traded
securities of companies engaging in such activities, unless, authorized to do so
by the holders of a majority of the Fund's outstanding voting shares.
As a continuing condition of registration of the Fund in a state, the
Fund has undertaken not to purchase any securities (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.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund will not (1) write puts and
calls on securities unless (a) the option is issued by the Options Clearing
Corporation, (b) the security underlying the put or call is within the
investment policies of the Fund, and (c) the aggregate value of the securities
underlying the calls or obligations underlying the puts determined, as of the
date of sale, does not exceed 25% of its net assets, and (2) buy and sell puts
and calls written by others unless (a) the options are listed on a national
securities or commodities exchange or offered through certain approved national
securities associations, and (b) the aggregate premiums paid on such options
held at any time do not exceed 20% of the Fund's net assets.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund will (1) limit its purchase of
warrants to 5% of net assets, of which 2% may be warrants not listed on the New
York or American Stock Exchange, (2) not invest in real estate limited
partnership interests and (3) not invest in oil, gas or other mineral leases.
Although not a fundamental restriction or policy requiring a
shareholder's vote to change, the Fund has agreed that so long as the state
authority requires and shares of the Portfolio are registered for sale in that
state, the Portfolio will maintain 300% asset coverage on any leverage or bank
borrowings.
In order to permit the sale of Fund shares in certain states, the Fund
may make commitments more restrictive than the investment restrictions described
above. Should the Fund determine that any such commitment is no longer in the
best interests of the Fund, it will revoke the commitment by terminating sales
of its shares in the state involved.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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DIVIDENDS AND TAXES
- ------------------------------------------------------------------------------
The Fund distributes to its shareholders dividends from net investment
income and net realized long-term and short-term capital gains annually. Fund
distributions are made in additional shares of that class of shares upon which
the distribution is based or, at the option of the shareholder, in cash.
Shareholders who have not opted, prior to the record date for any distribution,
to receive cash will have the number of distributed shares determined on the
basis of the Fund's net asset value per share computed at the end of the day on
the record date after adjustment for the distribution. Net asset value is used
in computing the number of shares in both gains and income distribution
reinvestments. Account statements and/or checks as appropriate will be mailed to
shareholders within seven days after the Fund pays the distribution. Unless the
Fund receives instructions to the contrary from a shareholder before the record
date, it will assume that the shareholder wishes to receive that distribution
and future gains and income distributions in shares. Instructions continue in
effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder and regardless of the period of time Fund shares have been held by
the shareholder. However, if such shares are held less than six months and
redeemed at a loss, the shareholder will recognize a long term capital loss on
such shares to the extent of the long term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
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VALUATION OF SECURITIES
- ------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
1. securities traded in the over-the-counter market are valued at the
mean of the bid and asked prices at the time of valuation, provided that a sale
has occurred and that this price reflects current market value according to
standards established by the Fund's Board of Trustees;
2. short term U.S. Government Guaranteed Securities (other than GNMA
certificates) and Other Eligible Securities that are purchased with maturities
of sixty days or less, including all master demand notes, are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), plus either accrued interest or amortized discount;
short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value and
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; and
3. all other U.S. Government Guaranteed Securities (other than GNMA
certificates) and Other Eligible Securities for which market quotations are
readily available are valued at current market value or, where market quotations
are not readily available, at fair value as determined in good faith according
to procedures established by the Board of Trustees.
The following securities are valued at prices deemed in good faith to
be fair under procedures established by the Fund's Board of Trustees: (1)
securities, including restricted securities, for which market quotations are not
readily available; and (2) other assets.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing U.S. Government Guaranteed Securities,
other than Treasury bills, and certain Other Eligible Securities. As a result,
depending on the particular security owned by the Fund, it is likely that most
of the valuations for such securities will be based upon their fair value
determined under procedures by the Trustees. The Fund's Board of Trustees has
authorized the use of a pricing service to determine the fair value of such
securities. Securities for which market quotations are readily available are
valued on a consistent basis at that price quoted which, in the opinion of the
Fund's Board of Trustees or the person designated by the Fund's Board of
Trustees to make the determination, most nearly represents the market value of
the particular security. Any securities for which market quotations are not
readily available or other assets are valued on a consistent basis at fair value
as determined in good faith using methods prescribed by the Fund's Board of
Trustees.
- ------------------------------------------------------------------------------
SALES CHARGES
- ------------------------------------------------------------------------------
GENERAL
Generally, the Fund offers three classes of shares. Class A shares are
offered with a maximum sales charge of 4.75% payable at the time of purchase
("Front End Load Option"). Class B shares purchased on or after June 1, 1995 are
subject to a contingent deferred sales charge payable upon redemption during the
72 month period following the month of purchase. Class B shares purchased prior
to June 1, 1995 are subject to a contingent deferred sales charge upon
redemption within three calendar years following the year of purchase ("Back End
Load Option"). Class B shares purchased on or after June 1, 1995 that have been
outstanding eight years following the month of purchase will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 that have been
outstanding during seven calendar years will similarly convert to Class A
shares. (Conversion of Class B shares represented by stock certificates will
require the return of the stock certificates to Keystone Investor Resource
Center, Inc., the Fund's transfer and dividend disbursing agent ("KIRC").) Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Fund as well as a table of
applicable sales charges for Class A shares; a discussion of reduced sales
charges that may apply to subsequent purchases; and a description of applicable
contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plan"), a contingent deferred sales charge
is imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after
April 10, 1995 (1) in an amount equal to or exceeding $1,000,000 and/or (2) by a
corporate qualified retirement plan or a non-qualified deferred compensation
plan sponsored by a corporation having 100 or more eligible employees (a
"Qualifying Plan"), in either case without a front-end sales charge, will be
subject to a contingent deferred sales charge of 0.50% during the 24 month
period following the date of purchase. Certain Class A shares purchased without
a front-end sales charge prior to April 10, 1995 may be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one-year period
commencing on the date such shares were originally purchased. The contingent
deferred sales charge will be retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of the lesser of net asset value or net cost of such Class B shares
redeemed during succeeding twelve-month periods following the month of purchase
as follows: 5% during the first period; 4% during the second period; 3% during
the third period; 3% during the fourth period; 2% during the fifth period, and
1% during the sixth period. No deferred sales charge is imposed on amounts
redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, the Fund,
with certain exceptions, may impose a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and the first calendar year after
the year of purchase; 2.00% on shares redeemed during the second calendar year
after the year of purchase; and 1.00% on shares redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales charges and
Waiver of Sales Charges" below.
CLASS C SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held during more than four consecutive calendar years or 72 months after the
month of purchase, as the case may be; or (5) Class C shares held for more than
one year from the date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year is assumed to be the year shares tendered for exchange were
originally purchased.
WAIVER OF SALES CHARGES
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
payment of commissions or the imposition of a contingent deferred sales charge
to (1) Directors, Trustees, officers, full-time employees and sales
representatives of the Fund, Keystone Management, Keystone, Keystone
Investments, Inc. ("Keystone Investments"), Harbor Capital Management Company,
Inc., their subsidiaries and the Principal Underwriter, who have been such for
not less than ninety days; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees and sales representatives; or
(3) to registered representatives of firms that have dealer agreements with the
Principal Underwriter, provided all such sales are made upon the written
assurance of the purchaser that the purchase is made for investment purposes and
that the securities will not be resold except through redemption by the Fund.
No initial sales charge is charged on purchases 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 is at least $500,000 and any
commission paid at the time of such purchase is not more than 1% of the amount
invested. In addition, no contingent deferred sales charge is imposed on
redemptions of such shares.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no contingent
deferred sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an Automatic Withdrawal Plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
REDEMPTION OF SHARES
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption in any 90 day period by any one shareholder up
to the lesser of $250,000 or 1% of the Fund's assets.
- -----------------------------------------------------------------------------
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.
DISTRIBUTION PLANS IN GENERAL
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% of the aggregate average daily net asset value
of the Fund's shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the 12b-1 Plan, plus interest at the
prime rate plus 1% on such amounts (less any contingent deferred sales charges
paid by shareholders to the Principal Underwriter).
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to up to 0.25% of the
Fund's average daily net asset value attributable to Class A shares, to finance
any activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
principal underwriter of the Fund (currently the Principal Underwriter) to
enable the Principal Underwriter to pay or to have paid to others who sell Class
A shares a service or other fee, at such intervals as the Principal Underwriter
may determine, in respect of Class A shares maintained by such recipients
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 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 outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLAN
The Fund has adopted Distribution Plans for its Class B shares. Each
Class B Distribution Plan provides that the Fund may expend daily amounts at an
annual rate of up to 1.00% of the Fund's average daily net asset value
attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter to enable the
Principal Underwriter to pay to others (dealers) (1) commissions in respect of
Class B shares sold since inception of the Distribution Plan; and (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by such recipients outstanding on the books of the Fund for
specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with a Class B
Distribution Plan that exceeds current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the principal underwriter of the Fund
(currently the Principal Underwriter) to enable the Principal Underwriter to pay
to others (dealers) (1) commissions in respect of Class C shares sold since
inception of the Distribution Plan; and (2) to enable the Principal Underwriter
to pay or to have paid to others a service fee, at such intervals as the
Principal Underwriter may determine, in respect of Class C shares maintained by
such recipients outstanding on the books of the Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
Each of the Distribution Plans may be terminated at any time by vote of
the Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of the Fund.
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 the
Trustees, including the Rule 12b-1 Trustees. Unpaid distribution costs for Class
B and Class C shares expenses at July 31, 1994 were $1,265,877 (9.0% of net
class assets), and $1,036,351 (6.0% of net class assets), respectively.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan, and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by a Distribution Plan as stated
above.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
For the fiscal year ended July 31, 1994, the Fund paid KDI $108,729,
$142,654, and $187,448, respectively pursuant to its Class A, Class B and Class
C Distribution Plans. These amounts were used to pay commissions and service
fees.
<PAGE>
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INVESTMENT MANAGER
- -------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund and is responsible for the
overall management of the Fund's business and affairs. Keystone Management,
organized in 1989, is a wholly-owned subsidiary of Keystone and its directors
and principal executive officers have been affiliated with Keystone, a seasoned
investment adviser, for a number of years. Keystone Management also serves as
investment manager to each of the other Keystone Fund Family and to certain
other funds in the Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to the Investment Management
Agreement with the Fund (the "Management Agreement"), and subject to the
supervision of the Fund's Board of Trustees, Keystone Management manages and
administers the operation of the Fund and manages the investment and
reinvestment of the Fund's assets in conformity with the Fund's investment
objectives and restrictions. The Management Agreement stipulates that Keystone
Management shall provide office space, all necessary office facilities,
equipment and personnel in connection with its services under the Management
Agreement and pay or reimburse the Fund for the compensation of Fund officers
and Trustees who are affiliated with the investment manager as well as pay all
expenses of Keystone Management incurred in connection with its investment
management services. All charges and expenses other than those specifically
referred to as being borne by Keystone Management will be paid by the Fund,
including, but not limited to, custodian charges and expenses; bookkeeping and
auditors' charges and expenses; transfer agent charges and expenses; fees of
Independent Trustees; brokerage commissions, brokers' fees and expenses; issue
and transfer taxes; costs and expenses under the Distribution Plan; taxes and
trust fees payable to governmental agencies; the cost of share certificates;
fees and expenses of the registration and qualification of the Fund and its
shares with the Securities and Exchange Commission (sometimes referred to herein
as the "SEC" or the "Commission") or under state or other securities laws;
expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; expenses of shareholders' and Trustees' meetings; charges and expenses
of legal counsel for the Fund and for the Trustees of the Fund on matters
relating to the Fund; 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 Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, under which Keystone or
such other investment adviser, as investment adviser, provides substantially all
the services to be provided by Keystone Management under the Management
Agreement. The Management Agreement also permits Keystone Management to delegate
to Keystone or another investment adviser substantially all of the investment
manager's rights, duties and obligations under the Management Agreement.
Services performed by Keystone Management include (1) performing
research and planning with respect to (a) the Fund's qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code,
(b) tax treatment of the Fund's portfolio investments, (c) tax treatment of
special corporate actions (such as reorganizations), (d) state tax matters
affecting the Fund, and (e) the Fund's distributions of income and capital
gains; (2) preparing the Fund's federal and state tax returns; (3) providing
services to the Fund's shareholders in connection with federal and state
taxation and distributions of income and capital gains; and (4) storing
documents relating to the Fund's activities.
The Fund pays Keystone Management a fee for its services at the annual
rate set forth below:
Net Asset Value
Management of the Shares
Fee Income 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
As a continuing condition of registration of shares in a state,
Keystone Management has agreed to reimburse the Fund annually for certain
operating expenses incurred by the Fund in excess of certain percentages of the
Fund's average daily net assets. Keystone Management is not required, however,
to make such reimbursements to the extent such reimbursement would result in the
Fund's inability to qualify as a regulated investment company under provisions
of the Internal Revenue Code. This condition may be modified or eliminated in
the future.
For one year, beginning January 1, 1993, Keystone agreed to limit
expenses of Class A shares to 1.00% annually and each of Class B and Class C
shares to 1.75% annually. Keystone extended these expense limits for an
additional one year period beginning January 1, 1994. Thereafter a
redetermination of whether to continue these expense limits and, if so, at what
rates, will be made. Keystone would not be required to make such reimbursement
to the extent which would result in the Fund's inability to qualify as a
regulated investment company under the provisions of the Internal Revenue Code.
In accordance with these voluntary expense limitations, for the fiscal year
ending July 31, 1994, Keystone reimbursed the Fund $156,708, $49,754, and
$68,958, respectively, for Class A Shares, Class B Shares and Class C Shares.
The Management Agreement continues in effect from year to year only if
approved at least annually by the Fund's Board of Trustees or by a vote of a
majority of the outstanding shares, and such renewal has been 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 Management Agreement may
be terminated, without penalty, on 60 days' written notice by the Fund's Board
of Trustees or by a vote of a majority of outstanding shares. The Management
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
For additional discussion of fees paid to Keystone Management, see
"Investment Adviser" below.
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INVESTMENT ADVISER
- -------------------------------------------------------------------------------
Pursuant to its Management Agreement with the Fund, Keystone Management
has delegated its investment management functions, except for certain
administrative and management services, to Keystone and has entered into an
Investment Advisory Agreement with Keystone (the "Advisory Agreement") under
which Keystone provides investment advisory and management services to the Fund.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey, and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services
an annual fee representing 85% of the management fee received by Keystone
Management under the Management Agreement.
Pursuant to the Advisory Agreement, and subject to the supervision of
the Fund's Board of Trustees, Keystone manages and administers the operation of
the Fund, and manages the investment and reinvestment of the Fund's assets in
conformity with the Fund's investment objectives and restrictions. The Advisory
Agreement stipulates that Keystone shall provide office space, all necessary
office facilities, equipment and personnel in connection with its services under
the Advisory Agreement and will pay or reimburse the Fund for the compensation
of Fund officers and Trustees who are affiliated with the investment manager and
will pay all expenses of Keystone incurred in connection with its investment
advisory services. All charges and expenses other than those specifically
referred to as being borne by Keystone will be paid by the Fund, including, but
not limited to, custodian charges and expenses; bookkeeping and auditors'
charges and expenses; transfer agent charges and expenses; fees of Independent
Trustees; brokerage commissions, brokers' fees and expenses; issue and transfer
taxes; costs and expenses under the Distribution Plan; taxes and trust fees
payable to governmental agencies; the cost of share certificates; fees and
expenses of the registration and qualification of the Fund and its shares with
the SEC or under state or other securities laws; expenses of preparing, printing
and mailing prospectuses, statements of additional information, notices, reports
and proxy materials to shareholders of the Fund; expenses of shareholder's and
Trustees' meetings; charges and expenses of legal counsel for the Fund and for
the Trustees of the Fund on matters relating to the Fund; charges and expenses
of filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
During the fiscal years ended July 31, 1992, the Fund paid or accrued
to Keystone Management investment management and administrative services fees of
$363,822, which represented 0.67% of the Fund's then average net assets. Of such
amount paid to Keystone Management, $309,249, was paid to Keystone for its
services to the Fund.
During the fiscal year ended July 31, 1993, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$354,031, which represented 0.66% of the Fund's average net assets. Of such
amount paid to Keystone Management, $300,926 was paid to Keystone for its
services to the Fund.
During the fiscal year ended July 31, 1994, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$498,981, which represented 0.64% of the Fund's average net assets. Of such
amount paid to Keystone Management, $424,134 was paid to Keystone for its
services to the Fund.
- -------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- -------------------------------------------------------------------------------
Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments; President, Chief Executive Officer and
Trustee or Director of all 30 Funds in the Keystone Investments Family of
Funds; Director and Chairman of the Board, Chief Executive Officer and Vice
Chairman of Keystone; Chairman of the Board and Director of Keystone
Institutional Company, Inc. ("Keystone Institutional") (formerly named
Keystone Investment Management Corporation), and Keystone Fixed Income
Advisors ("KFIA"); Director, Chairman of the Board, Chief Executive Officer
and President of Keystone Management, Keystone Software Inc. ("Keystone
Software"); Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"), Keystone Asset Corporation, Keystone Capital
Corporation, and Keystone Trust Company; Director of the Principal
Underwriter, Keystone Investor Resource Center, Inc. ("KIRC"), and
Fiduciary Investment Company, Inc. ("FICO"); Director and Vice President of
Robert Van Partners, Inc.; Director of Boston Children's Services
Association; Trustee of Anatolia College, Middlesex School, and Middlebury
College; Member, Board of Governors, New England Medical Center; and former
Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member, Board
of Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation (investment
advice) and former Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of all
other Keystone Investments Funds; Director and Chairman of the Board of
Hartwell Keystone; Chairman of the Board and Trustee of Anatolia College;
Trustee of University Hospital (and Chairman of its Investment Committee);
former Chairman of the Board and Chief Executive Officer of Keystone
Investments; and former Chief Executive Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; and former Dean, School of Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Director of Phoenix Total Return Fund and Equifax, Inc.;
Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund and The
Phoenix Big Edge Series Fund; and former President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman of the Board, Director and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board
and Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former Director
and President, Associated Industries of Vermont; former Chairman and
President, Vermont Marble Company; former Director of Keystone; and former
Director and Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR International,
Inc. (executive recruitment); former Senior Vice President, Boyden
International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman, Environmental Warranty, Inc., and Consultant,
Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital,
Old State House Association and Enhanced Financial Services, Inc.; Member,
Georgetown College Board of Advisors; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Kingswood-Oxford School and Greater Hartford
YMCA; former Director, Executive Vice President and Vice Chairman of The
Travelers Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky &
Armentano, P.C.; President, Nassau County Bar Association; former Associate
Dean and Professor of Law, St. John's University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, Keystone Trust Company; Treasurer of KIMCO, Robert Van
Partners, Inc., and FICO; Treasurer and Director of Keystone Management,
Keystone Software, and Hartwell Keystone; Vice President and Treasurer of
KFIA; and Director of KIRC.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other Keystone Investments Funds; and President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer of
KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone; Senior
Vice President, General Counsel, Secretary and Director of the Principal
Underwriter, Keystone Management and Keystone Software; Senior Vice
President and General Counsel of Keystone Institutional; Senior Vice
President, General Counsel and Director of FICO and KIRC: Senior Vice
President and Secretary of Hartwell Keystone and Robert Van Partners, Inc.
Vice President and Secretary of KFIA; Senior Vice President, General
Counsel and Secretary of Keystone Investments, Keystone Asset Corporation,
Keystone Capital Corporation and Keystone Trust Company.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended July 31, 1994, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. During
the same period the non-affiliated Trustees received no retainers and fees. As
of October 31, 1994, the Trustees and officers did not beneficially own any of
the Fund's then outstanding shares.
The address of all the Fund's Trustees, officers and the address of the
Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
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The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with the Principal Underwriter, a wholly-owned
subsidiary of Keystone.
The Principal Underwriter, located at 200 Berkeley Street, Boston,
Massachusetts, 02116-5034, is a Delaware corporation. The Principal Underwriter,
as agent, currently has the right to obtain subscriptions for and to sell shares
of the Fund to the public. In so doing, the Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from brokers, dealers or others, acting as principals, for sales of
shares. No such representative, dealer or broker has any authority to act as
agent for the Fund. The Principal Underwriter has not undertaken to buy or to
find purchasers for any specific number of shares. The Principal Underwriter may
receive payments from the Fund pursuant to the Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Fund's Declaration of Trust, By-Laws, current prospectus, and
statement of additional information. All orders are subject to acceptance by the
Fund, and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Underwriting Agreement, the Fund is not liable to
anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreement to pay all
expenses in connection with registration of its shares with the Commission and
auditing and filing fees in connection with registration of its shares under the
various state "blue-sky" laws.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may use its
discretion in providing to selected dealers promotional materials and selling
aids, including, but not limited to, personal computers, related software and
Fund data files.
The Principal Underwriter has agreed that it will in all respects duly
conform with all state and federal laws applicable to the sale of the shares and
will indemnify and hold harmless the Fund and each person who has been, is or
may be a Trustee or officer of the Fund against expenses reasonably incurred by
any of them in connection with any claim or in connection with any action, suit
or proceeding to which any of them may be a party, that arises out of or is
alleged to arise out of any misrepresentation or omission to state a material
fact on the part of the Principal Underwriter or any other person for whose acts
the Principal Underwriter is responsible or is alleged to be responsible, unless
such misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved by a majority of the Trustees of
the Fund and a majority of the Fund's Rule 12b-1 Trustees at least annually in
accordance with the 1940 Act and rules and regulations thereunder.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by a majority of the Fund's Rule 12b-1 Trustees or by a
vote of a majority of outstanding shares. The Underwriting Agreement will
terminate automatically upon its "assignment" as that term is defined in the
1940 Act.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Management
weighs such considerations in determining the overall reasonableness of
brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund, Keystone Management or Keystone is
considered to be in addition to and not in lieu of services required to be
performed by Keystone Management under the Management Agreement or Keystone
under the Advisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of Keystone Management or Keystone who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for such other clients. Under the Management Agreement and the Advisory
Agreement, Keystone Management and Keystone are permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
Management and Keystone do follow such a practice, they will do so on a basis
that is fair and equitable to the Fund.
The Fund may seek to maximize the rate of return on its portfolio by
engaging in short term trading consistent with its investment objective. Trading
will occur primarily in anticipation of or in response to market developments or
to take advantage of market decline (a rise in interest rates) or to purchase in
anticipation of a market rise (a decline in interest rates) and later sell. In
addition, a security may be sold and another purchased at approximately the same
time to take advantage of what Keystone believes to be a temporary disparity in
the normal yield relationship between the two securities. Yield disparities may
occur for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, due to such things as changes
in the overall demand for, or supply of, various types of U.S. Government
Guaranteed Securities and Other Eligible Securities or changes in the investment
objectives of investors. This policy of short term trading may result in a
higher portfolio turnover and increased expenses.
Neither Keystone Management, Keystone, nor the Fund intend to place
securities transactions with any particular broker-dealer or group thereof. The
Fund's Board of Trustees, however, has determined that the Fund may follow a
policy of considering sales of shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution, including best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
Management or Keystone from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop that the
same investment decision is made for more than one fund. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
The Fund paid no brokerage commissions during the fiscal years ended
July 31, 1992, 1993 and 1994.
In no instance are portfolio securities purchased from or sold to
Keystone Management, Keystone, the Principal Underwriter or any of their
affiliated persons, as defined in the 1940 Act and rules and regulations issued
thereunder.
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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 ("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 filed 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, Fund shares are entitled to a pro rata share based on the
relative net assets of each class. Shareholders have no preemptive or conversion
rights. Shares are redeemable and transferable. The Fund is authorized to issue
additional classes or series of shares. Generally, the Fund currently issues
three classes of shares, but may issue additional classes or series of shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Fund's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees; and (2) 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 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. 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 outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
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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 year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added 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 cumulative total return for Class A annualized for the period April
14, 1987 (commencement of investment operations) through July 31, 1994 was
66.71%. The cumulative total return of Class A for the one and five years ended
July 31, 1994 were (5.43)% and 38.92%, respectively. The compounded average
annual rate of return for Class A for the period April 14, 1987 through July 31,
1994 was 7.25%. The compounded average annual rate of return for Class A for the
five year period ended July 31, 1994 was 6.80%. The cumulative total return for
the Fund's Class B and Class C annualized for the period from February 1, 1993
(commencement of operations) through July 31, 1994 was 0.42% and 3.28%,
respectively. The cumulative total return of Class B and Class C for the one
year period ended July 31, 1994 was (1.44)% and (1.44)%, respectively. The
compounded average annual rate of return for the Fund's Class B and Class C
annualized for the period from February 1, 1993 (commencement of operations)
through July 31, 1994 was 0.28% and 2.18%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund's current yield for
Class A, Class B and Class C for the 30-day period ended July 31, 1994 was
6.07%, 5.64% and 5.64%, respectively.
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ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KIRC, located at 101 Main Street, Cambridge, MA 02142-1519, is a
wholly-owned subsidiary of Keystone, and serves as transfer agent and dividend
disbursing agent for the Fund.
KPMG Peat Marwick LLP, One Boston Place, Boston, Massachusetts 02108,
Certified Public Accountants, are the Fund's independent auditors.
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.
As of October 31, 1994, Merrill Lynch Pierce Fenner & Smith, Attention:
Book Entry, 4800 Deer Lake Dr. E 3rd FL, Jacksonville, FL 32246-6484 owned of
record 18.56% of the Fund's Class A outstanding shares. As of October 31, 1994,
Merrill Lynch Pierce Fenner & Smith, Attention: Book Entry, 4800 Deer Lake Dr. E
3rd FL, Jacksonville, FL 32246-6484 owned of record 20.85% of the Fund's Class B
outstanding shares. As of October 31, 1994, Merrill Lynch Pierce Fenner & Smith,
Attention: Book Entry, 4800 Deer Lake Dr. E 3rd FL, Jacksonville, FL 32246-6484
owned of record 15.30% of the Fund's Class C outstanding shares.
As of October 31, 1994, Yadkin Valley Telephone Membership Corp, P.O.
Box 368, Yadkinville, NC 27055-0368 owned of record 31.37% of the Fund's Class C
outstanding shares.
As of October 31, 1994, First Federal Savings and Loan Association,
Attn: Robert J. Scheidler, 212 N. Franklin Street, Greensburgh, IN 47240-1735
owned of record 6.175% of the Fund's Class C outstanding shares.
As of October 31, 1994, PaineWebber For the Benefit of Railroad Support
Services, 151 Ellis Street, Suite 200, Attn: Leon Leatherwood, Atlanta, GA
30303-2426 owned of record 5.47% of the Fund's Class C outstanding shares.
The Fund's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of 15 different investment companies in the family of
Keystone America Funds. The Keystone America Funds offer a range of choices to
serve shareholder needs. The Keystone America Funds consist of the funds having
the various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
<PAGE>
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APPENDIX
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MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one
year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes) and obligations
issued or guaranteed by the United States ("U.S.") government, its agencies or
instrumentalities, some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper 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 F-1 by Fitch Investors Services, Inc. ("Fitch'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.
<PAGE>
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 assets 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.
<PAGE>
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 assets 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 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, or issues insured by Federal Deposit
Insurance Corporation.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the creditworthiness
of an obligor, including obligors outside the U.S., with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees. Ratings of foreign obligors do not take into
account currency exchange and related uncertainties. The ratings are based on
current information furnished by the issuer or obtained by S&P from other
sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. Likelihood of default - capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings "AA and "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.
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 again 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 in 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 American, New York, 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 engage in 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 engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather than in
the securities markets. A futures contract creates an obligation by the seller
to deliver to the buyer the commodity specified in the contract at a specified
future time for a specified price. The futures contract creates an obligation by
the buyer to accept delivery from the seller of the commodity specified at the
specified future time for the specified price. In contrast, a spot transaction
creates an immediate obligation for the seller to deliver and the buyer to
accept delivery of and pay for an identified commodity. In general, futures
contracts involve transactions in fungible goods such as wheat, coffee and
soybeans. However, in the last decade an increasing number of futures contracts
have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the 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, 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 on U.S. government
securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in the
index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently stock index futures contracts can be purchased or sold on the S&P
Index of 500 Stocks, the S&P Index of 100 Stocks, the New York Stock Exchange
Composite Index, the Value Line Index and the Major Market Index. It is expected
that futures contracts trading in additional stock indices will be authorized.
The standard contract size is $500 times the value of the index.
The Fund does not believe that differences between existing stock indices
will create any differences in the price movements of the stock index futures
contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index futures
contracts will be developed in the future. It is anticipated that such index
based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or sale
of a security, in that no price or premium is paid or received. Instead, to
initiate trading, an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures 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 difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter into
an offsetting transaction with respect to a particular contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the Fund
will continue to be required to maintain the margin deposits on the contract and
to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on commodity futures are similar to options on stocks except
that an option on a commodity futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
rather than to purchase or sell stock, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account. This amount represents the amount by which the market
price of the futures contract at exercise exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and value of the futures
contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency or other financial
futures contracts is 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 indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. In addition
futures contract transactions involve the remote risk that a party 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 spcial 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 SECURITIES
Investment in foreign securities may involve more risk than investment
solely in securities of domestic issuers for the following reasons: (1) there
may be less public information available about foreign companies than is
available about U.S. companies; (2) foreign companies are not generally subject
to the uniform accounting, auditing and financial reporting standards and
practices applicable to U.S. companies; (3) foreign stock markets have less
volume than the U.S. market, and the securities of some foreign companies are
less liquid and more volatile than the securities of comparable U.S. companies;
(4) there may be less government regulation of stock exchanges, brokers, listed
companies and banks in foreign countries than in the U.S.; (5) the Fund may
incur fees on currency exchanges when it changes investments from one country to
another; (6) the Fund's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization of bank deposits, establishment of
exchange controls, political or social instability or diplomatic developments;
and (7) fluctuations in foreign exchange rates will affect the value of the
Fund's portfolio securities, the value of dividends and interest earned, gains
and losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests
in foreign securities they usually will be denominated in foreign currencies and
the Fund temporarily may hold funds in foreign currencies. Thus, the 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 CFTC and NFA. Currently the only national futures exchange on which currency
futures are traded is the International Monetary Market of the Chicago
Mercantile Exchange. Foreign currency futures trading is conducted in the same
manner and subject to the same regulations as trading in interest rate and index
based futures. The Fund intends to 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 and Swiss and French
Francs, C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and
1,000,000 for the Peso. In contrast to Forward Currency Exchange Contracts which
can be traded at any time, only four value dates per year are available, the
third Wednesday of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a variety of
currencies in both the United States and Europe. On the Philadelphia Stock
Exchange, for example, contracts for half the size of the corresponding futures
contracts on the Chicago Board Options Exchange are traded with up to nine
months maturity in Marks, Sterling, Yen, Swiss Francs and Canadian Dollars.
Options can be exercised at any time during the contract life, and require a
deposit subject to normal margin requirements. Since a futures contract must be
exercised, the Fund must continually make up the margin balance. As a result, a
wrong price move could result in the Fund losing more than the original
investment, as it cannot walk away from the futures contract as it can an option
contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in connection
with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is analogous to
the purchase of protective puts on individual stocks, where an absolute level of
protection is sought below which no additional economic loss would be incurred
by the Fund. Put options may be purchased to hedge a portfolio of foreign stocks
or foreign debt instruments or a position in the foreign currency upon which the
put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments,
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 recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the Fund
may be dealing with a foreign trader whose home country is facing a payments
problem. Even though the foreign trader intends to perform on its foreign
exchange contracts, the contracts are tied to other external liabilities the
country has incurred. As a result, performance may be delayed, and can result in
unanticipated cost to the Fund. This aspect of country risk is a major element
in the Fund's credit judgment as to with whom it will deal and in what amounts.
<PAGE>
SCHEDULE OF INVESTMENTS--July 31, 1994
Coupon Maturity Par Market
Rate Date Value Value
GNMA AND FHA
(33.4%)
GNMA Pool #044213 11.500% 2010 $ 10,640 $ 12,023
GNMA Pool #066375 11.500 2013 9,665 10,922
GNMA Pool #109215 12.000 2013 8,512 9,704
GNMA Pool #111004 12.500 2014 1,579 1,816
GNMA Pool #121205 12.500 2015 8,375 9,631
GNMA Pool #123752 12.500 2015 2,384 2,741
GNMA Pool #129483 10.000 2015 495 534
GNMA Pool #155671 9.500 2016 13,475 14,335
GNMA Pool #156180 10.000 2019 332,548 358,111
GNMA Pool #163934 9.000 2016 20,148 21,023
GNMA Pool #165633 9.000 2016 104,548 109,088
GNMA Pool #192803 9.500 2016 225,375 239,754
GNMA Pool #204238 9.500 2017 678,048 720,419
GNMA Pool #208850 9.500 2017 277,764 295,122
GNMA Pool #212897 9.500 2017 278,726 296,509
GNMA Pool #213635 9.500 2017 117,439 124,777
GNMA Pool #221645 9.500 2017 368,351 392,287
GNMA Pool #223682 9.500 2018 271,231 287,925
GNMA Pool #224848 9.500 2017 73,663 78,266
GNMA Pool #226032 9.500 2017 265,391 281,976
GNMA Pool #227163 10.000 2004 140,474 149,735
GNMA Pool #229824 9.500 2017 18,159 19,293
GNMA Pool #263455 10.000 2004 176,562 188,202
GNMA Pool #265090 10.000 2004 106,740 113,777
GNMA Pool #267047 10.000 2004 35,969 38,341
GNMA Pool #268164 10.250 2029 2,606,430 2,829,202
GNMA Pool #270183 10.000 2004 149,556 159,417
GNMA Pool #270218 10.000 2004 60,554 64,546
GNMA Pool #270281 10.000 2004 300,486 320,297
GNMA Pool #271395 10.000 2004 70,545 75,196
GNMA Pool #275214 10.000 2004 184,775 196,957
GNMA Pool #276242 10.000 2004 88,583 94,423
GNMA Pool #316571 8.500 2022 576,087 588,329
GNMA Pool #325164 8.000 2022 5,290,767 5,274,207
GNMA Pool #352824 6.500 2024 6,834,000 6,191,126
FHA Pool #02343143 9.125 1994 4,082,597 4,286,727
TOTAL GNMA AND FHA
(Cost--$23,607,371) 23,790,641 23,856,738
FNMA (7.1%)
FNMA
(Cost--$5,064,938) 8.000 2024 5,100,000 5,096,787
(continued on next page)
<PAGE>
Keystone America Government Securities Fund
SCHEDULE OF INVESTMENTS--July 31, 1994
Coupon Maturity Par Market
Rate Date Value Value
FHLPC (4.3%)
FHLPC #G10049 8.000% 2007 $ 2,934,671 $ 2,984,179
FHLPC #430438 10.500 2009 66,466 71,213
TOTAL FHLPC
(Cost--$3,082,001) 3,001,137 3,055,392
Collateralized
Mortgage
Obligations (3.9%)
FNMA 1993 180-SA
(Estimated
Maturity 1998) (b) 10.000 2000 1,081,955 1,037,324
FNMA 1993 78-KA
(Estimated
Maturity 2000) (b) 6.500 2008 1,870,999 1,719,635
TOTAL
COLLATERALIZED
MORTGAGE
OBLIGATIONS
(Cost--$2,901,632) 2,952,954 2,756,959
OTHER MORTGAGES
(1.2%)
FHA Blair House
(Charles River
Mortgage Co. Inc.)
(Cost--$864,158) 9.125 1994 814,283 854,996
GOVERNMENT ISSUES
(46.2%)
United States
Treasury Bond 7.875 2021 7,400,000 7,733,000
United States
Treasury Note 8.000 1996 10,000,000 10,389,100
United States
Treasury Note 8.000 1999 5,500,000 5,799,035
United States
Treasury Note 8.250 1998 2,500,000 2,643,750
United States
Treasury Note 8.500 2000 6,000,000 6,473,460
TOTAL GOVERNMENT
ISSUES
(Cost--$33,704,172) 31,400,000 33,038,345
Maturity
Value
REPURCHASE
AGREEMENT (1.9%)
HSBC Securities,
Inc., 4.17%,
purchased 7/29/94
(Collateralized by
$1,370,000 U.S.
Treasury Notes,
8.25%, due
11/15/94)
(Cost--$1,379,000) 4.170 8/01/1994 $ 1,379,479 1,379,000
TOTAL INVESTMENTS
(Cost--$70,603,272)
(a) 70,038,217
OTHER ASSETS AND
LIABILITIES--NET
(2.0%) 1,397,090
NET ASSETS
(100.0%) $71,435,307
See Notes to Schedule of Investments.
<PAGE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) The cost of investments for federal income tax purposes is $70,776,819.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at July 31, 1994, are as follows:
Gross unrealized appreciation $ 501,963
Gross unrealized depreciation (1,240,565)
Net unrealized depreciation $ (738,602)
(b) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected pre-payment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed rates.
Legend of Portfolio Abbreviations:
GNMA--Government National Mortgage Association
FHA--Federal Housing Association
FNMA--Federal National Mortgage Association
FHLPC--Federal Home Loan Participation Certificate
See Notes to Financial Statements.
<PAGE>
Keystone America Government Securities Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February
13, 1987
(Commencement
of
Operations)
to July 31,
Year Ended July 31,
1994(f) 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period $10.450 $10.580 $10.180 $10.010 $10.110 $ 9.740 $10.220 $10.000
Income from investment
operations
Investment income--net 0.571 0.683 0.682 0.756 0.760 0.753 0.748 0.140
Realized gains (losses)
on investments--net (0.630) 0.461 0.549 0.170 (0.104) 0.352 (0.400) 0.220
Total income (deficit)
from investment
operations (0.059) 1.144 1.231 0.926 0.656 1.105 0.348 0.360
Less distributions
Dividends from investment
income--net (0.571) (0.683) (0.689) (0.756) (0.756) (0.735) (0.828) (0.140)
Distributions in excess
of investment income--net
(a) (0.023) (0.061) (0.042) 0 0 0 0 0
Tax basis return of
capital (0.057) 0 0 0 0 0 0 0
Distributions from
realized gains on
investments--net 0 (0.530) (0.100) 0 0 0 0 0
Distributions in excess
of realized gains on
investments--net (a) (0.260) 0 0 0 0 0 0 0
Total distributions (0.911) (1.274) (0.831) (0.756) (0.756) (0.735) (0.828) (0.140)
Net asset value:
End of period $ 9.480 $10.450 $10.580 $10.180 $10.010 $10.110 $ 9.740 $10.220
Total return (b) (0.71%) 11.51% 12.45% 9.62% 6.84% 11.89% 3.55% 3.60%(d)
Ratios/supplemental data
Ratios to average net
assets:
Operating and management
expenses (c) 1.00% 1.41% 1.93% 1.92% 1.91% 1.90% 1.30% 1.00%(e)
Investment income--net 5.97% 6.49% 6.44% 7.46% 7.61% 7.68% 7.29% 5.74%(e)
Portfolio turnover rate 230% 189% 93% 72% 58% 171% 206% 60%
Net assets, end of period
(thousands) $38,541 $50,594 $47,892 $55,597 $61,744 $68,493 $73,757 $ 3,479
</TABLE>
(a)Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment income (or
tax basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis capital gains on a temporary
basis) are presented as "Distributions in excess of realized gains on
investments--net." From July 31, 1990 until the date of adoption of the
Statement of Position, distribution amounts exceeding book basis net
investment income were charged to paid-in capital.
(b) Excluding applicable sales charges.
(c)Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. The "Ratio of operating and management
expenses to average net assets" would have been 1.35% and 1.73% for the years
ended July 31, 1994 and 1993, respectively.
(d) Total return reflects investment activity from inception on investment
operations on April 14, 1987.
(e)Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(f) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B SHARES CLASS C SHARES
February 1, February 1,
1993 1993
(Date of (Date of
Initial Year Initial
Year Ended Public Ended Public
July 31, Offering) to July 31, Offering) to
1994(f) July 31, 1993 1994(f) July 31, 1993
Net asset value:
Beginning of
period $10.450 $10.320 $10.460 $10.320
Income from
investment
operations
Investment
income--net 0.494 0.254 0.495 0.247
Realized gains
(losses) on
investments--net (0.628) 0.223 (0.629) 0.240
Total income
(deficit) from
investment
operations (0.134) 0.477 (0.134) 0.487
Less distributions
Dividends from
investment
income--net (0.494) (0.254) (0.495) (0.247)
Distributions in
excess of
investment
income--net (a) (0.025) (0.093) (0.024) (0.100)
Tax basis return
of capital (0.057) 0 (0.057) 0
Distributions in
excess of realized
gains on
investments--net
(a) (0.260) 0 (0.260) 0
Total
distributions (0.836) (0.347) (0.836) (0.347)
Net asset value:
End of period $ 9.480 $10.450 $ 9.490 $10.460
Total return (b) (1.44%) 4.69%(d) (1.44%) 4.79%(d)
Ratios/supplemental
data
Ratio to average
net assets:
Operating and
management
expenses (c) 1.75% 1.72%(e) 1.75% 1.71%(e)
Investment
income--net 5.32% 5.46%(e) 5.32% 5.31%(e)
Portfolio turnover
rate 230% 189% 230% 189%
Net assets, end of
period (thousands) $15,386 $ 9,223 $17,505 $13,286
(a) Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment income (or
tax basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis capital gains on a temporary
basis) are presented as "Distributions in excess of realized gains on
investments--net." For the fiscal year ended July 31, 1993, distributions in
excess of book basis net income were charged to paid-in capital.
(b) Excluding applicable sales charges.
(c) Figures are net of expense reimbursement by Keystone in connection with
the voluntary expense limitation. The "Ratio of operating and management
expenses to average net assets" would have been 2.12% for the year ended
July 31, 1994 for both Class B and Class C, and 2.28% for Class B and 2.17%
for Class C, for the period ended February 1, 1993 (Date of Initial Public
Offering) to July 31, 1993.
(d) Annualized total return for the period February 1, 1993 (Date of Initial
Public Offering) to July 31, 1993.
(e) Annualized for the period February 1, 1993 (Date of Initial Public
Offering) to July 31, 1993.
(f) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
Keystone America Government Securities Fund
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1994
Assets:
Investments at market value
(identified cost--$70,603,272)
(Note 1) $70,038,217
Cash 929
Receivable for:
Fund shares sold 379,026
Interest 1,200,837
Prepaid expenses 43,373
Total assets 71,662,382
Liabilities:
Payable for:
Fund shares redeemed 48,866
Income and capital gains
distributions 133,032
Accrued expenses 45,177
Total liabilities 227,075
Net assets $71,435,307
Net assets represented by (Note 1):
Paid-in capital $76,300,615
Accumulated distributions in excess
of investment income--net (133,033)
Accumulated realized gains (losses)
on investment transactions--net (4,167,220)
Net unrealized appreciation
(depreciation) on investments (565,055)
Total net assets $71,435,307
Net asset value and redemption price
per share (Note 2):
Class A Shares ($9.48 on 4,065,523
shares outstanding) $38,540,682
Class B Shares ($9.48 on 1,623,379
shares outstanding) 15,386,196
Class C Shares ($9.49 on 1,845,763
shares outstanding) 17,508,429
$71,435,307
Offering price per share:
Class A Shares (including sales
charge of 4.75%) (Notes 1 and 2) $ 9.95
Class B Shares $ 9.48
Class C Shares $ 9.49
STATEMENT OF OPERATIONS
Year Ended July 31, 1994
Investment income (Note 1):
Interest $5,444,045
Expenses (Notes 2 and 4):
Management fee $498,981
Shareholder services 145,790
Accounting, auditing and legal 31,153
Custodian fees 87,713
Printing 19,816
Distribution Plan expenses 438,831
Registration fees 52,725
Miscellaneous expenses 24,618
Total expenses 1,299,627
Less: Reimbursement from Investment
Adviser (Note 4) (275,420)
Net expenses 1,024,207
Investment income--net (Note 1) 4,419,838
Realized and unrealized gain (loss) on
investments--net (Notes 1 and 3):
Realized gain (loss) on investments
sold:
Proceeds from sales 168,996,964
Cost of investments sold 171,923,317
Realized gain (loss) on
investments--net (2,926,353)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year 1,883,195
End of year (565,055)
Increase (decrease) in unrealized
appreciation or depreciation--net (2,448,250)
Net gain (loss) on investments (5,374,603)
Net increase (decrease) in net assets
resulting from operations ($954,765)
See Notes to Financial Statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended July 31,
1994 1993
Operations:
Investment income--net (Note 1) $ 4,419,838 $ 3,446,220
Realized gain (loss) on investments--net
(Notes 1 and 3) (2,926,353) 3,033,591
Increase (decrease) in unrealized
appreciation or depreciation--net (2,448,250) (668,605)
Net increase (decrease) in net assets
resulting from operations (954,765) 5,811,206
Net equalization credits (Note 1) 0 18,295
Distributions to shareholders from (Notes 1
and 6):
Investment income--net--Class A Shares (2,548,951) (3,160,139)
In excess of investment income--net--Class A
Shares (128,556) (286,191)
Tax basis return of capital--Class A Shares (231,563) 0
In excess of realized gain from investment
transactions--net--Class A Shares (1,219,222) 0
Investment income--net--Class B Shares (710,096) (136,488)
In excess of investment income--net--Class B
Shares (25,413) (36,496)
Tax basis return of capital--Class B Shares (92,445) 0
In excess of realized gain from investment
transactions--net--Class B Shares (323,905) 0
Investment income--net--Class C Shares (936,223) (167,888)
In excess of investment income--net--Class C
Shares (46,773) (50,057)
Tax basis return of capital--Class C Shares (105,195) 0
In excess of realized gain from investment
transactions--net--Class C Shares (461,128) 0
Realized gain from investment
transactions--net 0 (2,368,962)
Total distributions to shareholders (6,829,470) (6,206,221)
Capital share transactions
(exclusive of net equalization charges
and credits) (Note 2):
Proceeds from shares sold--Class A Shares 3,687,992 11,322,347
Proceeds from shares sold--Class B Shares 10,504,811 9,829,045
Proceeds from shares sold--Class C Shares 10,026,367 13,447,909
Payments for shares redeemed--Class A Shares (14,118,247) (12,747,474)
Payments for shares redeemed--Class B Shares (3,534,381) (736,148)
Payments for shares redeemed--Class C Shares (5,031,672) (383,986)
Net asset value of shares issued in
reinvestment of distributions from:
Investment income--net and paid-in
capital--Class A Shares 1,794,650 2,411,706
Investment income--net and paid in
capital--Class B Shares 463,284 91,054
Investment income--net and paid-in
capital--Class C Shares 822,769 167,310
Realized gain from investment
transactions--net--Class A Shares 903,142 2,186,327
Realized gain from investment
transactions--net--Class B Shares 218,056 0
Realized gain from investment
transactions--net--Class C Shares 379,863 0
Net increase (decrease) in net assets
resulting from capital share transactions 6,116,634 25,588,090
Total increase (decrease) in net assets (1,667,601) 25,211,370
Net assets:
Beginning of year 73,102,908 47,891,538
End of year [including accumulated
distributions in excess of investment
income--net and undistributed investment
income--net as follows: July 31,
1994--($133,033),
July 31, 1993 ($-0-)] (Note 1) $ 71,435,307 $ 73,102,908
See Notes to Financial Statements.
<PAGE>
Keystone America Government Securities Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone America Government Securities Fund (the "Fund") is a Massachusetts
business trust for which Keystone Management, Inc. ("KMI") is the Investment
Manager and Keystone Custodian Funds, Inc. ("Keystone") is the Investment
Adviser. The Fund was organized on October 24, 1986 and had no operations prior
to February 13, 1987. It is registered under the Investment Company Act of 1940
as a diversified open-end investment company, issuing three classes of shares,
specifically Class A, Class B, and Class C shares.
Class A shares are sold subject to 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 within three calendar years after the year
of purchase. Class C shares are sold subject to a contingent deferred sales
charge payable upon redemption within one year of purchase, and are available
only through dealers who have entered into special distribution agreements with
Keystone Distributors, Inc. ("KDI"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting of
members of current management of Keystone and its affiliates. KMI is a
wholly-owned subsidiary of Keystone. Keystone Investor Resource Center, Inc.
("KIRC") a wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Government National Mortgage Association ("GNMA") certificates are traded in
the over-the-counter market and are valued at the mean of bid and asked prices
at the time of valuation. Short-term investments that are purchased with
maturities of sixty days or less are valued at amortized cost (original purchase
cost as adjusted for amortization of premium or accretion of discount), which,
when combined with accrued interest, approximates market. Short-term investments
maturing in more than sixty days for which market quotations are readily
available are valued at current market value. Short-term investments maturing in
more than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. All other securities for which market
quotations are readily available are valued at current market value. Management
values the following securities at prices it deems in good faith to be fair: (i)
securities (including restricted securities) for which complete quotations are
not readily available and (ii) listed securities if, in the opinion of
management, the last sales price does not reflect a current value, or if no sale
occurred.
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or in the case
of a stock index, cash at a set price on a future date. Upon entering into a
futures contract, the Fund is required to deposit with a broker an amount
(initial margin) equal to a certain percentage of the purchase price indicated
in the futures contract. Subsequent payments (variation margin) are made or
received by the Fund each day, as the value of the underlying instrument or
index fluctuates, and are recorded for book purposes as unrealized gains or
losses by the Fund. For federal tax purposes, any futures contracts that remain
open at fiscal year-end are marked-to-market and the resultant net gain or loss
is included in federal taxable income.
<PAGE>
B. Securities transactions are accounted for on the trade date. Realized gains
and losses are computed on the identified cost basis. Interest income is
recorded on the accrual basis. Distributions to the shareholders are recorded by
the Fund at the close of business on the record date.
C. The Fund has qualified, and intends to qualify in the future, as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). Thus, the Fund is relieved of any federal income or
excise tax liability by distributing all of its net taxable investment income
and net taxable capital gains, if any, to its shareholders. The Fund intends to
avoid excise tax liability by making the required distributions under the
Internal Revenue Code.
D. For the year ended July 31, 1993, the Fund used the accounting practice known
as equalization by which a portion of the proceeds from sales and the costs of
redemptions of capital shares (equivalent on a per share basis to the amount of
undistributed net investment income on the date of the transactions) was
credited or charged to undistributed income. As a result, undistributed net
investment income per share was not affected by sales or redemptions of shares.
Effective August 1, 1993 the Fund discontinued equalization accounting.
E. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed upon
date and price), the repurchase price of the securities will generally equal the
amount paid by the Fund plus a negotiated interest amount. The seller under the
repurchase agreement will be required to provide securities (collateral) to the
Fund whose value will be maintained at an amount not less than the repurchase
price, and which generally will be maintained at 101% of the repurchase price.
The Fund monitors the value of collateral on a daily basis, and if the value of
collateral falls below required levels, the Fund intends to seek additional
collateral from the seller or terminate the repurchase agreement. If the seller
defaults, the Fund would suffer a loss to the extent that the proceeds from the
sale of the underlying securities were less than the repurchase price. Any such
loss would be increased by any cost incurred on disposing of such securities. If
bankruptcy proceedings are commenced against the seller under the repurchase
agreement, the realization on the collateral may be delayed or limited.
Repurchase agreements entered into by the Fund will be limited to transactions
with dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
F. The Fund distributes net investment income monthly and net capital gains, if
any, annually. Distributions from net investment income are based on tax basis
net income. From time to time, the Fund may distribute dividends that exceed
book basis net income.
Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As a
result, the Fund changed the financial statement classification of distributions
to shareholders to more clearly reflect the differences between financial
statement amounts available for distribution and amounts distributed to comply
with income tax regulations. Accordingly, amounts at July 31, 1994 have been
restated to reflect an increase in paid-in capital of $162,914, a decrease in
accumulated realized gains (losses) on investment transaction of $6,055 and a
decrease in undistributed net investment income of $156,859.
<PAGE>
Keystone America Government Securities Fund
The significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are due to the deferral of losses for income tax purposes that have been
recognized for financial statement purposes.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares of
beneficial interest, without par value. Transactions in shares of the Fund were
as follows:
Class A Shares
Year Ended July 31,
1994 1993
Shares sold 362,308 1,069,388
Shares redeemed (1,402,079) (1,198,879)
Shares issued in
reinvestment of
distributions from:
investment income--net and
paid-in capital 177,848 213,311
Realized gains--net 87,965 230,180
Net increase (773,958) 314,000
Class B Shares
February 1, 1993
(Date of Initial
Year Ended Public Offering)
July 31, 1994 to July 31, 1993
Shares sold 1,029,889 944,022
Shares redeemed (356,875) (70,513)
Shares issued in
reinvestment of
distributions from:
investment income--net and
paid-in capital 46,791 8,754
Realized gains--net 21,311 0
Net increase 741,116 882,263
Class C Shares
February 1, 1993
(Date of Initial
Year Ended Public Offering)
July 31, 1994 to July 31, 1993
Shares sold 967,368 1,291,039
Shares redeemed (511,906) (36,843)
Shares issued in
reinvestment of
distributions from:
investment income--net and
paid-in capital 82,874 16,097
Realized gains--net 37,134 0
Net increase 575,470 1,270,293
<PAGE>
The Fund bears some of the costs of selling its shares under a Distribution Plan
adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Class A Distribution Plan provides for payments that are currently limited
to 0.25% annually of the average daily net asset value of Class A shares to pay
expenses of the distribution of Class A shares. Amounts paid by the Fund to KDI
under the Class A Distribution Plan are currently used to pay others, such as
dealers, service fees at an annual rate of 0.25% of the average net asset value
of the shares sold by such others and remaining outstanding on the books of the
Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of 1.00%
of the average daily net asset value of Class B shares to pay expenses of the
distribution of Class B shares. Amounts paid by the Fund under the Class B
Distribution Plan are currently used to pay others (dealers) (i) a commission at
the time of purchase normally equal to 3.00% of the value of each share sold;
and/or (ii) service fees at an annual rate of 0.25% of the average daily net
asset value of shares sold by such others and remaining outstanding on the books
of the Fund for specified periods.
The Class C Distribution Plan provides for payments at an annual rate of 1.00%
of the average daily net asset value of Class C shares to pay expenses of the
distribution of Class C shares. Amounts paid by the Fund under the Class C
Distribution Plan are currently used to pay others (dealers) (i) a commission at
the time of purchase normally equal to 1.00% of the value of each share sold;
and (ii) a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by the rules of the National Association of Securities
Dealers, Inc.) and service fees at an annual rate of 0.25% of the average net
asset value of each share sold by such others and remaining outstanding on the
books for specified periods, beginning approximately 15 months after purchase.
Unreimbursed distribution expenses at July 31, 1994 for Class C shares were
$1,265,877.
Each of the Distribution Plans may be terminated at any time by a vote of
Independent Directors or by a vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of the Class B
Distribution Plan, payments to KDI will continue at the annual rate of 1.00% of
the average daily net asset value of the Class B shares, as compensation for its
services which had been earned while the Class B Distribution Plan was in
effect. Such unreimbursed distribution expenses at July 31, 1994 were
$1,036,351.
During the year ended July 31, 1994, the Fund paid KDI $108,729, $142,654, and
$187,448 under its Class A, Class B, and Class C Distribution Plans,
respectively.
(3.) Securities Transactions
Realized gains and losses are computed on the identified cost basis. Purchases
and sales of investment securities (including proceeds received at maturity) for
the year ended July 31, 1994 were as follows:
Cost of Proceeds
Purchases From Sales
Portfolio securities $ 174,737,846 $ 168,996,964
Short-term investments 1,403,387,460 1,407,623,992
$1,578,125,306 $1,576,620,956
<PAGE>
Keystone America Government Securities Fund
(4.) Investment Management and Transactions with Affiliates
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 payable daily at a rate of
2.0% of the Fund's gross dividends and interest income plus an amount determined
by applying percentage rates, which start at 0.50% and decline, as net assets
increase, to 0.25% 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 and receives for its
services an annual fee representing 85% of the management fee received by KMI.
During the year ended July 31, 1994, the Fund paid or accrued to KMI investment
management and administrative services fees of $498,981, which represent 0.64%
of the Fund's average net assets on an annualized basis. Of such amount paid to
KMI, $424,134 was paid to Keystone for its services to the Fund.
During the year ended July 31, 1994, the Fund paid or accrued to KGI $17,945 as
reimbursement for certain accounting and printing services and $145,790 for
shareholder services.
Beginning January 1, 1993, Keystone voluntarily agreed to limit expenses of
Class A shares to 1% annually and each of Class B and Class C shares to 1.75%
annually. However, Keystone would not be required to make such reimbursement to
an extent which would result in the Fund's inability to qualify as a regulated
investment company under the provisions of the Internal Revenue Code. In
accordance with this voluntary expense limitation, Keystone reimbursed the Fund
$156,708, $49,754, and $68,958 for Class A Shares, Class B Shares and Class C
Shares, respectively. Keystone does not intend to seek repayment of these
amounts.
Certain officers and/or Directors of Keystone are also officers and/or Directors
of the Fund. Officers of Keystone and affiliated Directors receive no
compensation directly from the Fund. Currently, the Independent Directors
receive no compensation for their services.
(5.) Class Level Expenses
Presently, the Fund's class-specific expenses are limited to expenses incurred
by a class of shares pursuant to its respective Distribution Plan. For the year
ended July 31, 1994, the total amount of expenses incurred by each class'
Distribution Plan is set forth in Note (2.) "Capital Share Transactions."
(6.) Distribution to Shareholders
A distribution of $0.053 for Class A, $0.047 for Class B, and $0.047 for Class C
per share from net investment income was declared payable by September 7, 1994
to shareholders of record August 25, 1994. This distribution is not reflected in
the accompanying financial statements. <PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone America Government Securities Fund
We have audited the accompanying statement of assets and liabilities of Keystone
America Government Securities Fund, including the schedule of investments, as of
July 31, 1994, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
seven year period ended July 31, 1994 and the period from February 13, 1987
(Commencement of Operations) to July 31, 1987, for Class A Shares, and for the
year ended July 31, 1994 and for the period from February 1, 1993 (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 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 July
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone America Government Securities Fund as of July 31, 1994, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the periods referred to above in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 2, 1994
