<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOV. 18, 1996.
File Nos. 811-4952
and 33-11048
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. --- ---
Post-Effective Amendment No. 20 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20 X
KEYSTONE INTERMEDIATE TERM BOND FUND
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(617) 338-3200
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
Boston, MA 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
- --- immediately upon filing pursuant to paragraph (b)
- -X- on November 29, 1996 pursuant to paragraph (b)
- --- 60 days after filing pursuant to paragraph (a)(1)
- ---
- --- on (date) pursuant to paragraph (a)(1)
- --- 75 days after filing pursuant to paragraph (a)(2)
- --- on (date) pursuant to paragraph (a)(2) of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has elected to register an indefinite number of its securities under the
Securities Act of 1933. A Rule 24f-2 Notice for Registrant's fiscal year ended
July 31, 1996 was filed September 25, 1996.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Proposed
Title of Share Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered Unit* Price** Fee
Shares of
Beneficial
Interest,
Without
Par Value 1,774,045 9.13 $289,996 $100
* Computed under Rule 457(d) on the basis of the offering price per share at the
close of business on November 4, 1996.
** The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 1,742,282 shares of the
Fund were redeemed during its fiscal year ended July 31, 1996. All of such
shares are being used for a reduction in this filing.
<PAGE>
KEYSTONE INTERMEDIATE TERM BOND FUND
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 20 to REGISTRATION STATEMENT
This Post-Effective Amendment No. 20 to Registrant's Registration
Statement No. 33-11048/811-4952 consists of the following pages,
items of information and documents.
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEM 24(a) and (b)
Financial Statements
Independent Auditors' Report
Listing of Exhibits
PART C - OTHER INFORMATION - ITEMS 25-32 - AND SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections
Principal Underwriter
Location of Accounts and Records
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE INTERMEDIATE TERM BOND FUND
Cross-Reference Sheet pursuant to Rules 404 and 495 under the Securities Act of
1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Fee Table
3 Performance Data
Financial Highlights
4 Cover Page
The Fund
Investment Objectives and Policies
Investment Restrictions
Risk Factors
Additional Investment Information
5 Fund Management and Expenses
Additional Information
5a Not Applicable
6 The Fund
Distributions and Taxes
Fund Shares
Shareholder Services
7 How to Buy Shares
Alternative Sales Options
Distribution Plans
Shareholder Sevices
Pricing Shares
8 How to Redeem Shares
Contingent Deferred Sales Charge and
Waiver of Sales Charges
9 Not applicable
<PAGE>
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 The Fund
13 Investment Objectives and Policies
Investment Restrictions
Brokerage
Appendix
14 Declaration of Trust
Trustees and Officers
15 Additional Information
16 Distribution Plans
Investment Manager and Investment Adviser
Principal Underwriter
Additional Information
17 Brokerage
18 Declaration of Trust
19 Valuation of Securities
Distribution Plans
Sales Charges
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return and
Yield Quotations
23 Financial Statements
<PAGE>
KEYSTONE INTERMEDIATE TERM BOND FUND
PART A
PROSPECTUS
<PAGE>
KEYSTONE INTERMEDIATE TERM
BOND FUND
PROSPECTUS NOVEMBER 29, 1996
Keystone Intermediate Term Bond Fund (the "Fund") is a mutual fund that
seeks current income by investing primarily in investment quality debt
securities. As a secondary objective, the Fund seeks to protect capital. Under
ordinary circumstances, the average maturity of the Fund's investments will
range from three to seven years, based on the investment adviser's analysis of
the interest rate environment.
The Fund offers Class A, B and C shares. Information on share classes and
their fee and sales charge structures may be found in the "Fee Table,"
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans," and "Fund Shares" sections of this
prospectus.
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
Additional information about the Fund is contained in a statement of
additional information dated November 29, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number provided on this page.
KEYSTONE INTERMEDIATE TERM BOND FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 6
Investment Objectives and Policies 6
Investment Restrictions 7
Risk Factors 8
Pricing Shares 9
Dividends and Taxes 9
Fund Management and Expenses 10
How to Buy Shares 13
Alternative Sales Options 14
Contingent Deferred Sales Charge and Waiver of Sales Charges 17
Distribution Plans 19
How to Redeem Shares 20
Shareholder Services 21
Performance Data 23
Fund Shares 24
Additional Information 24
Additional Investment Information (i)
Exhibit A A-1
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE INTERMEDIATE TERM BOND FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of shares of the Fund will
bear directly or indirectly. For more complete descriptions of the various
costs and expenses, see the following sections of this prospectus: "Fund
Management and Expenses"; "How to Buy Shares"; "Alternative Sales Options";
"Contingent Deferred Sales Charge and Waiver of Sales Charges"; "Distribution
Plans"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ........... 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load ............................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original declining to 1.00% in year and 0.00%
purchase price or redemption proceeds, as the sixth year and thereafter
applicable) 0.00% thereafter
Exchange Fee (per exchange)(5) .................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.65% 0.65% 0.65%
12b-1 Fees ........................................ 0.23% 1.00%(7) 1.00%(7)
Other Expenses .................................... 0.22% 0.20% 0.20%
---- ---- ----
Total Fund Operating Expenses ..................... 1.10% 1.85% 1.85%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
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 ............................................................................ $58 $81 $105 $175
Class B ............................................................................ $69 $88 $120 $197
Class C ............................................................................ $29 $58 $100 $217
You would pay the following expenses on the same investment, assuming no redemption at
the end of each period:
Class A ............................................................................ $58 $81 $105 $175
Class B ............................................................................ $19 $58 $100 $197
Class C ............................................................................ $19 $58 $100 $217
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
- ----------
(1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See "Class B Shares"
for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge at the time of purchase, but may be subject to a contingent deferred sales
charge. See the "Class A Shares" and the "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of this
prospectus for an explanation of the charge.
(5) There is no fee for exchange orders received by the Fund directly from a shareholder over the Keystone Automated Response Line
("KARL"). (For a description of KARL, see "Shareholder Services".)
(6) Expense ratios are for the fiscal year ended July 31, 1996, after giving effect to the reimbursement by Keystone Investment
Management Company ("Keystone") of expenses in accordance with certain voluntary expense limits. Keystone intends to continue
the foregoing expense limitations on a calendar month-by-month basis and may modify or terminate them in the future. Prior to
reimbursement, expense ratios for the fiscal year ended July 31, 1996 for the Fund's Class A, B, and C shares were 1.54%,
2.32%, and 2.31%, respectively, of average net assets. Total Fund Operating Expenses include indirectly paid expenses.
(7) Long term shareholders may pay more than the equivalent of the maximum front-end sales charges permitted by the National
Association of Securities Dealers, Inc. ("NASD").
(8) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual return
for the Fund may be greater or less than 5%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE INTERMEDIATE TERM BOND FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of
additional information. Additional information about the Fund's performance is
contained in its Annual Report, which will be made available upon request and
without charge.
<TABLE>
<CAPTION>
FEBRUARY 13, 1987
YEAR ENDED JULY 31, (COMMENCEMENT OF
------------------------------------------------------------------------------------- OPERATIONS) TO
1996 1995 1994(d) 1993 1992 1991 1990 1989 1988 JULY 31, 1987
---- ---- ------- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR . $ 8.88 $ 8.84 $ 9.46 $ 9.23 $ 8.64 $ 8.60 $ 9.11 $ 9.05 $ 9.61 $10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income ............ 0.59 0.63 0.57 0.70 0.71 0.72 0.67 0.69 0.72 0.17
Net realized and
unrealized gain
(loss) on
investments, closed
futures contracts
and foreign currency
transactions ...... (0.16) 0.02 (0.59) 0.18 0.60 0.05 (0.45) 0.10 (0.45) (0.42)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations ........ 0.43 0.65 (0.02) 0.88 1.31 0.77 0.22 0.79 0.27 (0.25)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS FROM:
Net investment
income ............ (0.58) (0.57) (0.57) (0.65) (0.71) (0.72) (0.70) (0.73) (0.83) (0.14)
In excess of net
investment income . 0 (0.04) (0.02) 0 (0.01) (0.01) (0.03) 0 0 0
Tax basis return of
capital ........... 0 0 (0.01) 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total distributions (0.58) (0.61) (0.60) (0.65) (0.72) (0.73) (0.73) (0.73) (0.83) (0.14)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
NET ASSET VALUE
END OF YEAR ....... $ 8.73 $ 8.88 $ 8.84 $ 9.46 $ 9.23 $ 8.64 $ 8.60 $ 9.11 $ 9.05 $ 9.61
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN(b) 4.95% 7.76% (0.29%) 9.88% 15.65% 9.42% 2.71% 9.13% 2.95% (2.50%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE
NET ASSETS:
Total expenses .... 1.10%(c) 1.00% 1.00% 1.52% 1.88% 2.00% 2.00% 1.92% 1.30% 1.00%(a)
Total expenses
excluding
reimbursement .... 1.54% 1.48% 1.80% 1.99% 1.88% 2.06% 2.33% 2.19% 2.65% 12.47%(a)
Net investment
income ........... 6.57% 7.13% 6.81% 7.48% 7.85% 8.42% 7.90% 7.88% 7.48% 6.86%(a)
Portfolio turnover
rate ............. 231% 149% 280% 160% 90% 76% 107% 148% 208% 14%
NET ASSETS END OF
YEAR (THOUSANDS) .. $12,958 $14,558 $16,036 $18,032 $19,288 $20,227 $23,694 $30,337 $38,615 $1,679
<FN>
- ----------
(a) Annualized for the period April 14, 1987 (Commencement of Investment Operations) to July 31, 1987.
(b) Excluding applicable sales charges.
(c) Ratio of total expenses to average net assets for the year ended July 31, 1996 includes indirectly paid expenses. Excluding
indirectly paid expenses for the year ended July 31, 1996, the expense ratio would have been 1.08%.
(d) Calculations based on average shares outstanding.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE INTERMEDIATE TERM BOND FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table has been taken from the Fund's Annual Report and should be
read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the
Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are incorporated by reference into the statement
of additional information. Additional information about the Fund's performance
is contained in its Annual Report, which will be made available upon request
and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED JULY 31, (DATE OF INITIAL
------------------------------------------ PUBLIC OFFERING) TO
1996 1995 1994(d) JULY 31, 1993
------ ------- ------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR ................... $ 8.89 $ 8.85 $ 9.47 $ 9.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................... 0.52 0.56 0.49 0.29
Net realized and unrealized gain (loss) on
investments, closed futures contracts and foreign
currency transactions .............................. (0.16) 0.02 (0.58) 0.12
------ ------- ------- ------
Total from investment operations .................... 0.36 0.58 (0.09) 0.41
------ ------- ------- ------
LESS DISTRIBUTIONS FROM:
Net investment income ............................... (0.51) (0.51) (0.49) (0.29)
In excess of net investment income .................. 0 (0.03) (0.03) 0
Tax basis return of capital ......................... 0 0 (0.01) 0
------ ------- ------- ------
Total distributions ................................. (0.51) (0.54) (0.53) (0.29)
------ ------- ------- ------
NET ASSET VALUE END OF YEAR ......................... $ 8.74 $ 8.89 $ 8.85 $ 9.47
====== ======= ======= ======
TOTAL RETURN(b) ..................................... 4.10% 6.87% (1.05%) 4.42%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .................................... 1.85%(c) 1.75% 1.75% 1.76%(a)
Total expenses excluding reimbursement ............ 2.32% 2.21% 2.36% 2.71%(a)
Net investment income ............................. 5.82% 6.38% 5.48% 5.67%(a)
Portfolio turnover rate ............................. 231% 149% 280% 160%
NET ASSETS END OF YEAR (THOUSANDS) .................. $16,034 $17,985 $17,819 $8,159
<FN>
- ----------
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Ratio of total expenses to average net assets for the year ended July 31, 1996 includes indirectly paid expenses. Excluding
indirectly paid expenses for the year ended July 31, 1996, the expense ratio would have been 1.83%.
(d) Calculations based on average shares outstanding.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE INTERMEDIATE TERM BOND FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table has been taken from the Fund's Annual Report and should be
read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the
Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are incorporated by reference into the statement
of additional information. Additional information about the Fund's performance
is contained in its Annual Report, which will be made available upon request
and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED JULY 31, (DATE OF INITIAL
--------------------------------------- PUBLIC OFFERING) TO
1996 1995 1994(d) JULY 31, 1993
------ ----- ----- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR .................. $ 8.89 $ 8.85 $ 9.46 $ 9.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .............................. 0.52 0.55 0.49 0.29
Net realized and unrealized gain (loss) on
investments, closed futures contracts and foreign
currency transactions ............................. (0.16) 0.03 (0.57) 0.11
------ ------- ------- ------
Total from investment operations ................... 0.36 0.58 (0.08) 0.40
------ ------- ------- ------
LESS DISTRIBUTIONS FROM:
Net investment income .............................. (0.51) (0.51) (0.49) (0.29)
In excess of net investment income ................. 0 (0.03) (0.03) 0
Tax basis return of capital ........................ 0 0 (0.01) 0
------ ------- ------- ------
Total distributions ................................ (0.51) (0.54) (0.53) (0.29)
----- ------ ------ -----
NET ASSET VALUE END OF YEAR ........................ $ 8.74 $ 8.89 $ 8.85 $ 9.46
====== ======= ======= ======
TOTAL RETURN(b) .................................... 4.10% 6.87% (0.95%) 4.31%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ................................... 1.85%(c) 1.75% 1.75% 1.77%(a)
Total expenses excluding reimbursement ........... 2.31% 2.23% 2.37% 2.61%(a)
Net investment income ............................ 5.82% 6.37% 5.44% 5.61%(a)
Portfolio turnover rate ............................ 231% 149% 280% 160%
NET ASSETS END OF YEAR (THOUSANDS) ................. $9,084 $10,185 $13,086 $7,522
<FN>
- ----------
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Ratio of total expenses to average net assets for the year ended July 31, 1996 includes indirectly paid expenses. Excluding
indirectly paid expenses for the year ended July 31, 1996, the expense ratio would have been 1.83%.
(d) Calculations 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 approximately twenty
funds managed by Keystone Management, Inc. ("Keystone Management"), the Fund's
investment manager, and is one of more than thirty funds advised by Keystone
Investment Management Company ("Keystone"), the Fund's investment adviser.
Keystone and Keystone Management are, from time to time, also collectively
referred to as "Keystone."
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund seeks current income by investing primarily in a broad range of
investment quality debt securities. As a secondary objective, the Fund seeks
to protect capital. Where appropriate the Fund will take advantage of
opportunities to realize capital appreciation.
The Fund's investment objectives are 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).
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objectives.
PRINCIPAL INVESTMENTS
The Fund seeks current income by normally investing at least 80% of its
assets in debt securities including United States ("U.S.") Treasury bills,
notes and bonds; mortgage-backed securities issued by the U.S. government, its
agencies or instrumentalities; mortgage-backed securities issued by private
issuers; corporate debt securities; and commercial paper.
Under ordinary circumstances, the Fund expects to invest at least 65% of its
assets in bonds and debentures. In addition, the Fund will only invest its
assets in securities that, at the time of investment, are rated within the
four highest grades by Standard & Poor's Corporation ("S&P") (AAA,
AA, A and BBB), by Moody's Investors Service ("Moody's") (Aaa, Aa, A and Baa)
or by Fitch Investors Service, Inc. -- Municipal Division ("Fitch") (AAA, AA,
A and BBB), or, if not rated or rated under a different system, are of
comparable quality to obligations so rated, as determined by Keystone. The
Fund's investments are expected to have a minimum average rating of A by
Moody's, S&P or Fitch.
The Fund currently expects that the dollar weighted average maturity of its
investments will range from 3 to 7 years. However, the Fund may invest in
securities with remaining maturities of ten years or less.
The Fund's debt securities may include fixed and adjustable rate or stripped
bonds, debentures, notes, equipment trust certificates and debt securities
convertible into, or exchangeable for, preferred or common stock. The Fund may
also invest in units, which are debt securities with stock or warrants to buy
stock attached, and preferred stock. The Fund will not invest in securities
judged to be speculative or of poor quality, but may invest in investment
grade securities as described above.
Bonds which are rated BBB or Baa are considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. 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. Such bonds lack outstanding investment characteristics and may
have speculative characteristics. Keystone will dispose of any bond whose
rating is reduced below Baa by Moody's, BBB by S&P or BBB by Fitch.
When the Fund buys securities, it will consider the ratings of Moody's, S&P
and Fitch assigned to various debt securities as well as many other factors,
including the preservation of capital, the potential for realizing capital
appreciation, maturity and yield to maturity. The Fund will adjust its
investments in particular securities or in types of debt securities in
response to its appraisal of changing economic conditions and trends. The Fund
may sell one security and purchase another security of comparable quality and
maturity to take advantage of what it believes to be short-term differentials
in market values or yield disparities.
OTHER ELIGIBLE SECURITIES
The Fund may invest up to 20% of its total assets under ordinary
circumstances and, when in Keystone's opinion market conditions warrant, up to
100% of its assets for temporary defensive purposes 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 by S&P,
PRIME-1, the highest grade by Moody's or, if not rated by such services, is
issued by a company which 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 that are members of the Federal Deposit
Insurance Corporation including U.S. branches of foreign banks and foreign
branches of U.S. banks; (3) corporate obligations which at the date of
investment are rated A or better by S&P or Moody's; and (4) obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
When the Fund is investing for temporary defensive purposes, it is not
pursuing its investment objective.
The Fund may also invest in foreign securities and securities denominated in
foreign currencies.
The Fund may enter into repurchase and reverse repurchase agreements,
purchase and sell securities and currencies 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. The Fund may also enter into currency and other
financial futures contracts and related options transactions for hedging
purposes and not for speculation. The Fund may employ new investment
techniques with respect to such options and futures contracts and related
options.
The Fund may also invest in collateralized mortgage obligations ("CMOs"),
including inverse floating rate CMOs, and interest only ("IO") and principal
only ("PO") stripped mortgage obligations, all of whose underlying securities
are issued by or guaranteed as to principal and interest by the full faith and
credit of the U.S. government.
The Fund may also invest in certain other types of derivative instruments,
including interest rate swaps, equity swaps, index swaps, currency swaps and
caps and floors, in addition to forwards, futures, options, mortgage-backed
securities and other asset-backed securities as mentioned above. 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 associated risks, see the
"Risk Factors" and "Additional Investment Information" sections of the
prospectus and the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which
may not be changed without the approval of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in detail 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 or
enter into reverse repurchase agreements, except that the Fund may (a) enter
into reverse repurchase agreements or (b) borrow money from banks for
temporary or emergency purposes in aggregate amounts up to one-third of the
value of the Fund's net assets; provided that while borrowings exceed 5% of
the Fund's net assets, any such borrowings will be repaid before additional
investments are made.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid, securities that
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investment on
its books and (2) limiting its holdings of such securities to 15% of net
assets.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of
risk. Before you buy shares of the Fund, you should carefully evaluate your
ability to assume the risks your investment in the Fund poses. You can lose
money by investing in the Fund. Your investment is not guaranteed. A decrease
in the value of the Fund's portfolio securities can result in a decrease in
the value of your investment.
Certain risks related to the Fund are discussed below. In addition to the
risks discussed in this section, specific risks attendant to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.
Should the Fund need to raise cash to meet a large number of redemptions, it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
By itself, the Fund does not constitute a balanced investment plan. You
should take into account your own investment objectives as well as your other
investments when considering an investment in the Fund.
FIXED INCOME SECURITIES. The Fund stresses earning income by investing in
fixed income securities, which are generally considered to be interest rate
sensitive. This means that their market value (and the Fund's share prices)
will tend to vary inversely with changes in interest rates (i.e., decreasing
when interest rates rise and increasing when interest rates fall). For
example, if interest rates increase after the security is purchased, the
security, if sold prior to maturity, may return less than its cost.
Shorter term bonds are less sensitive to interest rate changes, but longer
term bonds generally offer higher yields.
When choosing among bond funds, you should consider the anticipated yield
together with potential changes in share price, as these two factors determine
each fund's total return. The yield and potential price changes of each fund
depend on the quality and maturity of the obligations in its portfolio, as
well as on market conditions.
Investment yields on relatively short-term investments are subject to
substantial and rapid fluctuation.
To the extent that investments are made in debt securities (other than U.S.
government securities), derivatives or structured securities, such
investments, despite favorable credit ratings, are subject to some risk of
default.
DERIVATIVES. 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" and the statement of additional information for
further discussion of the risks inherent in the use of derivatives.
FOREIGN RISK. Investing in securities of foreign issuers generally involves
greater risk than investing in securities of domestic issuers for the
following reasons: publicly available information on issuers and securities
may be scarce; many foreign countries do not follow the same accounting,
auditing, and financial reporting standards as are used in the U.S.; market
trading volumes may be smaller, resulting in less liquidity and more price
volatility compared to U.S. securities of comparable quality; there may be
less regulation of securities trading and its participants; the possibility
may exist for expropriation, confiscatory taxation, nationalization,
establishment of exchange controls, political or social instability or
negative diplomatic developments; and dividend or interest withholding may be
imposed at the source.
Fluctuations in foreign exchange rates impose an additional level of risk,
possibly affecting the value of the Fund's foreign investments and earnings,
as well as gains and losses realized through trades, and the unrealized
appreciation or depreciation of investments. The Fund may also incur costs
when it shifts assets from one country to another.
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.
Current values for the Fund's portfolio securities are determined as
follows:
(1) publicly traded bonds are valued 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 and various
relationships between securities in determining value.
(2) short-term instruments having maturities of more than sixty days for
which market quotations are readily available at current market.
(3) short-term instruments which are purchased with remaining maturities of
sixty days when purchased 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
value.
(4) short-term instruments maturing in more than sixty days when purchased
which are held on the sixtieth day prior to maturity, are valued at amortized
cost (market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest,
approximates market.
(5) 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 continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (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.
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 monthly and
net capital gains, if any, annually. Shareholders receive Fund distributions
in the form of additional shares of that class of shares upon which the
distribution is based or, at the shareholder's option, in cash. Fund
distributions in the form of additional shares are made at net asset value
without the imposition of a sales charge.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front-end sales charge, while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher
than those of Class A shares, and income distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with
respect to Class B and Class C shares.
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. 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. Any taxable dividend declared in October,
November or December to shareholders of record in such a month, and paid by
the following January 31 will be includable in the taxable income of the
shareholders on December 31 of the year in which the dividend was declared.
The Fund advises its shareholders annually as to the federal tax status of
all distributions made during the year.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the
Fund. Subject to the authority of the Fund's Board of Trustees, Keystone
Management, located at 200 Berkeley Street, Boston Massachusetts 02116-5034,
is responsible for the overall management of the Fund's business and affairs.
INVESTMENT MANAGER
Keystone Management was organized in 1989 and is a wholly-owned subsidiary
of Keystone. 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 some of the
other Keystone America Funds and to certain other funds in the Keystone
Investments 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 will provide
investment advisory and management services as described below to the Fund.
Services provided 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 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; and (3) providing services to the Fund's
shareholders in connection with federal and state taxation and distributions
of income and capital gains.
The Fund pays Keystone Management a fee for its services at the annual rate
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 payable daily.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("Keystone
Investments"). Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in
a number of voting trusts, the trustees of which are George S. Bissell, Albert
H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van
Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone Management, Keystone,
their affiliates and the Keystone Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone will receive for its services
an annual fee equal to 85% of the management fee received by Keystone
Management under the Management Agreement.
During the year ended July 31, 1996, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of $273,644,
which represented 0.65% of the Fund's average daily net assets. Of such amount
paid to Keystone Management, $232,597 was paid or accrued to Keystone for its
services to the Fund.
Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant
to which Keystone Investments will be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC") (the
"Merger"). The surviving corporation will be known as Keystone Investments,
Inc. Subject to a number of conditions being met, it is currently anticipated
that the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.
If consummated, the proposed Merger will be deemed to cause an assignment,
within the meaning of the 1940 Act, of both the Management Agreement and the
Advisory Agreement. Consequently, the completion of the Merger is contingent
upon, among other things, the approval of the Fund's shareholders of a new
investment advisory and management agreement between the Fund and Keystone
("The New Advisory Agreement"). The Fund's Trustees have approved the terms of
the New Advisory Agreement, subject to the approval of shareholders and the
completion of the Merger, and have called a special meeting of shareholders to
obtain their approval of, among other things, the New Advisory Agreement. The
meeting is expected to be held in December 1996. The proposed New Advisory
Agreement has terms, including fees payable thereunder, that are substantively
identical to those in the current agreements.
In addition to an assignment of the Fund's Management Agreement and Advisory
Agreement, the Merger, if consummated, will also be deemed to cause an
assignment, as defined by the 1940 Act, of the Principal Underwriting
Agreement between the Fund and Keystone Investment Distributors Company, the
"Principal Underwriter"). As a result, the Fund's Trustees have approved the
following agreements, subject to the Merger's completion: (i) a principal
underwriting agreement between Evergreen Funds Distributor, Inc. ("EFD") and
the Fund; (ii) a marketing services agreement between the Principal
Underwriter and EFD with respect to the Fund; and (iii) a subadministration
agreement between Keystone and EFD with respect to the Fund. EFD is a wholly-
owned subsidiary of Furman Selz LLC. It is currently anticipated that on or
about January 2, 1997, Furman Selz LLC will transfer EFD, and Furman Selz
LLC's its related services, to BISYS Group, Inc. ("BISYS") (the "Transfer").
The Fund's Trustees have also approved, subject to completion of the Transfer,
(i) a new principal underwriting agreement between EFD and the Fund; (ii) a
new marketing services agreement between the Principal Underwriter and EFD
with respect to the Fund; and (iii) a subadministration agreement between
Keystone and BISYS with respect to the Fund. The terms of such agreements will
be substantively identical to the terms of the agreements to be executed upon
completion of the Merger.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Christopher P. Conkey has been the Fund's portfolio manager since 1988. He
is a Keystone Senior Vice President with more than 13 years of investment
experience.
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, fees of its independent
Trustees (Trustees who are not interested persons as defined in the 1940 Act,
of the Fund); its transfer, dividend disbursing and shareholder servicing
agent expenses; its custodian expenses; fees of its independent auditors and
legal counsel to the Independent 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, 1996, after expense reimbursements, the
Fund's Class A, B, and C shares each paid 1.10%, 1.85%, and 1.85%,
respectively, of its average net assets in expenses.
Keystone has voluntarily limited the expenses of the Fund's Class A, B and C
shares to 1.10%, 1.85%, and 1.85%, respectively, of each class's average daily
net assets. Keystone currently intends to continue the foregoing expense
limitations on a calendar month-by-month basis. Keystone will periodically
evaluate these limitations and may modify or terminate them in the future.
Keystone will not be required to reimburse the Fund to the extent such
reimbursement would result in the Fund's inability to qualify as a regulated
investment company under the Code. In accordance with such voluntary expense
limitations in effect, for the fiscal year ended July 31, 1996, Keystone
reimbursed the Fund $60,861, $83,534 and $46,701 for Class A, Class B and
Class C shares, respectively.
During the year ended July 31, 1996, the Fund paid or accrued $23,963 to
Keystone Investments for certain accounting services and $106,796 to Keystone
Investor Resource Center, Inc. ("KIRC") the Fund's transfer and dividend
paying agent, for transfer agent fees. KIRC, a wholly-owned subsidiary of
Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
SECURITIES TRANSACTIONS
Under policies established by the 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 consider as a factor the number of shares of the Fund
sold by the broker-dealer. In addition, broker-dealers executing portfolio
transactions may, from time to time, be affiliated with the Fund, Keystone,
the Fund's principal underwriter or their affiliates. The Fund may pay higher
commissions to broker-dealers which 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
years ended July 31, 1995 and 1996 the Fund's portfolio turnover rates were
149% and 231%, respectively. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs,
which will be borne directly by the Fund as well as additional realized gains
and/or losses to shareholders. 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.
For further information about brokerage and distributions, see the statement
of additional information.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a
selling agreement with the Principal Underwriter. The Principal Underwriter, a
wholly-owned subsidiary of Keystone, is located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
In addition, you may purchase shares of the Fund by mailing to the Fund c/o
Keystone Investor Resource Center, Inc., P.O. Box 2121, Boston, Massachusetts
02106-2121, a completed account application and a check payable to the Fund.
You may also telephone 1-800-343-2898 to obtain the number of an account to
which you can wire or electronically transfer funds and then send in a
completed account application. Subsequent investments in any amount may be
made by check, by wiring Federal funds, by direct deposit 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 the 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 broker-dealers or other firms
prior to the close of the Exchange and received by the Principal Underwriter
prior to the close of its business day will be confirmed at the offering price
effective as of the close of the Exchange on that day.
Orders for shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined
(generally the next business day's offering price) plus, in the case of Class
A shares, the applicable sales charge.
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable. Broker-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
The Fund offers Class A, B, and C 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 (1) in an amount equal to or
exceeding $1,000,000 or (2) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), 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.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a deferred sales charge if they are
redeemed. Class B shares purchased on or after June 1, 1995, are subject to a
deferred sales charge upon redemption during the 72-month period from and
including the month of purchase. Class B shares purchased prior to June 1,
1995, are subject to a deferred sales charge upon redemption during the four
calendar years following purchase. Class B shares purchased on or after June
1, 1995, that have been outstanding for eight years from and including the
month of purchase will automatically convert to Class A shares without the
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 broker-
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 net assets attributable to their respective classes.
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:
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------------------------------------
Less than $100,000 ...... 4.75% 4.99% 4.25%
$100,000 but less than 3.25%
$250,000 ............... 3.75% 3.90%
$250,000 but less than 2.25%
$500,000 ............... 2.50% 2.56%
$500,000 but less than
$1,000,000 ............. 1.50% 1.52% 1.50%
- ----------
*Rounded to the nearest one-hundredth percent.
----------------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a tax-
sheltered annuity plan sponsored by a public educational entity having 5,000
or more eligible employees (an "Educational TSA Plan") will be at net asset
value without the imposition of a front-end sales charge (each such purchase,
an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay broker-
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
0.50% of the investment amount up to $4,999,999; plus 0.25% of the investment
amount over $4,999,999.
With the exception of Class A shares acquired by an Educational TSA Plan in
an NAV Purchase, as described above, Class A shares acquired 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. Class A shares acquired by an Educational TSA Plan in
an NAV Purchase are not subject to a contingent deferred sales charge.
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 and 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 offered in connection with certain fee based programs, such as
wrap accounts sponsored or managed by broker-dealers, investment advisers or
others 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 when
the amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates and the shareholder either (1) paid a front-end sales charge, or
(2) was at some time subject to, but did not actually pay, a contingent
deferred sales charge with respect to the redemption proceeds.
In addition, 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 when the amount invested represents redemption proceeds from
such unrelated registered open-end investment company and the shareholder
either (1) paid a front end sales charge, or (2) was at some time subject to,
but did not actually pay, a contingent deferred sales charge with respect to
the redemption proceeds. This special net asset value purchase is currently
offered only on a calendar month-by-month basis and may be modified or
terminated in the future.
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 (who may reallow all or part to others, such as broker-
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 and 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 deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -----------
First twelve-month period ................... 5.00%
Second twelve-month period .................. 4.00%
Third twelve-month period ................... 3.00%
Fourth twelve-month period .................. 3.00%
Fifth twelve-month period ................... 2.00%
Sixth twelve-month period ................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and the first calendar year
after the year of purchase; 2.00% on shares redeemed during the second
calendar year after the year of purchase; and 1.00% on shares redeemed during
the third calendar year after the year of purchase. No deferred sales charge
is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by
the Principal Underwriter. Amounts received by the Principal Underwriter under
the Class B Distribution Plans are reduced by deferred sales charges retained
by the Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver
of Sales Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of a front-end sales charge or exchange fee. Class
B shares purchased prior to June 1, 1995 will similarly convert to Class A
shares at the end of seven calendar years after the year of purchase.
Conversion of Class B shares represented by stock certificates will require
the return of the stock certificates to KIRC. The Class B shares so converted
will no longer be subject to the higher expenses borne by Class B shares.
Because the net asset value per share of the Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is
the Fund's opinion that such a conversion will not constitute a taxable event
under federal income tax law. In the event that this ceases to be the case,
the Board of Trustees will consider what action, if any, is appropriate and in
the best interests of the Class B shareholders.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans 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 Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as broker-dealers) (1) as
commissions for Class B shares sold and (2) as shareholder service fees.
Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the
aggregate may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers 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-dealer or other party will receive
service fees at an annual rate of 0.25% of the average daily net asset value
of such Class B share maintained by the recipient and outstanding on the books
of the Fund for specified periods. See "Distribution Plans" below.
CLASS C SHARES
Class C shares are offered only through broker-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 Charge and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLANS
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 Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as dealers) (1) as commissions
for Class C 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 broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share
sold, plus the first year's service fee in advance in the amount of 0.25% of
the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, the broker-dealer or other party will receive a
commission at an annual rate of 0.75% (subject to the 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 and 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 such shares; (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 24
months; (4) Class B shares held more than four consecutive calendar years or
more than 72 months, as the case may be; or (5) Class C shares held for more
than one year. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
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 a Systematic Income
Plan of up to 1.5% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
The Fund 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. See the statement of
additional information for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, the Principal Underwriter may provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to broker-dealers with whom it has broker-dealer
agreements that relates to sales incentive campaigns conducted by such broker-
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. Broker-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 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to broker-dealers that satisfy certain
criteria established from time to time by the Principal Underwriter. These
conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on
the broker-dealer's satisfaction of the required conditions, be periodic and
may be up to 0.25% of the value of shares sold by such broker-dealer.
During the period commencing November 1, 1996 through December 31, 1996 (the
"Offering Period"), the Principal Underwriter, or any successor entity to
Keystone, will pay to First Union Brokerage Services, Inc. ("First Union
Brokerage"), a wholly-owned subsidiary of First Union National Bank of North
Carolina, an additional concession equal to 0.50% of the public offering price
of any class of Fund shares sold by First Union Brokerage during the Offering
Period.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to broker-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 broker-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 currently limits the amount that the 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 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 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 Fund's Class B
Distribution Plans that exceed current annual payments permitted to be
received by the Principal Underwriter from the Fund (The "Advances"). The
Principal Underwriter intends to seek full payment of such Advances from the
Fund (together with annual interest thereon at the prime rate plus 1%) at such
time in the future as, and to the extent that, payment thereof by the Fund
would be within the permitted limits. If the Fund's Independent Trustees
authorize such 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.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B
shares sold during the two-year period commencing approximately June 1, 1995.
The Fund has agreed not to reduce the rate of payment of 12b-1 fees in respect
of such Class B shares unless it terminates such shares' Distribution Plan
completely. If it terminates such Distribution Plan, the Fund may be subject
to adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. 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 Advances.
For Class B shares sold prior to June 1, 1995, unreimbursed distribution
expenses at July 31, 1996 were $1,059,039 (6.61% of such Class B net assets at
July 31, 1996). For Class B shares sold on or after June 1, 1995, unreimbursed
distribution expenses at July 31, 1996 were $225,787 (1.41% of such Class B
net assets at July 31, 1996). Unreimbursed distribution expenses at July 31,
1996 for Class C shares were $1,192,820 (13.13% of Class C net assets at July
31, 1996).
Broker-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 redemption value by writing
to the Fund c/o KIRC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Fund. 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.
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 broker-dealers and will calculate the net asset value
on the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. The Principal Underwriter
charges no fee for this service but your broker-dealer may do so.
The redemption value equals the net asset value per share adjusted for
fractions of a cent 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. A deferred sales charge may be imposed by the Fund at the time of
redemption of certain shares as explained in "Alternative Sales Options." 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 with a
certified check, by Federal Reserve or bank wire of funds, by direct deposit,
or by EFT. Although the mailing of a redemption check or the wiring or EFT of
redemption proceeds may be delayed, the redemption value will be determined
and the redemption processed in the ordinary course of business upon receipt
of proper documentation. In such a case, after the redemption and prior to the
release of the proceeds, no appreciation or depreciation will occur in the
value of the redeemed shares, and no interest will be paid on the redemption
proceeds. If the payment of a redemption has been delayed, the check will be
mailed or the proceeds wired or sent EFT promptly after good payment has been
collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you.
Payment of the amount due on redemption, less any applicable contingent
deferred sales charge (as described above), will be made within seven days
thereafter except as discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC may
waive this requirement, or may require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you
and process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to
engage in telephone transactions generally, you must complete the appropriate
sections of the Fund's application.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation
of your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if
the address and bank account of record have been the same for a minimum period
of 30 days.
If 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
Due to 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.
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, except as noted below, may be exchanged for the same type
of Class B shares of other Keystone America Funds and the same type of Class
B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.
Class B shares purchased on or after June 1, 1995 cannot be exchanged for
Class B shares of Keystone Capital Preservation and Income Fund during the 24-
month period commencing with and including the month of purchase.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares acquired in an NAV Purchase or otherwise without a front-
end sales charge,
(2) Class B shares that have been held for less than 72 months or four
years, as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over
to the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone fund for a $10 fee by calling
or writing to Keystone. The exchange fee is waived for individual investors
who make an exchange using KARL. As noted above, if the shares being tendered
for exchange are still subject to a deferred sales charge, such charge will
carry over to the shares being acquired in the exchange transaction. The Fund
reserves the right, after providing the required notice to shareholders, to
terminate this exchange offer or to change its terms, including the right to
change the fee for any exchange.
Orders to exchange a certain class of shares of the 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 such shares next determined after the proceeds from such
redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund
prior to 4:00 p.m., eastern time on any day the Fund is open for business will
be executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after 4:00 p.m. eastern time
on any business day will be executed at the respective net asset values
determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes
more than five exchanges of shares of the funds in a year or three in a
calendar quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. 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.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $100 per month or quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmtion with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the
amount or schedule of your automatic investments, you may write to or call
KIRC. Please include your account numbers. Termination may take up to 30
days.
RETIREMENT PLANS
The Fund has various retirement plans available to investors, including
Individual Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee
Pension Plans (SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity
Plans; 403(b)(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing
Plans; and Money Purchase Plans. For details, including fees and application
forms, call toll free 1-800-247-4075 or write to KIRC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income 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 Systematic Income Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of 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 the Systematic Income Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more
shares being purchased when the selected fund's net asset value is relatively
low and fewer shares being purchased when the fund's net asset value is
relatively high and may result in a lower average cost per share than a less
systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in a Keystone America Fund or a money market fund managed or advised
by Keystone. You should designate on the application (1) the dollar amount of
each monthly or quarterly investment (minimum $100) you wish to make and (2)
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
Keystone America Fund shares you may own automatically invested to purchase
the same class of shares of any other Keystone America Fund. You may select
this service on your application and indicate the Keystone America Fund(s)
into which distributions are to be invested. The value of shares purchased
will be ineligible for Rights of Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at
current net asset value.
PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield."
ALL DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. 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 in 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
The Fund issues Class A, B, and C shares which participate in dividends and
distributions and have equal voting, liquidation and other rights except that
(1) expenses related to the distribution of each class of shares or other
expenses that the Board of Trustees may designate as class expenses from time
to time, are borne solely by 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. 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 holders of 10%
of the outstanding shares request a meeting for the purpose of removing a
Trustee. As prescribed by Section 16(c) of the 1940 Act, shareholders may be
eligible for shareholder communication assistance in connection with the
special meeting.
Under Massachusetts law it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. However, the Fund's Declaration
of Trust provides that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
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 discussed in the Statement of
Additional Information which limit such investments to commercial paper rated
A-1 by S&P, Prime-1 by Moodys and F-1 by Fitch Investors Service, Inc.
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 creditworthy. 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.
FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities principally traded
in securities markets outside the U.S. While investment in foreign securities
is intended to reduce risk by providing further diversification, such
investments involve sovereign risk in addition to the credit and market risks
normally associated with domestic securities. Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and custodian fees are
generally higher than in the United States. Investments in foreign securities
may also be subject to other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets, imposition of withholding taxes on dividend or
interest payments and currency blockage (which would prevent cash from being
brought back to the U.S.). These risks are carefully considered by Keystone
prior to the purchase of these securities.
"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. A separate account of liquid assets equal to the
value of such purchase commitments will be maintained until payment is made.
When issued and delayed delivery agreements are subject to risks from
changes in value based upon changes in the level of interest rates, 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 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 in furtherance of 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. 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 securities of foreign issuers.
When the Fund invests in foreign securities, they usually will be denominated
in foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell.
The Fund intends to use these contracts to hedge the U.S. dollar value of a
security it already owns, particularly if the Fund expects a decrease in the
value of the currency in which the foreign security is denominated. Although
the Fund will attempt to benefit from using forward contracts, the success of
its hedging strategy will depend on Keystone's 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.
INDEXED COMMERCIAL PAPER
Indexed commercial paper may have its principal linked to changes in foreign
currency exchange rates whereby its principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the
referenced exchange rate. A Fund will purchase such commercial paper with the
currency in which it is denominated and, at maturity, will receive interest
and principal payments thereon in that currency, but the amount of principal
payable by the issuer at maturity will change in proportion to the change (if
any) in the exchange rate between the two specified currencies between the
date the instrument is issued and the date the instrument matures. While such
commercial paper entails the risk of loss of principal, the potential for
realizing gains as a result of changes in foreign currency exchange rates
enables the Fund to hedge (or cross-hedge) against a decline in the U.S.
dollar value of investments denominated in foreign currencies while providing
an attractive money market rate of return.
MORTGAGE-RELATED SECURITIES
The mortgage-related securities in which the Fund may typically invest are
securities representing interests in pools of mortgage loans made to home
owners. Mortgage-related securities bear interest at either a fixed rate or an
adjustable rate determined by reference to an index rate. The mortgage loan
pools may be assembled for sale to investors (such as the Fund) by
governmental or private organizations. Mortgage-related securities issued by
the Government National Mortgage Association ("GNMA") are backed by the full
faith and credit of the U.S. government; those issued by Federal National
Mortgage Associated ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") are not so backed.
Securities representing interests in pools created by private issuers
generally offer a higher rate of interest than securities representing
interests in pools created by governmental issuers because there are no direct
or indirect governmental guarantees of the underlying mortgage payments.
However, private issuers sometimes obtain committed loan facilities, lines of
credit, letters of credit, surety bonds or other forms of liquidity and credit
enhancement to support the timely payment of interest and principal with
respect to their securities if the borrowers on the underlying mortgages fail
to make their mortgage payments. The ratings of such non-governmental
securities are generally dependent upon the ratings of the providers of such
liquidity and credit support and would be adversely affected if the rating of
such an enhancer were downgraded. The Fund may buy mortgage-related
securities without credit enhancement if the securities meet the Fund's
investment standards. Although the market for mortgage-related securities is
becoming increasingly liquid, those of certain private organizations may not
be readily marketable.
One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an un-
divided beneficial interest in the underlying pool of mortgage loans and
receives a pro rata share of the monthly payments made by the borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of the
securities. Prepayments of mortgages resulting from the sale, refinancing or
foreclosure of the underlying properties are also paid to the holders of these
securities. Some mortgage-related securities, such as securities issued by
GNMA, are referred to as "modified pass-through" securities. The holders of
these securities are entitled to the full and timely payment of principal and
interest, net of certain fees, regardless of whether payments are actually
made on the underlying mortgages. Another form of mortgage-related security is
a "pay-through" security, which is a debt obligation of the issuer secured by
a pool of mortgage loans pledged as collateral that is legally required to be
paid by the issuer regardless of whether payments are actually made on the
underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs") are the predominant type of "pay-
through" mortgage-related security. CMOs are designed to reduce the risk of
prepayment for investors by issuing multiple classes of securities, each
having different maturities, interest rates and payment schedules, and with
the principal and interest on the underlying mortgages allocated among the
several classes in various ways. The interest rate may be fixed or adjustable.
The collateral securing the CMOs may consist of a pool of mortgages, but may
also consist of mortgage-backed bonds or pass-through securities. The
secondary market for CMOs is actively traded. CMOs may be issued by a U.S.
government instrumentality or agency or by a private issuer. Although payment
of the principal of, and interest on, the underlying collateral securing
privately issued CMOs may be guaranteed by GNMA, FNMA or FHLMC, these CMOs
represent obligations solely of the private issuer and are not insured or
guaranteed by GNMA, FNMA, FHLMC, any other governmental agency or any other
person or entity.
INVERSE FLOATING RATE COLLATERALIZED MORTGAGE OBLIGATIONS. In addition to
investing in fixed rate and adjustable rate CMOs, the Fund may also invest in
CMOs with rates that move inversely to market rates ("inverse floaters").
An inverse floater bears an interest rate that resets in the opposite
direction of the change in a specified interest rate index. As market interest
rates rise, the interest rate on the inverse floater goes down, and vice
versa. Inverse floaters tend to exhibit greater price volatility than fixed-
rate bonds of similar maturity and credit quality. The interest rates on
inverse floaters may be significantly reduced, even to zero, if interest rates
rise. Moreover, the secondary market for inverse floaters may be limited in
rising interest rate environments.
ADJUSTABLE RATE MORTGAGE SECURITIES. Another type of mortgage-related
security, known as adjustable-rate mortgage securities ("ARMS"), bears
interest at a rate determined by reference to a predetermined interest rate or
index. There are two main categories of rates or indices: (1) rates based on
the yield on U.S. Treasury securities and (2) indices derived from a
calculated measure such as a cost of funds index or a moving average of
mortgage rates. Some rates and indices closely mirror changes in market
interest rate levels, while others tend to lag changes in market rate levels
and tend to be somewhat less volatile.
ARMS may be secured by adjustable-rate mortgages or fixed-rate mortgages.
ARMS secured by fixed-rate mortgages generally have lifetime caps on the
coupon rates of the securities. To the extent that general interest rates
increase faster than the interest rates on the ARMS, these ARMS will decline
in value. The adjustable-rate mortgages that secure ARMS will frequently have
caps that limit the maximum amount by which the interest rate or the monthly
principal and interest payments on the mortgages may increase. These payment
caps can result in negative amortization (i.e., an increase in the balance of
the mortgage loan). Furthermore, since many adjustable-rate mortgages only
reset on an annual basis, the values of ARMS tend to fluctuate to the extent
that changes in prevailing interest rates are not immediately reflected in the
interest rates payable on the underlying adjustable-rate mortgages.
STRIPPED MORTGAGE SECURITIES. Stripped mortgage-related securities ("SMRS")
are mortgage-related securities that are usually structured with two classes
of securities collateralized by a pool of mortgages or a pool of mortgaged-
backed bonds or pass-through securities, with each class receiving different
proportions of the principal and interest payments from the underlying assets.
A common type of SMRS has one class of interest-only securities ("IOs")
receiving all of the interest payments from the underlying assets, while the
other class of securities, principal-only securities ("POs"), receives all of
the principal payments from the underlying assets. IOs and POs are extremely
sensitive to interest rate changes and are more volatile than mortgage-related
securities that are not stripped. IOs tend to decrease in value as 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 pursuant to the guidelines established by the Board,
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.
VARIABLE, FLOATING AND INVERSE FLOATING RATE INSTRUMENTS. Fixed-income
securities may have fixed, variable or floating rates of interest. Variable
and floating rate securities pay interest at rates that are adjusted
periodically, according to a specified formula. A "variable" interest rate
adjusts at predetermined intervals (e.g., daily, weekly or monthly), while a
"floating" interest rate adjusts whenever a specified benchmark rate (such as
the bank prime lending rate) changes.
The Fund may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of
time if short-term interest rates rise above a predetermined level or "cap."
The amount of such an additional interest payment typically is calculated
under a formula based on a short-term interest rate index multiplied by a
designated factor.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities represent interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations or foreign government
securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such
as commercial bank loans or Brady Bonds) and the issuance by that entity of
one or more classes of structured securities backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured securities to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured securities is dependent on the
extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments. Structured
securities of a given class may be either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured securities
typically have higher yields and present greater risks than unsubordinated
structured securities.
BRADY BONDS. Brady Bonds are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructurings under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been
issued only recently, and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various
currencies (although most are U.S. dollar-denominated) and they are actively
traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
that have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of
rolling interest payments based on the applicable interest rate at that time
and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments, but generally are not
collateralized. Brady Bonds are often viewed as having up to four valuation
components: (1) collateralized repayment of principal at final maturity, (2)
collateralized interest payments, (3) uncollateralized interest payments, and
(4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
EQUIPMENT TRUST CERTIFICATES. Equipment Trust Certificates are a mechanism for
financing the purchase of transportation equipment, such as railroad cars and
locomotives, trucks, airplanes and oil tankers.
Under an equipment trust certificate, the equipment is used as the security
for the debt and title to the equipment is vested in a trustee. The trustee
leases the equipment to the user, i.e. the railroad, airline, trucking or oil
company. At the same time equipment trust certificates in an aggregate amount
equal to a certain percentage of the equipment's purchase price are sold to
lenders. The trustee pays the proceeds from the sale of certificates to the
manufacturer. In addition, the company using the equipment makes an initial
payment of rent equal to the balance of the purchase price to the trustee,
which the trustee also pays to the manufacturer. The trustee collects lease
payments from the company and uses the payments to pay interest and principal
on the certificates. At maturity, the certificates are redeemed and paid, the
equipment is sold to the company and the lease is terminated. These
certificates are typically traded in the over-the-counter market.
Generally, these certificates are regarded as obligations of the company
that is leasing the equipment and are shown as liabilities in its balance
sheet. However, the company does not own the equipment until all the
certificates are redeemed and paid. In the event the company defaults under
its lease, the trustee terminates the lease. If another lessee is available,
the trustee leases the equipment to another user and makes payments on the
certificates from new lease rentals.
The principal risk of these certificates is the decline in value of the
equipment. However, the equipment which is typically involved is not subject
to rapid decline in value.
ZERO COUPON "STRIPPED" BONDS. A zero coupon "stripped" bond represents
ownership in serially maturing interest payments or principal payments on
specific underlying notes and bonds, including coupons relating to such notes
and bonds. The interest and principal payments are direct obligations of the
issuer. Coupon zero coupon bonds of any series mature periodically from the
date of issue of such series through the maturity date of the securities
related to such series. Principal zero coupon bonds mature on the date
specified therein, which is the final maturity date of the related Treasury
securities. Each zero coupon bond entitles the holder to receive a single
payment at maturity. There are no periodic interest payments on a zero coupon
bond. Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights
and privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individually against the issuers and are not required to act in concert with
other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds
or coupon zero coupon bonds (either initially or in the secondary market) is
treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the
amount payable at maturity over the purchase price. The purchaser is required
to take into account each year as ordinary income an allocable portion of such
discounts determined on a "constant yield" method. Any such income increases
the holder's tax basis for the zero coupon bond, and any gain or loss on a
sale of the zero coupon bonds relative to the holder's basis, as so adjusted,
is a capital gain or loss. If the holder owns both principal zero coupon bonds
and coupon zero coupon bonds representing interest in the same underlying
issue of securities, a special basis allocation rule (requiring the aggregate
basis to be allocated among the items sold and retained based on their
relative fair market value at the time of sale) may apply to determine the
gain or loss on a sale of any such zero coupon bonds and the subsequent
accrual of discount on the retained items.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds. Only Class A shares subject to
an initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
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 irre-
vocably 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
+
Balanced Fund II
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
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
--------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[Recycle Logo]
ITBF-P 11/95
8.6M
--------------------------------------
KEYSTONE
--------------------------------
[Graphic Omitted]
--------------------------------
INTERMEDIATE TERM
BOND FUND
--------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE INTERMEDIATE TERM BOND FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE INTERMEDIATE TERM BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
November 29, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Intermediate Term Bond Fund (the "Fund") dated November 29, 1996. A copy of the
prospectus may be obtained from the Fund's principal underwriter, Keystone
Investment Distributors Company (the "Principal Underwriter"), or your
broker-dealer. The Principal Underwriter is located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
The Fund 2
Investment Policies 2
Investment Restrictions 2
Distributions and Taxes 5
Valuation of Securities 6
Brokerage 7
Sales Charges 10
Distribution Plans 14
Trustees and Officers 18
Investment Manager and Investment Adviser 23
Principal Underwriter 27
Declaration of Trust 30
Standardized Total Return
and Yield Quotations 32
Financial Statements 33
Additional Information 34
Appendix A-1
- --------------------------------------------------------------------------------
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 managed by Keystone Management, Inc.
("Keystone Management"), its investment manager, and is advised by Keystone
Investment Management Company ("Keystone"), its investment adviser.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
The Fund invests primarily in investment quality debt securities.
Certain investments and investment techniques, including the risks associated
with such investments and investment techniques, and ratings criteria applicable
to the Fund are more fully explained in the Appendix to this statement of
additional information.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (the
"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). 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 United States ("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 (a) enter into reverse repurchase agreements or (b) borrow
money from banks for temporary or emergency purposes in aggregate amounts up to
one-third of the value of the Fund's net assets; provided that while borrowings
from banks exceed 5% of the Fund's net assets, any such borrowings will be
repaid before additional investments are made;
(5) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis or collateral
arrangement with respect to the writing of options on securities are not deemed
to be a pledge of assets;
(6) issue senior securities; the purchase or sale of securities on a
"when issued" basis or collateral arrangement with respect to the writing of
options on securities are not deemed to be the issuance of a senior security;
(7) make loans, except that the Fund may (a) purchase or hold debt
securities consistent with its investment objective, (b) lend portfolio
securities valued at not more than 15% of its total assets to broker-dealers and
(c) enter into repurchase agreements;
(8) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 25% of its total assets would be invested in
a single industry; except that (a) there is no restriction with respect to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (b) wholly-owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of the parents; (c) the industry classification of
utilities will be determined according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (d) the industry classification of medically related industries
will be determined according to their services (for example, management,
hospital supply, medical equipment and pharmaceuticals will each be considered a
separate industry);
(9) invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation;
(10) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(11) purchase or sell commodities or commodity contracts or real
estate, except that it may purchase and sell securities secured by real estate
and securities of companies which invest in real estate and may engage in
currency or other financial futures contracts and related options transactions;
and
(12) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid, securities that
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investment on
its books and (2) limiting its holdings of such securities to 15% of net assets.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund will make distributions from net investment income monthly and
net capital gains, if any, annually in shares, or, at the option of the
shareholder, in cash. Distributions are taxable whether received in cash or
additional shares. 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 ex-dividend date after adjustment for the distribution.
Net asset value is used in computing the number of shares in both gains and
income distribution reinvestments. Account statements and/or checks as
appropriate will be mailed to shareholders within seven days after the Fund pays
the distribution. Unless the Fund receives instructions to the contrary from a
shareholder before the record date, it will assume that the shareholder wishes
to receive that distribution and future gains and income distributions in
shares. Instructions continue in effect until changed in writing. Because most
of the Fund's income will consist of interest, it is not expected that any
portion of dividends paid by the Fund will qualify for the corporate dividends
received deduction.
Distributed long-term capital gains are taxable as such to the
shareholder, regardless of how long the shareholder has held the Fund shares.
However, if such shares are held for 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.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined as
follows:
(1) short-term investments maturing in or with remaining 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;
(2) all other securities for which market quotations are readily
available are valued at the mean of the bid and asked prices at the time of
valuation;
(3) securities, including restricted securities, for which complete
quotations are not readily available and other assets are valued at prices
deemed in good faith to be fair under procedures established by the Fund's Board
of Trustees.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing fixed income securities. As a result,
it is likely that most of the valuations for such securities will be based upon
their fair value determined under procedures which have been approved by the
Fund's Board of Trustees. The Fund's Board of Trustees has authorized the use of
a pricing service to determine the fair value of its fixed income securities and
certain other securities.
- --------------------------------------------------------------------------------
BROKERAGE
- --------------------------------------------------------------------------------
It is the policy of Keystone, in effecting transactions in the Fund's
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
broker's ability to effect the transaction at all where a large block is
involved; the availability of the broker to stand ready to execute potentially
difficult transactions in the future; and the financial strength and stability
of the broker. Such considerations are weighed by management in determining the
overall reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends 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 its Investment Management Agreement with
the Fund (the "Management Agreement") or Keystone under its Investment Advisory
Agreement with Keystone Management (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 which is fair and equitable to the Fund.
The Fund expects that purchases and sales of income securities usually
will be principal transactions. Such securities are normally purchased directly
from the issuer or from an underwriter or market maker for the securities. There
usually will be no brokerage commissions paid by the Fund for such purchases.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's markup or reflect a dealer's markdown. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.Neither Keystone Management, Keystone nor the Fund
intends to place securities transactions with any particular broker-dealer or
group thereof. The Fund's Board of Trustees however, has determined that the
Fund may consider sales of shares as a factor in the selection of broker-dealers
to execute portfolio transactions, subject to the requirements of best
execution, including best price, described above.
The Fund's Board of Trustees periodically reviews the Fund's brokerage
policy. In the event of further regulatory developments affecting securities
exchanges and brokerage practices generally, the Board of Trustees may change,
modify or eliminate any of the foregoing practices.
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, however,
that the same investment decision is made for more than one fund. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. Although, in some cases this system could
have a detrimental effect on the price or volume of the Fund portfolio
securities, in other cases, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
Portfolio securities are not purchased from or sold to Keystone
Management, Keystone, the Principal Underwriter or any of their affiliates, as
defined in the 1940 Act and rules andregulations issued thereunder.
For the fiscal year ended July 31, 1994, 1995 and 1996, the Fund paid
$0, $34,700 and $234, respectively, in brokerage commissions.
- --------------------------------------------------------------------------------
SALES CHARGES
- --------------------------------------------------------------------------------
General
The Fund offers Class A, B, and C 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 ("CDSC") payable upon redemption during the
72-month period from and including the month of purchase. Class B shares
purchased prior to June 1, 1995, are subject to a CDSC payable upon redemption
within three calendar years after the first year of purchase ("Back-End Load
Option"). Class B shares purchased on or after June 1, 1995, that have been
outstanding eight years from and including the month of purchase will
automatically convert to Class A shares without imposition of a front-end sales
charge or exchange fee. Class B shares purchased prior to June 1, 1995, that
have been outstanding during seven calendar years will similarly convert to
Class A shares. Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to Keystone Investor Resource
Center, Inc., the Fund's transfer and dividend disbursing agent ("KIRC"). Class
C shares are sold subject to a CDSC payable upon redemption within one year
after purchase ("Level Load Option"). Class C shares are available only through
broker-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 and a description of applicable CDSCs.
Contingent Deferred Sales Charges
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plans"), a CDSC is imposed at the time of
redemption of certain Fund shares, as described below. If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you and retained by
the Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
Class A Shares
With certain exceptions, purchases of Class A shares (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 or a Title I tax sheltered
annuity or TSA Plan sponsored by a organization having 100 or more eligible
employees (a "Qualifying Plan"), in either case without a front-end sales
charge, will be subject to a CDSC during the 24-month period following the date
of purchase.
Class B Shares
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a CDSC on Class B shares redeemed
during succeeding twelve-month periods as follows: 5.00% during the first
twelve-month period; 4.00% during the second twelve-month period; 3.00% during
the third twelve-month period; 3.00% during the fourth twelve-month period;
2.00% during the fifth twelve-month period, and 1.00% during the sixth
twelve-month period. No CDSC is imposed on amounts redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, the Fund,
with certain exceptions, will impose a CDSC 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 CDSC is imposed on amounts redeemed thereafter.
Amounts received by the Principal Underwriter under the Class B
Distribution Plans are reduced by CDSCs retained by the Principal Underwriter.
See "Calculation of Contingent Deferred Sales Charge" and "Waiver of Sales
Charges" below.
<PAGE>
Class C Shares
With certain exceptions, the Fund may impose a CDSC of 1.00% on Class C
shares redeemed within one year after the date of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter.
Calculation of Contingent Deferred Sales Charge
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares.
No CDSC 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 24 months; (4) Class B shares held
during more than four consecutive calendar years or more than 72 months, as the
case may be; or (5) Class C shares held for more than one year from date of
purchase.
Upon request for redemption, shares not subject to the CDSC will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed. There is no CDSC when the shares of a class are exchanged for the
shares of the same class of another Keystone America Fund. Moreover, for the
purpose of computing CDSCs, when shares of one fund are exchanged for shares of
another fund, the date of purchase of the shares being acquired by exchange is
deemed to be the date shares being tendered for exchange were originally
purchased.
Waiver of Sales Charges
Shares of the Fund also may be sold, to the extent permitted by
applicable law, regulations, interpretations or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees and sales representatives of the Fund,
Keystone Management, Keystone, Keystone Investments, Inc. ("Keystone
Investments"), Harbor Capital Management Company, Inc., the Principal
Underwriter, and certain of their affiliates who have been such for not less
than ninety days; (2) a pension and profit-sharing plan established by such
companies, and their affiliates, for the benefit of their Trustees, Directors,
officers, full-time employees and sales representatives; or (3) registered
representatives of a firm with a dealer agreement with the Principal
Underwriter; provided, however, that all such sales are made upon the written
assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge 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 purchased pursuant to this waiver is
at least $500,000 and any commission paid at the time of such purchase is not
more than 1% of the amount invested.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan, as
a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.5% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
Redemption 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, however,
under the 1940 Act to redeem for cash all shares presented for redemption by any
one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets in
any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assisgned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
- --------------------------------------------------------------------------------
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 the adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Independent Trustees
(Trustees who are not interested persons of the Fund, as defined in the 1940
Act, and who have no direct or indirect financial interest in the Distribution
Plans or any agreement related thereto).
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
currently limits annual expenditures to 1.00% of the aggregate average daily net
asset value of its shares, of which 0.75% may be used to pay such distribution
costs and 0.25% may be used to pay shareholder service fees. The NASD also
limits the aggregate amount that the Fund may pay for such distribution costs to
6.25% of gross share sales since the inception of the Distribution Plan, plus
interest at the prime rate plus 1.00% on such amounts (less any CDSCs paid by
shareholders to the Principal Underwriter) remaining unpaid from time to time.
Class A Distribution Plan. The Class A Distribution Plan provides that the Fund
may expend daily amounts at an annual rate, which is currently limited to 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 its shares, including, without limitation, expenditures consisting of
payments to 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 and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
Class B Distribution Plan. 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, (1) to enable the Principal Underwriter to pay to others
(broker-dealers) commissions in respect of Class B shares since inception of the
Distribution Plan; and (2) to enable the Principal Underwriter to pay or to have
paid to others a service fee, at such intervals as the Principal Underwriter may
determine, in respect of Class B shares maintained by any such recipients and
outstanding on the books of the Fund for specified periods.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share sold
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-dealer 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 and outstanding on the books of the
Fund for specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with a Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
Advances, 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.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, the Principal Underwriter has
sold to a financial institution substantially all of its 12b-1 fee collection
rights and CDSC collection rights in respect of Class B shares sold during the
two-year period commencing approximately June 1, 1995. The Fund has agreed not
to reduce the rate of payment of 12b-1 fees in respect of such Class B shares
unless it terminates such shares' Distribution Plan completely. If it terminates
such Distribution Plan, the Fund may be subject to adverse distribution
consequences.
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 its shares, including,
without limitation, expenditures consisting of payments to enable the Principal
Underwriter to pay to others (broker-dealers) commissions in respect of Class C
shares 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 and outstanding on the books of the Fund for specified
periods.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, 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 and outstanding on the books of the Fund for specified periods.
Distribution Plans - General
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by a Distribution Plan as
stated above.
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 Independent Trustees.
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 such Trustees.
Each of the Distribution Plans may be terminated at any time by a vote
(i) of the Independent Trustees, or (ii) a majority of the outstanding voting
shares of the respective class of the Fund. 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 Advances.
For the fiscal year ended July 31, 1996, the Fund paid the Principal
Underwriter $31,314, $180,216 ($151,467 with respect to Class B shares sold
prior to June 1, 1995 and $28,749 with respect to Class B shares sold on or
after June 1, 1995) and $100,878 under the Class A, Class B and Class C
Distribution Plans, respectively.
At July 31, 1996, unpaid distribution costs for Class B shares sold
prior to June 1, 1995, Class B shares sold on or after June 1, 1995, and Class C
shares were $1,059,039, $225,787 and $1,192,820 respectively.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Plans have benefited the
Fund.
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The 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 and Chief Executive Officer of
Keystone Investments, Keystone, Keystone Management and Keystone
Software, Inc. ("Keystone Software"); President, Chief Executive
Officer and Trustee or Director of all other funds in the Keystone
Investments Family of Funds; Chairman of the Board and Director of
Keystone Institutional Company, Inc. ("Keystone Institutional")and
Keystone Fixed Income Advisers ("KFIA"); Director and President of
Keystone Asset Corporation, Keystone Capital Corporation and Keystone
Trust Company; Director of the Principal Underwriter, KIRC, and
Fiduciary Investment Company, Inc. ("FICO"); Director of Boston
Children's Services Associa tion; Trustee of Anatolia College,
Middlesex School, and Middlebury College; Member, Board of Governors,
New England Medical Center; former Director and President of Hartwell
Keystone Advisers, Inc. ("Hartwell Keystone"); former Director and Vice
President, Robert Van Partners, Inc.; and former Trustee of Neworld
Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Pro fessor, Finance
Department, George Washington University; President, Amling & Company
(investment advice); and former Member, Board of Advisers, Credito
Emilano (banking).
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Investment Counselor
to Appleton Partners, Inc.; and former Managing Director, Seaward
Management Corporation (in vestment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Chairman of
the Board and Trustee or Director of all other funds in the Keystone
Investments Family of Funds; Director of Keystone Investments; Chairman
of the Board and Trustee of Anatolia College; Trustee of University
Hospital (and Chairman of its Investment Committee); former Director
and Chairman of the Board of Hartwell Keystone; and former Chairman of
the Board and Chief Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Principal, Padanaram
Associates, Inc.; and former Executive Director, Coalition of Essential
Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; and former Director,
Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Trustee, Treasurer,
and Chairman of the Finance Committee, Cambridge College; Chairman
Emeritus and Director, American Institute of Food and Wine; Chairman
and President, Oldways Preservation and Exchange Trust (education);
Former Chairman of the Board, Director, and Executive Vice President,
The London Harness Company; former Managing Partner, Roscommon Capital
Corp.; former Chief Executive Officer, Gifford Gifts of Fine Foods;
former Chairman, Gifford, Drescher & Associates (environmental
consulting); and former Director, Keystone Investments and Keystone.
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Chairman of the Board and
Chief Executive Officer, Carson Products Company; Director of Phoenix
Total Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund,
Phoenix Multi- Portfolio Fund, and The Phoenix Big Edge Series Fund;
and former President, Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Chairman and Of
Counsel, Keyser, Crowley, Meub, Layden, Kulig & Sullivan P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Di rector, Vermont Yankee Nuclear Power Corporation,
Grand Trunk Corporation, Grand Trunk Western Railroad, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.,
and the Investment Company Institute; former Director and President,
Associated Industries of Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow Financial Corp.; and
former Director and Chairman of the Board, Hitchcock Clinic, Proctor
Bank, and Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Vice Chair and
former Executive Vice President, DHR Interna tional, 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 funds
in the Keystone Investments Family of Funds; Chairman, Environmental
Warranty, Inc. (insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of Connecticut Natural
Gas Corpora tion, Hartford Hospital, Old State House Association,
Middlesex Mutual Assurance Company, and Enhance Financial Services,
Inc.; Chairman, Board of Trustees, Hartford Graduate Center; Trustee,
Greater Hartford YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corpora tion; former Trustee,
Kingswood-Oxford School; and former Managing Director and Consultant,
Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; Adjunct Professor of Law
and former Associate Dean, St. John's University School of Law; Adjunct
Professor of Law, Touro College School of Law; and former President,
Nassau County Bar Association.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; Director,
Senior Vice President, Chief Financial Officer, and Treasurer of
Keystone Investments, the Principal Underwriter, Keystone Asset
Corporation, Keystone Capital Corporation, and Keystone Trust Company;
Treasurer of Keystone Institutional and FICO; Treasurer and Director of
Keystone Management and Keystone Software; Vice President and Treasurer
of KFIA; Director of KIRC; former Treasurer and Director of Hartwell
Keystone; and former Treasurer of Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; and
President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in
the Keystone Investments Family of Funds; Vice President and former
Controller of Keystone Investments, Keystone, the Principal
Underwriter, FICO, and Keystone Software; and former Controller of
Keystone Asset Corporation and Keystone Capital Corporation.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other funds in the Keystone
Investments Family of Funds; Senior Vice President, General Counsel,
and Secretary of Keystone; Senior Vice President, General Counsel,
Secretary, and Director of the Principal Underwriter, Keystone
Management, and Keystone Software; Senior Vice President and General
Counsel of Keystone Institutional; Senior Vice President, General
Counsel, and Director of FICO and KIRC; Vice President and Secretary of
KFIA; Senior Vice President, General Counsel, and Secretary of Keystone
Investments, Keystone Asset Corporation, Keystone Capital Corporation,
and Keystone Trust Company; and former Senior Vice President and
Secretary of Hartwell Keystone and Robert Van Partners, Inc.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain
other funds in the Keystone Investments Familly of Funds; and Senior
Vice President of Keystone.
* This Trustee may be considered an "interested person" of the Fund 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, 1996, no Trustee or officer
received any direct remuneration from the Fund. For the year ended December 31,
1995, aggregate compensation received by the Independent Trustees on a complex
wide basis (approximately 31 funds) was $450,716. As of October 31, 1996 the
Trustees and officers beneficially owned less than 1% of each of the Fund's then
outstanding Class A, B, and C shares.
The address of all the Fund's Trustees and officers and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND INVESTMENT ADVISER
- --------------------------------------------------------------------------------
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 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. 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 some of the other funds in the
Keystone America Fund Family and to certain other funds in the Keystone
Investments Family of Funds.
Except as otherwise noted below, pursuant to the Management Agreement,
Keystone Management manages and administers the operation of the Fund, and
manages the investment and reinvestment of the Fund's assets in conformity with
its investment objectives and restrictions. The Management Agreement stipulates
that Keystone Management shall (i) provide office space and all necessary office
facilities, equipment and personnel in connection with its services under the
Management Agreement; (ii) pay or reimburse the Fund for the compensation of
Fund officers and Trustees who are affiliated with the investment manager; and
(iii) shall pay all expenses of Keystone Management incurred in connection with
its investment advisory services. The Fund shall bear all other costs and
expenses, including, but not limited to, (i) custodian charges and expenses;
(ii) bookkeeping and auditors' charges and expenses; (iii) transfer agent
charges and expenses; (iv) fees of Independent Trustees; (v) brokerage
commissions, brokers' fees and expenses and issue and transfer taxes; (vi) costs
and expenses under the Distribution Plan; (vii) taxes and trust fees payable to
governmental agencies; (viii) the cost of share certificates; (ix) fees and
expenses of the registration and qualification of the Fund and its shares with
the Securities and Exchange Commission (the "Commission") or under state or
other securities laws; (x) expenses of preparing, printing and mailing
prospectuses, statements of additional information, notices, reprots and proxy
materials to shareholders of the Fund; (xi) expenses of shareholder's and
Trustees' meetings; (xii) charges and expenses of legal counsel for the Fund and
for the Independent Trustees on matters relating to the Fund; (xiii) charges and
expenses of filing annual and other reports with the Commission and other
authorities; and (xiv) all extraordinary charges and expenses of 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 of
1986, as amended (the "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; and (3) providing services to the Fund's shareholders in
connection with federal and state taxation and distributions of income and
capital gains.
The Fund pays Keystone Management a fee for its services at the annual
rate of:
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 payable daily.
The Management Agreement continues in effect from year to year only if
approved at least annually (i) by the Fund's Board of Trustees or by a vote of a
majority of the outstanding shares, and (ii) 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.
The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, as investment adviser,
will provide 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. For additional discussion of fees paid to
Keystone Management, see "Investment Adviser" below.
Investment Adviser
Pursuant to the Management Agreement, Keystone Management has entered
into the Advisory Agreement under which Keystone Management has delegated all of
its investment management functions, except for certain administrative and
management services to Keystone. As a result, subject to the supervision of the
Fund's Board of Trustees, Keystone performs services on behalf of the Fund that
are substantially similar to those described above with respect to Keystone
Management.
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments. Both Keystone and Keystone Investments are
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone and its affiliates. The
shares of Keystone Investments common stock beneficially owned by management are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D.
Van Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone Management, Keystone, their
affiliates and the Keystone Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone will receive for its
services an annual fee equal to 85% of the management fee received by Keystone
Management under the Management Agreement.
During the fiscal year ended July 31, 1994, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$290,111 (0.60% of the Fund's average net assets). Of such amount paid to
Keystone Management, $246,594 was paid to Keystone for its services to the Fund.
During the fiscal year ended July 31, 1995, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$291,834 (0.67% of the Fund's average net assets). Of such amount paid to
Keystone Management, $248,059 was paid to Keystone for its services to the Fund.
During the fiscal year ended July 31, 1996, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$273,644 (0.65% of the Fund's average net assets). Of such amount paid to
Keystone Management, $232,597, was paid to Keystone for its services to the
Fund.
Keystone voluntarily limits expenses of Class A shares to 1.10% of
average net assets annually and has limited expenses of each of Class B and
Class C shares to 1.85% of average net assets annually. Keystone currently
intends to continue these expense limitations on a calendar month-by-month
basis. Keystone will periodically evaluate these expense limits and may modify
or terminate them in the future. In accordance with expense limitations in
effect for the fiscal year ended July 31, 1996, Keystone reimbursed the Fund
$60,861, $83,534 and $46,701 for Class A, Class B and Class C shares,
respectively. In any event, Keystone would not be required to make such
reimbursement to the extent that it would result in the Fund's inability to
qualify as a regulated investment company under the Code.
Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant to
which Keystone Investments will be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC")(the
"Merger"). The surviving corporation will assume the "Keystone Investments,
Inc." Subject to a number of conditions being met, it is currently anticipated
that the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.
If consummated, the proposed Merger will be deemed to cause an
assignment, within the meaning of the 1940 Act, of both the Management Agreement
and the Advisory Agreement. Consequently, the completion of the Merger is
contingent upon, among other things, the approval of the Fund's shareholders of
a new investment advisory and management agreement between the Fund and Keystone
(the "New Advisory Agreement"). The Fund's Trustees have approved the terms of
the New Advisory Agreement, subject to the approval of shareholders and the
completion of the Merger, and have called a special meeting of shareholders to
obtain their approval of, among other things, the New Advisory Agreement. The
meeting is expected to be held in December 1996. The proposed New Advisory
Agreement has terms, including fees payable thereunder, that are substantively
identical to those in the current agreements.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements with the
Principal Underwriter (the "Underwriting Agreements"), a Delaware corporation
and wholly-owned subsidiary of Keystone.
The Principal Underwriter, as agent, currently has the right to obtain
subscriptions for and to sell shares of the Fund to the public. In so doing, the
Principal Underwriter may retain and employ representatives to promote
distribution of the shares and may obtain orders from brokers, dealers or
others, acting as principals, for sales of shares. No such representative or
broker-dealer 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 Agreements, the Fund is not liable to
anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with 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 provide 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.
The Principal Underwriter has also agreed that it will indemnify and hold
harmless the Fund, and each person who has been, is or may be a Trustee or
officer of the Fund, against expenses reasonably incurred by any of them in
connection with any claim, action, suit or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
The Underwriting Agreements provide that they will remain in effect as
long as their terms and continuance are approved at least annually by a majority
of (i) the Independent Trustees cast in person at a meeting called for that
purpose, and (ii) the Fund's Trustees.
The Underwriting Agreements may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreements will terminate automatically
upon their "assignment," as that term is defined in the 1940 Act.
In addition to an assignment of the Fund's Management Agreement and
Advisory Agreement, the Merger, if consummated, will also be deemed to cause an
assignment, as defined by the 1940 Act, of the Underwriting Agreements. As a
result, the Fund's Trustees have approved the following agreements, subject to
the Merger's completion: (i) a principal underwriting agreement between
Evergreen Funds Distributor, Inc. ("EFD") and the Fund; (ii) a marketing
services agreement between the Principal Underwriter and EFD with respect to the
Fund; and (iii) a subadministration agreement between Keystone and Furman Selz
LLC with respect to the Fund. EFD is a wholly-owned subsidiary of Furman Selz
LLC. It is currently anticipated that on or about January 2, 1997, Furman Selz
LLC will transfer EFD, and Furman Selz LLC's related services, to BISYS Group,
Inc. ("BISYS") (the "Transfer"). The Fund's Trustees have also approved, subject
to completion of the Transfer, (i) a new principal underwriting agreement
between EFD and the Fund; (ii) a new marketing services agreement between the
Principal Underwriter and EFD with respect to the Fund; and (iii) a new
subadministration agreement between Keystone and BISYS with respect to the Fund.
The terms of such agreements will be substantively identical to the terms of the
agreements to be executed upon completion of the Merger.
- --------------------------------------------------------------------------------
DECLARATION OF TRUST
- --------------------------------------------------------------------------------
Massachusetts Business Trust
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated October 24, 1986 (the "Declaration of Trust"). The
Fund is similar in most respects to a business corporation, with the exception
of shareholder liability described below. A copy of the Declaration of Trust is
on file as an exhibit to the Registration Statement of which this statement of
additional information is a part. This summary is qualified in its entirety by
reference to the Declaration of Trust.
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues Class A, B, and C 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 (2) requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees, and (3) provides for indemnification out
of the Fund's property for any shareholder held personally liable for the
obligations of the Fund.
Voting Rights
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. Classes of shares of the
Fund have equal voting rights except that each class of shares has exclusive
voting rights with respect to its respective Distribution Plan. No amendment may
be made to the Declaration of Trust that adversely affects any class of shares
without the approval of a majority of the shares of that class. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees to
be elected at a meeting and, in such event, the holders of the remaining 50% or
less of the shares voting will not be able to elect any Trustees.
After an initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law or until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the Fund's outstanding shares.
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.
The Trustees have absolute and exclusive control over the management
and disposition of assets of the Fund and may perform such acts as in their sole
judgment and discretion are necessary and proper for conducting the business and
affairs of the Fund or promoting the interests of the Fund and the shareholders.
- --------------------------------------------------------------------------------
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 the maximum sales
charge 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 average annual rate of return for Class A for the period April 14,
1987 through July 31, 1996 was 5.74%. The average annual rates of return for
Class A for the five year and one year periods ended July 31, 1996 were 6.39%
and (0.03%), respectively. The average annual rates 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, 1996 were 3.33% and 4.06%,
respectively. The annual rates of return for the Fund's Class B and Class C
shares for the one year period ended July 31, 1996 was 0.17% and 4.10%,
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 yields
for Class A, Class B and Class C for the 30-day period ended July 31, 1996 were
6.07%, 5.62% and 5.61%, respectively.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein to the Fund's Annual Report, as filed with the Commission:
Schedule of Investments and Statement of Assets and Liabilities as of
July 31, 1996;
Statement of Operations for the year ended July 31, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1996;
Financial Highlights for each of the years in the nine-year period
ended July 31, 1996 and the period from February 13, 1987 (commencement
of operations) to July 31, 1987 for Class A shares;
Financial Highlights for each of the years in the three-year period
ended July 31, 1996, and for the period from February 1, 1993 (date of
initial public offering) to July 31, 1993 for Class B and for Class C
shares;
Notes to Financial Statements; and
Independent Auditors' Report dated September 6, 1996.
A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may bhe made in writing to KIRC, P.O. Box 2121,
Boston, Massachusetts 02106-2121 or by calling KIRC toll free at 1-800-343-2898.
- --------------------------------------------------------------------------------
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
("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.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
KIRC, located at 200 Berkeley Street, Boston, MA 02116-5034, is a
wholly-owned subsidiary of Keystone and the Fund's transfer and dividend
disbursing agent.
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, 1996, Merrill, Lynch, Pierce, Fenner & Smith, Attn:
Book Entry, 4800 Deer Lake Dr. E. 3rd Fl., Jacksonville, Fl 32246-6486, owned
24.395% of the outstanding Class A shares. Keystone Savings & Investment Trust,
c/o ADQ Inc., ATTN. Paula Werkowski, PO Box 8992, Waltham, MA 02254-8992, owned
5.472% of the outstanding Class A shares.
As of October 31, 1996, Merrill, Lynch, Pierce, Fenner & Smith, Attn:
Book Entry, 4800 Deer Lake Dr. E. 3rd Fl., Jacksonville, Fl 32246-6486, owned
15.802% of the outstanding Class B shares.
As of October 31, 1996, 1995, Merrill, Lynch, Pierce, Fenner & Smith,
Attn: Book Entry, 4800 Deer Lake Dr. E. 3rd Fl., Jacksonville, Fl 32246-6486,
owned 25.644% of the outstanding Class C shares. NFSC FEBO #A1F-362239, American
Federation of Teachers, AFL-CIO Building, 555 New Jersey Avenue N.w.,
Washington, D.C. 20001-2029, owned 5.288% of the Fund outstanding Class C
shares.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the 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 approximately 16 different investment companies in
the Keystone America Fund Family. The Keystone America Funds offer a range of
choices to serve shareholder needs. The Keystone America Funds consist of the
following funds having the various investment objectives described below:
Keystone Balanced Fund II - Seeks current income and capital appreciation
consistent with the preservation of capital.
Keystone Capital Preservation and Income Fund - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
Keystone Fund for Total Return - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
Keystone Fund of the Americas - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
Keystone Global Opportunities Fund - Seeks long-term capital growth from foreign
and domestic securities.
Keystone Global Resources and Development Fund - (Formerly Keystone Strategic
Development Fund.) Seeks long-term capital growth by investing primarily in
equity securities of foreign and domestic companies involved in the natural
resources and energy industries.
Keystone Government Securities Fund - Seeks income and capital preservation from
U.S. government securities.
Keystone America Hartwell Emerging Growth Fund, Inc. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
Keystone Intermediate Term Bond Fund - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
Keystone Omega Fund - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
Keystone Small Company Growth Fund II - Seeks long-term growth of capital by
investing primarily in equity securities with small market capitalizations.
Keystone State Tax Free Fund - A mutual fund consisting of four separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
Keystone State Tax Free Fund - Series II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
Keystone Strategic Income Fund - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
Keystone Tax Free Income Fund - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
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.
<PAGE>
A-1
APPENDIX
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturi- ties 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), Prime-1 by Moody's Investors
Service, Inc. (Moody's); or, if not rated, will be issued by companies which
have an outstanding debt issue rated at the time of purchase Aaa, Aa or A by
Moody's, or AAA, AA or A by S&P, or will be determined by Keystone to be of
comparable quality.
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.
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.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are deemed
to have a superior capacity for repayment of short term promissory obligations.
Repayment capacity of Prime-1 issuers is normally evidenced by the following
characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate
reliance on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
Certificates of Deposit
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denomi- nated
certificates of U.S. banks, including their branches abroad, and of U.S.
branches of foreign banks, which are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation, or of savings and loan associations
and have at least $1 billion in deposits as of the date of their most recently
published financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
Bankers' Acceptances
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. Government Securities
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association (GNMA).
Treasury bills have maturities of one year or less. Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
greater than ten years at the date of issuance. GNMA securities include GNMA
mortgage passthrough 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 Series 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.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term mortgage backed securities includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations.
There are currently three basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full faith and credit" of
the U.S.); (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole mortgage loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
governmental or private lenders. Such securities, which are ownership interests
in the underlying mortgage loans, differ from conventional debt securities,
which provide for periodic payment of interest in fixed amounts (usually
semi-annually) with principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
pre-payments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the service of the
underlying mortgage loans.
Collateralized mortgage obligations in which the Fund may invest are
securities issued by a U.S. government instrumentality that are collateralized
by a portfolio of mortgages or mortgage-backed securities. The issuer's
obligation to make interest and principal payments is secured by the underlying
portfolio of mortgages or mortgage backed securities.
EQUIPMENT TRUST CERTIFICATES
Equipment Trust Certificates are a mechanism for financing the purchase
of transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.
Under an equipment trust certificate, the equipment is used as the
security for the debt and title to the equipment is vested in a trustee. The
trustee leases the equipment to the user, i.e. the railroad, airline, trucking
or oil company. At the same time equipment trust certificates in an aggregate
amount equal to a certain percentage of the equipment's purchase price are sold
to lenders. The trustee pays the proceeds from the sale of certificates to the
manufacturer. In addition, the company using the equipment makes an initial
payment of rent equal to the balance of the purchase price to the trustee, which
the trustee also pays to the manufacturer. The trustee collects lease payments
from the company and uses the payments to pay interest and principal on the
certificates. At maturity, the certificates are redeemed and paid, the equipment
is sold to the company and the lease is terminated. These certificates are
typically traded in the over-the-counter market.
Generally, these certificates are regarded as obligations of the
company that is leasing the equipment and are shown as liabilities in its
balance sheet. However, the company does not own the equipment until all the
certificates are redeemed and paid. In the event the company defaults under its
lease, the trustee terminates the lease. If another lessee is available, the
trustee leases the equipment to another user and makes payments on the
certificates from new lease rentals.
The principal risk of these certificates is the decline in value of the
equipment. However, the equipment which is typically involved is not subject to
rapid decline in value.
ZERO COUPON "STRIPPED" BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Coupon zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related Treasury securities. Each zero coupon bond entitles the holder to
receive a single payment at maturity. There are no periodic interest payments on
a zero coupon bond. Zero coupon bonds are offered at discounts from their face
amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon bonds have the right upon default
on the underlying coupon obligations or principal obligations to proceed
directly and individually against the issuers and are not required to act in
concert with other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or coupon zero coupon bonds (either initially or in the secondary market)
is treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
coupon bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market value at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds and the subsequent accrual of discount on the retained items.
CORPORATE BOND RATINGS
S&P Corporate Bond Ratings
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories. Bond
ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Moody's Corporate and Municipal 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Baa 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 a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times be
unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new debt securities against which it can write options. This
may result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available, the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss on the transaction.
Options Trading Markets
Options which the Fund will trade are generally listed on national
securities exchanges. Exchanges on which such options currently are traded are
the Chicago Board Options Exchange and the New York, American, Pacific and
Philadelphia Stock Exchanges (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 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 view. It is the intention of the Fund to
comply with the staff's current position and the outcome of such
reconsideration.
Special Considerations Applicable to Options
On Treasury Bonds and Notes. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
On Treasury Bills. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with its Custodian liquid assets maturing no
later than those which would be deliverable in the event of an assignment of an
exercise notice to ensure that it can meet its open option obligations.
On GNMA Certificates. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options in
the over-the-counter market, or should they commence trading, on any Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
Risks Pertaining to the Secondary Market. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any particular time,
and for some options no secondary market may exist. In such event, it might not
be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or a broker to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options that had
been issued as a result of trades would generally continue to be exercisable in
accordance with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions which are related to
currency and other financial futures contracts for hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to enter into such futures contracts for speculation.
Futures Contracts
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based 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, Government National Mortgage Association
(GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
Index Based Futures Contracts
Stock Index Futures Contracts
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently, stock index futures contracts can be purchased or sold on
the Standard and Poor's Corporation (S&P) Index of 500 Stocks, the S&P Index of
100 Stocks, the New York Stock Exchange Composite Index, the Value Line Index
and the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.
The Fund does not believe that differences between existing stock
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
Other Index Based Futures Contracts
It is expected that bond index and other financially based index futures
contracts will be developed in the future. It is anticipated that such index
based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
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 or other
financial futures contracts and sell such options to terminate an existing
position. Options on currency or other financial futures are similar to options
on stocks except that an option on a currency or other financial futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
currency or other instruments making up a financial futures index, at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the 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 special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund
invests in foreign securities they usually will be denominated in foreign
currencies and the Fund temporarily may hold funds in foreign currencies. Thus,
the value of a Fund share will be affected by changes in exchange rates.
Forward Currency Contracts
As one way of managing exchange rate risk, the Fund may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell.
The Fund also may use these contracts to hedge the U.S. dollar value of
a security it already owns, particularly if the Fund expects a decrease in the
value of the currency in which the foreign security is denominated. Although the
Fund will attempt to benefit from using forward contracts, the success of its
hedging strategy will depend on Keystone's ability to predict accurately the
future exchange rates between foreign currencies and the U.S. dollar. The value
of the Fund's investments denominated in foreign currencies will depend on the
relative strength of those currencies and the U.S. dollar, and the Fund may be
affected favorably or unfavorably by changes in the exchange rate or exchange
control regulations between foreign currencies and the dollar. Changes in
foreign currency exchange rates also may affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to shareholders by the
Fund.
Currency Futures Contracts
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc, and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark and Swiss Francs 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, French Francs and
Canadian Dollars. Options can be exercised at any time during the contract life,
and require a deposit subject to normal margin requirements. Since a futures
contract must be exercised, the Fund must continually make up the margin
balance. As a result, a wrong price move could result in the Fund losing more
than the original investment, as it cannot walk away from the futures contract
as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
future 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 lib- eralizations were carried out by Switzerland,
the United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result, performance may be delayed and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
<PAGE>
EXHIBIT A
GLOSSARY OF TERMS
Class of Options. Options covering the same underlying security.
Clearing Corporation. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corpor- ation B.V. or the London
Options Clearing House.
Closing Purchase Transaction. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
Closing Sale Transaction. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or a buyer by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller.)
Covered Call Option Writer. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security or
holds on a share for share basis a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
Covered Put Option Writer. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
brokerdealer carrying the writer's position or holds on a share for share basis
a put on the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or,
if less than the exercise price of the put written, the difference is maintained
by the writer in cash, U.S. Treasury bills or other high grade, short term
obligations in a segregated account with the writer's broker or custodian.
Securities Exchange. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange; in the
Netherlands, the European Options Exchange; and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for option transactions are published in various
financial publications.
Commodities Exchange. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago; Chicago Mercantile Exchange;
International Monetary Market (a division of the Chicago Mercantile Exchange);
the Kansas City Board of Trade; and the New York Futures Exchange.
Exercise Price. The price per unit at which the holder of a call option
may purchase the underlying security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
Expiration Date. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
Hedging. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
Option. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the put
at the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. The Fund will sell ("write") and purchase puts
only on U.S. Exchanges.
Option Period. The time during which an option may be exer- cised,
generally from the date the option is written through its expiration date.
Premium. The price of an option agreed upon between the buyer and
writer or their agents in a transaction on the floor of an Exchange.
Series of Options. Options covering the same underlying security and
having the same exercise price and expiration date.
Stock Index. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the common stocks so included.
Index Based Futures Contract. An index based futures contract is a
bilateral agreement pursuant to which a party agrees to buy or deliver at
settlement an amount of cash equal to $500 times the difference between the
closing value of an index on the expiration date and the price at which the
futures contract is originally struck. Index based futures are traded on
Commodities Exchanges. Currently index based stock index futures contracts can
be purchased or sold with respect to the Standard & Poor's Corporation (S&P) 500
Stock Index and S&P 100 Stock Index on the Chicago Mercantile Exchange, the New
York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index and Major Market Index on the Kansas City Board of Trade.
Underlying Security. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
KEYSTONE INTERMEDIATE TERM BOND FUND
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24(a). Financial Statements
The following financial statements are incorporated by reference to Registrant's
Annual Report, filed with the Securities and Exchange Commission on
September 26, 1996.
Schedule of Investments July 31, 1996
Financial Highlights
Class A For each of the years in
the nine-year period ended
July 31, 1996, and the
period from February 13,
1987 (Commencement of
Operations) to July 31,
1987
Class B For each of the years in
the three-year period ended
July 31, 1996, and the
period from February 1,
1993 (date of initial
public offering) to
July 31, 1993
Class C For each of the years in
the three-year period ended
July 31, 1996, and the
period from February 1,
1993 (date of initial
public offering) to
July 31, 1993
Statement of Assets and Liabilities July 31, 1996
Statement of Operations Year ended
July 31, 1996
Statements of Changes in Net Assets Two years ended
July 31, 1996
Notes to Financial Statements
Independent Auditors' Report September 6, 1996
<PAGE>
Item 24(b). Exhibits
(1) Registrant's Declaration of Trust, as supplemented (the "Declaration of
Trust")(1)
(2) Registrant's By-Laws, as amended(1)
(3) Not applicable.
(4) (a) The Declaration of Trust Articles III, V, VI and VIII(1)
(b) Registrant's By-Laws, as amended, Article 2., Section 2.5(1)
(5) (a) Investment Management Agreement between Registrant and Keystone
Management, Inc. (the "Management Agreement")(1)
(b) Investment Advisory Agreement between Keystone Management, Inc. and
Keystone Investment Management Company (the "Advisory Agreement")(1)
(6) (a) Principal Underwriting Agreements with schedules and amendments between
the Registrant and Keystone Investment Distributors Company (the
"Underwriting Agreements")(1)
(b) Form of Dealer Agreement used by Keystone Investment Distributors
Company (2)
(7) Not applicable.
(8) Custodian, Fund Accounting and Recordkeeping Agreements, as amended, with
State Street Bank and Trust Company(1)
(9) Not applicable.
(10) Opinion and consent of counsel as to the legality of securities registered
by the Fund(3)
(11) Consent as to the use of the Independent Auditors' Report(3)
(12) Not applicable.
(13) (a) Subscription Agreements(4)
(b) Release of one Subscription Agreement and a new Subscription
Agreement(5)
(14) Model plans used in the establishment of retirement plans in connection
with which the Registrant offers securities(6)
(15) Registrant's Class A, B and C Distribution Plans, adopted pursuant to Rule
12b-1(1)
(16) Schedules for computation of performance quotations(3)
(17) Financial Data Schedules(3)
(18) Registrant's Multiple Class Plan adopted pursuant to Rule 18f-3 (7)
(19) Powers of Attorney(3)
- ------------------
(1) Filed with Post-Effective Amendment No. 18 ("Post-Effective Amendment No.
18") to Registration Statement No. 33-11048/811-4952 (the "Registration
Statement") and incorporated by reference herein.
(2) Filed with Post-Effective Amendment No. 10 to the Registration Statement
and is incorporated by reference herein.
(3) Filed herewith.
(4) Filed with the Registration Statement and incorporated by reference herein.
(5) Filed with Pre-Effective Amendment No. 2 to the Registration Statement
and are incorporated by reference herein.
(6) Filed with Post-Effective Amendment No. 66 to the Registration Statement
No. 2-10527/811-96 of Keystone Custodian Fund, Series K-1 and incorporated
by reference herein.
(7) Filed with Post-Effective Amendment No. 17 to the Registration Statement
and incorporated by reference herein.
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of October 31, 1996
-------------- --------------------------------
Shares of Beneficial
Interest, without par
value:
Class A 624
Class B 696
Class C 389
Item 27. Indemnification
Provisions for the indemnification of the Registrant's Trustees and officers are
contained in Article VIII of the Declaration of Trust, a copy of which was filed
with Post-Effective Amendment No. 18 and incorporated by reference herein.
Provisions for the indemnification of Keystone Investment Distributors Company,
the Registrant's Principal Underwriter, are contained in Section 9 of the
Underwriting Agreements, copies of which were filed with Post-Effective
Amendment No. 18 and incorporated by reference herein.
Provisions for the indemnification of Keystone Management, Inc. and Keystone
Investment Management Company, Registrant's investment manager and adviser,
respectively, are contained in Section 6 of the Management Agreement and
Section 5 of the Advisory Agreement, copies of which were filed with
Post-Effective Amendment No. 18 and incorporated by reference herein.
Item 28. Businesses and Other Connections of Investment Adviser
The following tables list the names of the various officers and
directors of Keystone Management, Inc. and Keystone Investment
Management Company, Registrant's investment manager and adviser,
respectively, and their respective positions. For each named
individual, the tables list, for at least the past two fiscal years,
(i) any other organizations or Keystone Investment Management Company,
(excluding investment advisory clients) with which the officer and/or
director has had or has substantial involvement; and (ii) positions
held with such organizations.
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF KEYSTONE MANAGEMENT, INC.
<TABLE>
<CAPTION>
Position with
Keystone Other
Management, Business
Name Inc. Affiliations
- ---- ------------- -------------
<S> <C> <C>
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Execu- President and Director:
tive Officer, Keystone Investments, Inc.
President and Keystone Software, Inc.
Director Keystone Asset Corporation
Keystone Capital Corporation
Keystone Investments Family of Funds
Chairman of the Board and Director:
Keystone Investment Management Company
Keystone Institutional Company, Inc.
Keystone Fixed Income Advisers, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment Company, Inc.
Keystone Investor Resource Center, Inc.
Boston Children's Services Association
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Edward F. Godfrey Treasurer and Senior Vice President,
Director Chief Financial Officer, Treasurer and Director:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Treasurer:
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Former Treasurer and Director:
Hartwell Keystone Advisers, Inc.
Senior Vice President:
Keystone Investments Family of Funds
Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment Distributors Company
Chairman and Director:
Keystone Investor Resource Center, Inc.
Keystone Investment Management Company
Senior Vice President and Director:
Keystone Investments, Inc.
Treasurer:
Hartwell Emerging Growth Fund
Hartwell Growth Fund
Former President:
Keystone Management, Inc.
Former Treasurer:
Keystone Investments, Inc.
Keystone Investment Management Company
Rosemary D. Van Senior Vice General Counsel, Senior
Antwerp President, Vice President and Secretary:
General Counsel Keystone Investments, Inc.
and Secretary Senior Vice President and General Counsel:
Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Keystone Investor Resource, Center, Inc.
Fiduciary Investment Company, Inc.
Keystone Investment Distributors Company
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Formerly Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Fiduciary Investment Company, Inc.
Keystone Software, Inc.
Formerly Vice President and Controller:
Hartwell Keystone Advisers, Inc.
John D. Rogol Vice President Vice President and Controller:
and Controller Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Comptroller:
Keystone Asset Corporation
Keystone Capital Corporation
Vice President and Treasurer:
Keystone Investor Resource Center, Inc.
Michael A. Thomas Vice President Vice President:
Keystone Investments, Inc.
</TABLE>
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Executive President and Director:
Officer,and Keystone Investments, Inc.
Director Keystone Management, Inc.
Keystone Software, Inc.
Keystone Asset Corporation
Keystone Capital Corporation
Chairman of the Board and Director:
Keystone Fixed Income Advisers, Inc.
Keystone Institutional Company, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment Company, Inc.
Keystone Investment Distributors Company
Keystone Investor Resource Center, Inc.
Boston Children's Services Associates
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Philip M. Byrne Director President and Director:
Keystone Institutional Company, Inc.
Senior Vice President:
Keystone Investments, Inc.
Herbert L. Senior Vice None
Bishop, Jr. President
Donald C. Dates Senior Vice None
President
Gilman Gunn Senior Vice None
President
Edward F. Director, Director, Senior Vice President
Godfrey Senior Vice President, President, Chief Financial Officer and Treasurer:
Treasurer and Keystone Investments, Inc.
Chief Financial Officer Keystone Investment Distributors Company
Treasurer:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Former Treasurer and Director:
Hartwell Keystone Advisers, Inc.
James R. McCall Director and None
President
Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment Distributors Company
Senior Vice President and Director:
Keystone Investments, Inc.
Chairman and Director:
Keystone Investor Resource Center, Inc.
Keystone Management, Inc.
Formerly President:
Keystone Management, Inc.
Formerly Treasurer:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone America Hartwell Growth Fund, Inc.
Rosemary D. Senior Vice General Counsel, Senior Vice President and Secretary:
Van Antwerp President, Keystone Investments, Inc.
General Counsel Senior Vice President and General Counsel:
and Secretary Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Keystone Investor Resource Center, Inc.
Fiduciary Investment Company, Inc.
Keystone Investment Distributors Company
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Former Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Formerly Controller:
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
John D. Rogol Vice President Vice President and
Controller:
Keystone Investments, Inc.
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Robert K. Vice President None
Baumback
Betsy A. Blacher Senior Vice None
President
Francis X. Claro Vice President None
Kristine R. Vice President None
Cloyes
Christopher P. Senior Vice None
Conkey President
J. Gary Craven Senior Vice None
President
Richard Cryan Senior Vice None
President
Maureen E. Senior Vice None
Cullinane President
Walter T. Senior Vice None
McCormick President
George F. Wilkins Senior Vice None
President
John F. Addeo Vice President None
Andrew G. Baldassare Vice President None
David S. Benhaim Vice President None
Donald M. Bisson Vice President None
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Dana E. Erikson Vice President None
Sami J. Karam Vice President None
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
John C. Vice President None
Madden, Jr.
Eleanor H. Marsh Vice President None
James D. Medredeff Vice President None
Stanley M. Niksa Vice President None
Jonathan A. Noonan Vice President None
Robert E. O'Brien Vice President None
Margery C. Parker Vice President None
William H. Vice President None
Parsons
Joyce W. Petkovich Vice President None
Daniel A. Rabasco Vice President None
Harlen R. Sanderling Vice President None
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
Mary J. Willis Vice President None
Peter Willis Vice President None
Richard A. Wisentaner Vice President None
Cheryle E. Wanble Vice President None
Walter Zagrobski Vice President None
Joseph J. Asst. Vice President None
Decristofaro
</TABLE>
<PAGE>
Item 29. Principal Underwriter
(a) Keystone Investment Distributors Company, which acts as Registrant's
principal underwriter, also acts as principal underwriter for the
following entities:
Keystone Quality Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Government Securities Fund
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Intermediate Term Bond Fund
Keystone Omega Fund
Keystone Strategic Income Fund
Keystone State Tax Free Fund
Keystone State Tax Free Fund-Series II
Keystone Tax Free Income Fund
Keystone World Bond Fund
Keystone Fund of the Americas
Keystone International Fund Inc.
Keystone Precious Metals Holdings, Inc.
Keystone Global Resources and Development Fund
Keystone Tax Free Fund
Keystone Small Company Growth Fund II
Keystone Balanced Fund II
Keystone Emerging Markets Fund
(b) Information with respect to each officer and director of Registrant's
acting principal underwriter:
<PAGE>
Item 29(b) (continued)
Positions with
Keystone Investment Positions with
Name Distributors Company Registrant
- ---- -------------------- --------------
Ralph J. Spuehler* Director, President None
Edward F. Godfrey* Director, Senior Vice Senior Vice
President, Treasurer President
and Chief Financial
Officer
Rosemary D. Van Antwerp* Director, Senior Vice Senior Vice
President, General President
Counsel and Secretary and Secretary
Albert H. Elfner, III* Director President
Charles W. Carr* Senior Vice President None
Peter M. Delehanty* Senior Vice President None
J. Kevin Kenely* Vice President None
John D. Rogol* Vice President and None
Controller
C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londenderry, NH 03053
William L. Carey, Jr. Regional Manager and None
4 Treble Lane Vice President
Malvern, PA 19355
John W. Crites Regional Manager and None
2769 Oakland Circle W. Vice President
Aurora, CO 80014
<PAGE>
Item 29(b) (continued)
Positions with
Keystone Investment Positions with
Name Distributors Company Registrant
- ---- -------------------- --------------
Richard J. Fish Regional Manager and None
309 West 90th Street Vice President
New York, NY 10024
Michael E. Gathings Regional Vice None
245 Wicklawn Way President
Roswell, GA 30076
Paul D. Graffy Regional Manager and None
15509 Janas Drive Vice President
Lockport, IL 60441
Robert G. Holz, Jr. Regional Manager and None
313 Meadowcrest Drive President
Richardson, Texas 75080
Todd L. Kobrin Regional Manager and None
20 Iron Gate Vice President
Metuchen, NJ 08840
Ralph H. Johnson Regional Manager and None
345 Masters Court, #2 Vice President
Walnut Creek, CA 94598
Paul J. McIntyre Regional Manager and None
118 Main Center #203 Vice President
Northville, MI 48167
Robert P. Muligan* Regional Manager and None
Vice President
Alan V. Niemi Regional Manager and None
3511 Grant Street Vice President
Lee's Summit, MO 64064
Matthew D. Twomey Regional Vice None
9627 Sparrow Court President
Ellicott City, MD 21042
Raymond P. Ajemian* Manager and None
Vice President
Jonathan I. Cohen* Vice President None
Michael S. Festa* Vice President None
Russell A. Haskell* Vice President None
<PAGE>
Item 29(b) (continued)
Positions with
Keystone Investment Positions with
Name Distributors Company Registrant
- ---- -------------------- --------------
Jeffrey M. Landes Vice President None
Joan M. Balchunas* Assistant Vice None
President
Julie A. Robinson Vice President None
John M. McAllister* Vice President None
Thomas J. Gainey* Assistant Vice None
President
Lyman Jackson* Assistant Vice None
President
Eric S. Jeppson* Assistant Vice None
President
Mark Minnucci* Assistant Vice None
President
Ashley M. Norwood* Assistant Vice None
President
*Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
Item 29(c). - Not applicable
<PAGE>
Item 30. Location of Accounts and Records
Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02277
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a copy
of the Registrant's prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders, upon request
and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933, and the Registrant has
duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized in the City of Boston, and
The Commonwealth of Massachusetts, on the 18th day of November, 1996.
KEYSTONE INTERMEDIATE TERM BOND FUND
By:/s/ Rosemary D. Van Antwerp
---------------------------
Rosemary D. Van Antwerp
Senior Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 18th day of November, 1996.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board and Trustee
- --------------------------
George S. Bissell*
/s/ Albert H. Elfner Chief Executive Officer, President
- -------------------------- and Trustee
Albert H. Elfner*
/s/ J. Kevin Kenely Treasurer (Principal Accounting
- -------------------------- and Financial Officer)
J. Kevin Kenely
*By: /s/ James M. Wall
-----------------------
James M. Wall**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
- ---------- -----
/s/ Frederick Amling Trustee
- --------------------------
Frederick Amling*
/s/ Charles A. Austin, III Trustee
- --------------------------
Charles A. Austin, III*
/s/ Edwin D. Campbell Trustee
- --------------------------
Edwin D. Campbell*
/s/ Charles F. Chapin Trustee
- --------------------------
Charles F. Chapin*
/s/ K. Dun Gifford Trustee
- --------------------------
K. Dun Gifford*
/s/ Leroy Keith, Jr. Trustee
- --------------------------
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Trustee
- --------------------------
F. Ray Keyser, Jr.*
/s/ David M. Richardson Trustee
- --------------------------
David M. Richardson*
/s/ Richard J. Shima Trustee
- --------------------------
Richard J. Shima*
/s/ Andrew J. Simons Trustee
- --------------------------
Andrew J. Simons*
*By: /s/ James M. Wall
-----------------------
James M. Wall**
Attorney-in-Fact
** James M. Wall, by signing his name hereto, does hereby sign this document on
behalf of each of the above-named individuals pursuant to powers of attorney
duly executed by such persons and attached hereto as Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
1 Declaration of Trust(1)
2 By-Laws, as amended(1)
5 (a) Management Agreement(1)
(b) Advisory Agreement(1)
6 (a) Underwriting Agreements(1)
(b) Dealers Agreement(2)
8 Custodian, Fund Accounting
and Recordkeeping Agreements, as amended(1)
10 Opinion and Consent of Counsel
11 Independent Auditors' Consent
13 (a) Subscription Agreements(3)
(b) Copy of Release of one Subscription Agreement and a new
Subscription Agreement(4)
14 Model Retirement Plans(5)
15 Class A, B and C Distribution Plans(1)
16 Performance Data Schedules
17 Financial Data Schedules (Exhibit 27)
18 Multiple Class Plan(6)
19 Powers of Attorney
- ----------------------------------
1 Incorporated by reference herein to Post-Effective Amendment No. 18
to the Registration Statement.
2 Incorporated by reference herein to Registrant's Post-Effective Amendment
No. 10 to the Registration Statement.
3 Incorporated by reference herein to the Registration Statement.
4 Incorporated by reference herein to Pre-Effective Amendment No. 2 to the
Registration Statement.
5 Incorporated by reference herein to Post-Effective Amendment No. 66 to
the Registration Statement No. 2-10527/811-96.
6 Incorporated by reference herein to Post-Effective Amendment No. 17 to
the Registration Statement.
November 18, 1996
Keystone Intermediate Term Bond Fund
200 Berkeley Street
Boston, Massachusetts 02116-5034
Gentlemen:
I am Senior Vice President of and General Counsel to Keystone Investment
Management Company, investment adviser to Keystone Intermediate Term Bond Fund
(the "Fund"). You have asked for my opinion with respect to the proposed
issuance of 1,774,045 additional shares of the Fund.
To my knowledge, a Prospectus is being filed with the Securities and
Exchange Commission (the "Commission") as part of Post- Effective Amendment No.
20 to the Fund's Registration Statement, which covers the public offering and
sale of the Fund shares currently registered with the Commission.
In my opinion, such additional shares, if issued and sold in accordance
with the Fund's Declaration of Trust ("Declaration of Trust") and offering
Prospectus, will be legally issued, fully paid, and nonassessable by the Fund,
entitling the holders thereof to the rights set forth in the Declaration of
Trust and subject to the limitations set forth therein.
My opinion is based upon my examination of the Fund's Declaration of Trust
and By-Laws; a review of the minutes of the Fund's Board of Trustees authorizing
the issuance of such additional shares; and the Fund's Prospectus. In my
examination of such documents, I have assumed the genuineness of all signatures
and the conformity of copies to originals.
I hereby consent to the use of this opinion in connection with
Post-Effective Amendment No. 20 to the Fund's Registration Statement, which
covers the registration of such additional shares.
Sincerely yours,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Vice President and
General Counsel
<PAGE>
Exhibit 99.11
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Intermediate Term Bond Fund
We consent to the use of our report dated September 6, 1996
incorporated by reference herein and to the reference to our firm under the
caption "FINANCIAL HIGHLIGHTS" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
November 18, 1996
<PAGE>
4223 KEYSTONE AMERICA INTERMED TERM CLASS A
SEC STANDARDIZED ADVERTISING YIELD
A PHASE II-ROLLING
PRICING DATE 07/25/96
30 DAY YTM 6.06719%
<TABLE>
<CAPTION>
PRICE ST VARIABLE GAIN/LOSS LONG TERM MORTGAGE TOTAL DIV
DATE INCOME ADJ INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
06/26/96 357.98 5,013.03 3,077.80 8,448.81 33.78916950
06/27/96 454.68 4,996.65 3,077.80 8,529.13 33.83000945
06/28/96 194.77 4,773.12 3,077.80 8,045.69 33.78026555
06/29/96 194.77 4,773.12 3,077.80 8,045.69 33.78026555
06/30/96 194.77 4,773.12 3,077.80 8,045.69 33.78026555
07/01/96 222.04 4,571.82 3,073.91 7,867.77 33.77751736
07/02/96 72.17 4,783.98 3,073.91 7,930.06 33.78088341
07/03/96 141.08 4,765.84 3,073.85 7,980.77 33.75930431
07/04/96 141.08 4,765.84 3,073.85 7,980.77 33.75930431
07/05/96 157.95 4,846.11 3,073.85 8,077.91 33.78788151
07/06/96 157.95 4,846.11 3,073.85 8,077.91 33.78788151
07/07/96 157.95 4,846.11 3,073.85 8,077.91 33.78788151
07/08/96 39.49 4,856.51 3,073.85 7,969.85 33.86056381
07/09/96 238.44 4,592.51 3,073.85 7,904.80 33.83690389
07/10/96 213.30 4,572.05 3,067.18 7,852.53 34.03381010
07/11/96 212.15 4,568.08 3,067.18 7,847.41 33.95406655
07/12/96 71.60 4,747.91 3,065.11 7,884.62 33.93200221
07/13/96 71.60 4,747.91 3,065.11 7,884.62 33.93200221
07/14/96 71.60 4,747.91 3,065.11 7,884.62 33.93200221
07/15/96 90.10 4,734.65 3,048.87 7,873.62 33.93524969
07/16/96 101.98 4,727.65 3,048.87 7,878.50 33.88921726
07/17/96 100.87 4,729.24 3,048.87 7,878.98 33.85583067
07/18/96 99.60 4,708.04 3,048.87 7,856.51 33.87895060
07/19/96 27.57 4,895.82 3,046.54 7,969.93 34.00748000
07/20/96 27.57 4,895.82 3,046.54 7,969.93 34.00748000
07/21/96 27.57 4,895.82 3,046.54 7,969.93 34.00748000
07/22/96 6.91 4,913.12 3,046.14 7,966.17 34.01732986
07/23/96 13.99 4,899.70 2,946.40 7,860.09 34.00613899
07/24/96 63.06 4,917.16 2,889.81 7,870.03 33.97346748
07/25/96 74.51 (3,709.06) 4,924.05 2,889.81 4,179.31 33.98803624
TOTAL INCOME FOR PERIOD 79,822.51
TOTAL EXPENSES FOR PERIOD 11,737.83
AVERAGE SHARES OUTSTANDING 1,493,467.13
LAST PRICE DURING PERIOD 9.13
<CAPTION>
PRICE ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
DATE INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
06/26/96 2,854.78 390.96 1,494,295.271 9.09 2,854.78 390.96 1,494,295.271
06/27/96 2,885.41 389.05 1,497,968.705 9.12 5,740.19 780.01 2,992,263.976
06/28/96 2,717.86 391.16 1,494,766.032 9.18 8,458.05 1,171.17 4,487,030.008
06/29/96 2,717.86 391.16 1,494,766.032 9.18 11,175.91 1,562.33 5,981,796.040
06/30/96 2,717.86 391.16 1,494,766.032 9.18 13,893.77 1,953.49 7,476,562.072
07/01/96 2,657.54 392.60 1,494,498.035 9.18 16,551.31 2,346.09 8,971,060.107
07/02/96 2,678.84 392.39 1,494,498.035 9.15 19,230.15 2,738.48 10,465,558.142
07/03/96 2,694.25 391.52 1,492,832.600 9.17 21,924.40 3,130.00 11,958,390.742
07/04/96 2,694.25 391.52 1,492,832.600 9.17 24,618.65 3,521.52 13,451,223.342
07/05/96 2,729.35 391.65 1,492,832.600 9.09 27,348.00 3,913.17 14,944,055.942
07/06/96 2,729.35 391.65 1,492,832.600 9.09 30,077.35 4,304.83 16,436,888.542
07/07/96 2,729.35 391.65 1,492,832.600 9.09 32,806.70 4,696.48 17,929,721.142
07/08/96 2,698.64 388.34 1,492,832.600 9.07 35,505.34 5,084.82 19,422,553.742
07/09/96 2,674.74 387.60 1,489,543.148 9.09 38,180.08 5,472.42 20,912,096.890
07/10/96 2,672.52 387.67 1,502,397.993 9.12 40,852.60 5,860.09 22,414,494.883
07/11/96 2,664.51 392.20 1,497,458.867 9.13 43,517.11 6,252.29 23,911,953.750
07/12/96 2,675.41 391.48 1,494,964.669 9.15 46,192.52 6,643.77 25,406,918.419
07/13/96 2,675.41 391.48 1,494,964.669 9.15 48,867.93 7,035.26 26,901,883.088
07/14/96 2,675.41 391.48 1,494,964.669 9.15 51,543.34 7,426.74 28,396,847.757
07/15/96 2,671.93 391.74 1,495,129.248 9.14 54,215.27 7,818.48 29,891,977.005
07/16/96 2,669.96 391.25 1,491,599.085 9.15 56,885.23 8,209.73 31,383,576.090
07/17/96 2,667.49 391.10 1,488,827.729 9.17 59,552.72 8,600.83 32,872,403.819
07/18/96 2,661.70 390.53 1,488,488.113 9.21 62,214.42 8,991.36 34,360,891.932
07/19/96 2,710.37 392.36 1,493,504.323 9.20 64,924.79 9,383.72 35,854,396.255
07/20/96 2,710.37 392.36 1,493,504.323 9.20 67,635.16 9,776.07 37,347,900.578
07/21/96 2,710.37 392.36 1,493,504.323 9.20 70,345.53 10,168.43 38,841,404.901
07/22/96 2,709.88 393.26 1,493,504.323 9.18 73,055.41 10,561.69 40,334,909.224
07/23/96 2,672.91 392.49 1,491,453.388 9.20 75,728.32 10,954.18 41,826,362.612
07/24/96 2,673.72 392.58 1,488,753.879 9.18 78,402.04 11,346.76 43,315,116.491
07/25/96 1,420.47 391.07 1,488,897.291 9.13 79,822.51 11,737.83 44,804,013.782
</TABLE>
CLASS B
SEC STANDARDIZED ADVERTISING YIELD
PHASE II-ROLLING
B
PRICING DATE 07/25/96
30 DAY YTM 5.61542%
<TABLE>
<CAPTION>
PRICE ST VARIABLE GAIN/LOSS LONG TERM MORTGAGE TOTAL DIV
DATE INCOME ADJ INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
06/26/96 357.98 0.00 5,013.03 3,077.80 8,448.81 42.45096420
06/27/96 454.68 0.00 4,996.65 3,077.80 8,529.13 42.37399943
06/28/96 194.77 0.00 4,773.12 3,077.80 8,045.69 42.39606280
06/29/96 194.77 0.00 4,773.12 3,077.80 8,045.69 42.39606280
06/30/96 194.77 0.00 4,773.12 3,077.80 8,045.69 42.39606280
07/01/96 222.04 0.00 4,571.82 3,073.91 7,867.77 42.39792178
07/02/96 72.17 0.00 4,783.98 3,073.91 7,930.06 42.37914588
07/03/96 141.08 0.00 4,765.84 3,073.85 7,980.77 42.38987943
07/04/96 141.08 0.00 4,765.84 3,073.85 7,980.77 42.38987943
07/05/96 157.95 0.00 4,846.11 3,073.85 8,077.91 42.36992045
07/06/96 157.95 0.00 4,846.11 3,073.85 8,077.91 42.36992045
07/07/96 157.95 0.00 4,846.11 3,073.85 8,077.91 42.36992045
07/08/96 39.49 0.00 4,856.51 3,073.85 7,969.85 42.45857482
07/09/96 238.44 0.00 4,592.51 3,073.85 7,904.80 42.44570952
07/10/96 213.30 0.00 4,572.05 3,067.18 7,852.53 42.31537150
07/11/96 212.15 0.00 4,568.08 3,067.18 7,847.41 42.44337733
07/12/96 71.60 0.00 4,747.91 3,065.11 7,884.62 42.44620400
07/13/96 71.60 0.00 4,747.91 3,065.11 7,884.62 42.44620400
07/14/96 71.60 0.00 4,747.91 3,065.11 7,884.62 42.44620400
07/15/96 90.10 0.00 4,734.65 3,048.87 7,873.62 42.44433258
07/16/96 101.98 0.00 4,727.65 3,048.87 7,878.50 42.47991417
07/17/96 100.87 0.00 4,729.24 3,048.87 7,878.98 42.42426071
07/18/96 99.60 0.00 4,708.04 3,048.87 7,856.51 42.45297510
07/19/96 27.57 0.00 4,895.82 3,046.54 7,969.93 42.31499304
07/20/96 27.57 0.00 4,895.82 3,046.54 7,969.93 42.31499304
07/21/96 27.57 0.00 4,895.82 3,046.54 7,969.93 42.31499304
07/22/96 6.91 0.00 4,913.12 3,046.14 7,966.17 42.29888122
07/23/96 13.99 0.00 4,899.70 2,946.40 7,860.09 42.28565628
07/24/96 63.06 0.00 4,917.16 2,889.81 7,870.03 42.29865008
07/25/96 74.51 (3,709.06) 4,924.05 2,889.81 4,179.31 42.31186040
TOTAL INCOME FOR PERIOD 99,871.68
TOTAL EXPENSES FOR PERIOD 24,712.59
AVERAGE SHARES OUTSTANDING 1,865,461.44
LAST PRICE DURING PERIOD 8.71
<CAPTION>
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C>
3,586.60 825.92 1,875,120.854 8.68 3,586.60 825.92 1,875,120.854
3,614.13 822.57 1,872,790.301 8.70 7,200.73 1,648.49 3,747,911.155
3,411.06 823.99 1,872,551.033 8.75 10,611.79 2,472.48 5,620,462.188
3,411.06 823.99 1,872,551.033 8.75 14,022.85 3,296.47 7,493,013.221
3,411.06 823.99 1,872,551.033 8.75 17,433.91 4,120.46 9,365,564.254
3,335.77 828.66 1,872,561.817 8.75 20,769.68 4,949.12 11,238,126.071
3,360.69 828.34 1,871,583.234 8.73 24,130.37 5,777.46 13,109,709.305
3,383.04 826.05 1,871,206.192 8.74 27,513.41 6,603.51 14,980,915.497
3,383.04 826.05 1,871,206.192 8.74 30,896.45 7,429.56 16,852,121.689
3,422.60 827.04 1,868,816.341 8.67 34,319.05 8,256.60 18,720,938.030
3,422.60 827.04 1,868,816.341 8.67 37,741.65 9,083.63 20,589,754.371
3,422.60 827.04 1,868,816.341 8.67 41,164.25 9,910.67 22,458,570.712
3,383.88 818.93 1,868,821.820 8.65 44,548.13 10,729.60 24,327,392.532
3,355.25 817.39 1,865,481.883 8.67 47,903.38 11,546.99 26,192,874.415
3,322.83 817.86 1,864,987.971 8.70 51,226.21 12,364.85 28,057,862.386
3,330.71 820.08 1,868,897.896 8.71 54,556.92 13,184.93 29,926,760.282
3,346.72 823.02 1,867,156.977 8.73 57,903.64 14,007.95 31,793,917.259
3,346.72 823.02 1,867,156.977 8.73 61,250.36 14,830.96 33,661,074.236
3,346.72 823.02 1,867,156.977 8.73 64,597.08 15,653.98 35,528,231.213
3,341.91 824.09 1,867,213.004 8.72 67,938.99 16,478.07 37,395,444.217
3,346.78 822.99 1,866,939.469 8.74 71,285.77 17,301.06 39,262,383.686
3,342.60 824.48 1,862,899.919 8.74 74,628.37 18,125.54 41,125,283.605
3,335.32 822.99 1,862,505.247 8.78 77,963.69 18,948.53 42,987,788.852
3,372.48 826.84 1,855,706.334 8.77 81,336.17 19,775.37 44,843,495.186
3,372.48 826.84 1,855,706.334 8.77 84,708.65 20,602.21 46,699,201.520
3,372.48 826.84 1,855,706.334 8.77 88,081.13 21,429.05 48,554,907.854
3,369.60 822.90 1,854,576.114 8.76 91,450.73 22,251.95 50,409,483.968
3,323.69 820.80 1,852,097.020 8.77 94,774.42 23,072.75 52,261,580.988
3,328.92 820.98 1,851,131.082 8.75 98,103.34 23,893.73 54,112,712.070
1,768.34 818.86 1,851,131.082 8.71 99,871.68 24,712.59 55,963,843.152
</TABLE>
CLASS C
SEC STANDARDIZED ADVERTISING YIELD
PHASE II-ROLLING
C
PRICING DATE 07/25/96
30 DAY YTM 5.61361%
<TABLE>
<CAPTION>
PRICE ST FIXED GAIN/LOSS LONG TERM MORTGAGE TOTAL DIV
DATE INCOME ADJ INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
06/26/96 357.98 0.00 5,013.03 3,077.80 8,448.81 23.75986630
06/27/96 454.68 0.00 4,996.65 3,077.80 8,529.13 23.79599112
06/28/96 194.77 0.00 4,773.12 3,077.80 8,045.69 23.82367165
06/29/96 194.77 0.00 4,773.12 3,077.80 8,045.69 23.82367165
06/30/96 194.77 0.00 4,773.12 3,077.80 8,045.69 23.82367165
07/01/96 222.04 0.00 4,571.82 3,073.91 7,867.77 23.82456086
07/02/96 72.17 0.00 4,783.98 3,073.91 7,930.06 23.83997071
07/03/96 141.08 0.00 4,765.84 3,073.85 7,980.77 23.85081626
07/04/96 141.08 0.00 4,765.84 3,073.85 7,980.77 23.85081626
07/05/96 157.95 0.00 4,846.11 3,073.85 8,077.91 23.84219804
07/06/96 157.95 0.00 4,846.11 3,073.85 8,077.91 23.84219804
07/07/96 157.95 0.00 4,846.11 3,073.85 8,077.91 23.84219804
07/08/96 39.49 0.00 4,856.51 3,073.85 7,969.85 23.68086137
07/09/96 238.44 0.00 4,592.51 3,073.85 7,904.80 23.71738659
07/10/96 213.30 0.00 4,572.05 3,067.18 7,852.53 23.65081840
07/11/96 212.15 0.00 4,568.08 3,067.18 7,847.41 23.60255611
07/12/96 71.60 0.00 4,747.91 3,065.11 7,884.62 23.62179379
07/13/96 71.60 0.00 4,747.91 3,065.11 7,884.62 23.62179379
07/14/96 71.60 0.00 4,747.91 3,065.11 7,884.62 23.62179379
07/15/96 90.10 0.00 4,734.65 3,048.87 7,873.62 23.62041773
07/16/96 101.98 0.00 4,727.65 3,048.87 7,878.50 23.63086856
07/17/96 100.87 0.00 4,729.24 3,048.87 7,878.98 23.71990862
07/18/96 99.60 0.00 4,708.04 3,048.87 7,856.51 23.66807430
07/19/96 27.57 0.00 4,895.82 3,046.54 7,969.93 23.67752696
07/20/96 27.57 0.00 4,895.82 3,046.54 7,969.93 23.67752696
07/21/96 27.57 0.00 4,895.82 3,046.54 7,969.93 23.67752696
07/22/96 6.91 0.00 4,913.12 3,046.14 7,966.17 23.68378893
07/23/96 13.99 0.00 4,899.70 2,946.40 7,860.09 23.70820473
07/24/96 63.06 0.00 4,917.16 2,889.81 7,870.03 23.72788244
07/25/96 74.51 (3,709.06) 4,924.05 2,889.81 4,179.31 23.70010336
TOTAL INCOME FOR PERIOD 55,915.36
TOTAL EXPENSES FOR PERIOD 13,830.46
AVERAGE SHARES OUTSTANDING 1,044,888.20
LAST PRICE DURING PERIOD 8.71
<CAPTION>
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C>
2,007.43 462.28 1,049,992.316 8.67 2,007.43 462.28 1,049,992.316
2,029.59 460.40 1,052,188.873 8.70 4,037.02 922.68 2,102,181.189
1,916.78 462.73 1,052,731.087 8.75 5,953.80 1,385.41 3,154,912.276
1,916.78 462.73 1,052,731.087 8.75 7,870.58 1,848.13 4,207,643.363
1,916.78 462.73 1,052,731.087 8.75 9,787.36 2,310.86 5,260,374.450
1,874.46 465.66 1,052,731.087 8.75 11,661.82 2,776.52 6,313,105.537
1,890.52 465.46 1,053,328.162 8.73 13,552.34 3,241.98 7,366,433.699
1,903.48 464.69 1,053,328.162 8.74 15,455.82 3,706.67 8,419,761.861
1,903.48 464.69 1,053,328.162 8.74 17,359.30 4,171.36 9,473,090.023
1,925.95 465.34 1,052,098.654 8.67 19,285.25 4,636.70 10,525,188.677
1,925.95 465.34 1,052,098.654 8.67 21,211.20 5,102.04 11,577,287.331
1,925.95 465.34 1,052,098.654 8.67 23,137.15 5,567.38 12,629,385.985
1,887.33 460.82 1,042,800.925 8.65 25,024.48 6,028.20 13,672,186.910
1,874.81 455.90 1,042,864.509 8.67 26,899.29 6,484.10 14,715,051.419
1,857.19 457.01 1,042,864.509 8.70 28,756.48 6,941.11 15,757,915.928
1,852.19 458.36 1,039,772.692 8.71 30,608.67 7,399.47 16,797,688.620
1,862.49 457.67 1,039,583.255 8.73 32,471.16 7,857.14 17,837,271.875
1,862.49 457.67 1,039,583.255 8.73 34,333.65 8,314.81 18,876,855.130
1,862.49 457.67 1,039,583.255 8.73 36,196.14 8,772.48 19,916,438.385
1,859.78 458.62 1,039,601.008 8.72 38,055.92 9,231.10 20,956,039.393
1,861.76 457.99 1,039,037.064 8.73 39,917.68 9,689.09 21,995,076.457
1,868.89 458.64 1,042,060.893 8.74 41,786.57 10,147.73 23,037,137.350
1,859.48 460.14 1,038,860.106 8.78 43,646.05 10,607.87 24,075,997.456
1,887.08 460.97 1,038,860.106 8.77 45,533.13 11,068.84 25,114,857.562
1,887.08 460.97 1,038,860.106 8.77 47,420.21 11,529.81 26,153,717.668
1,887.08 460.97 1,038,860.106 8.77 49,307.29 11,990.78 27,192,577.774
1,886.69 460.46 1,038,898.086 8.75 51,193.98 12,451.24 28,231,475.860
1,863.49 459.58 1,038,903.515 8.77 53,057.47 12,910.82 29,270,379.375
1,867.39 460.30 1,038,903.515 8.75 54,924.86 13,371.12 30,309,282.890
990.50 459.34 1,037,363.087 8.71 55,915.36 13,830.46 31,346,645.977
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KAITBF CLASS A MTD YTD ONE YEAR THREE YEAR THREE YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
4.75% LOAD -5.13% -0.03% 7.42% 2.41%
no load 0.40% -0.40% 4.95% 12.77% 4.09%
Beg dates 28-Jun-96 29-Dec-95 31-Jul-95 30-Jul-93 30-Jul-93
Beg Value (LOAD) 18,440 18,588 17,640 16,417 16,417
Beg Value (no load) 17,564 17,705 16,802 15,637 15,637
End Value 17,635 17,635 17,635 17,635 17,635
TIME 3
INCEPTION DATE 14-Apr-87
<CAPTION>
KAITBF CLASS A FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
4.75% LOAD 36.30% 6.39% 67.97% 5.74%
no load 43.09% 7.43% 76.35% 6.29%
Beg dates 31-Jul-91 31-Jul-91 14-Apr-87 14-Apr-87
Beg Value (LOAD) 12,938 12,938 10,499 10,499
Beg Value (no load) 12,324 12,324 10,000 10,000
End Value 17,635 17,635 17,635 17,635
5 9.2972222222
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KAITBF-B MTD YTD ONE YEAR THREE YEAR THREE YEAR
TIME 31-Jul-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A -5.67% 0.17% 7.31% 2.38%
W/O CDSC 0.33% -0.87% 4.10% 10.08% 3.25%
Beg dates 28-Jun-96 29-Dec-95 31-Jul-95 30-Jul-93 30-Jul-93
Beg Value (no load) 11,457 11,596 11,042 10,442 10,442
End Value (W/O CDSC) 11,495 11,495 11,495 11,495 11,495
End Value (with cdsc) 10,938 11,061 11,206 11,206
beg nav 8.75 9.10 8.89 9.47 9.47
end nav 8.74 8.74 8.74 8.74 8.74
shares originally purchased 1,309.33 1,274.26 1,242.07 1,102.65 1,102.65
5% cdsc thru date=> 31-Jan-94
TIME 4% cdsc thru date=> 31-Jan-95 3
</TABLE>
<TABLE>
<CAPTION>
KAITBF-B FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
TIME TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 12.14% 3.33% NA NA
W/O CDSC 14.95% 4.06% NA NA
Beg dates 01-Feb-93 01-Feb-93 01-Feb-93 01-Feb-93
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 11,495 11,495 11,495 11,495
End Value (with cdsc) 11,214 11214.3542871 11,495 11494.7820946
beg nav 9.35 9.35 9.35 9.35
end nav 8.74 8.74 8.74 8.74
shares originally purchased 1,069.52 1,069.52 1,069.52 1,069.52
3.5 3.5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KAITBF-C MTD YTD ONE YEAR THREE YEAR THREE YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A -1.83% 4.10% 10.20% 3.29%
W/O CDSC 0.33% -0.87% 4.10% 10.20% 3.29%
Beg dates 28-Jun-96 29-Dec-95 31-Jul-95 30-Jul-93 30-Jul-93
Beg Value (no load) 11,457 11,596 11,042 10,431 10,431
End Value (W/O CDSC) 11,495 11,495 11,495 11,495 11,495
End Value (with cdsc) 11,384 11,495 11,495 11,495
beg nav 8.75 9.10 8.89 9.46 9.46
end nav 8.74 8.74 8.74 8.74 8.74
shares originally purchased 1,309.36 1,274.27 1,242.06 1,102.65 1,102.65
TIME
</TABLE>
<TABLE>
<CAPTION>
KAITBF-C FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 14.95% 4.06% NA NA
W/O CDSC 14.95% 4.06% NA NA
Beg dates 01-Feb-93 01-Feb-93 01-Feb-93 01-Feb-93
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 11,495 11,495 11,495 11,495
End Value (with cdsc) 11,495 11495.0327979 11,495 11495.0327979
beg nav 9.35 9.35 9.35 9.35
end nav 8.74 8.74 8.74 8.74
shares originally purchased 1,069.52 1,069.52 1,069.52 1,069.52
</TABLE>
<PAGE>
Exhibit 99.19
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/ George S. Bissell
------------------------------
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.
/s/ Albert H. Elfner, III
------------------------------
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Rosemary D. Van Antwerp, Jean S.
Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of
them singly, my true and lawful attorneys, with full power to them and each of
them to sign for me and in my name in the capacity indicated below any and all
registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5,
N-1 and N-1A, as amended from time to time, and any and all amendments thereto
to be filed with the Securities and Exchange Commission for the purpose of
registering from time to time all investment companies of which I am now or
hereafter a Director, Trustee or officer and for which Keystone Custodian Funds,
Inc. serves as Adviser or Manager and registering from time to time the shares
of such companies, and generally to do all such things in my name and in my
behalf to enable such investment companies to comply with the provisions of the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ J. Kevin Kenely
------------------------------
J. Kevin Kenely
Treasurer
Dated: December 15, 1995
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
------------------------------
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
------------------------------
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
------------------------------
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
------------------------------
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
------------------------------
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
------------------------------
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser,Jr.
------------------------------
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
------------------------------
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
------------------------------
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Andrew J. Simons
------------------------------
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE INTERMEDIATE TERM BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 38,329,483
<INVESTMENTS-AT-VALUE> 37,633,106
<RECEIVABLES> 702,355
<ASSETS-OTHER> 83,615
<OTHER-ITEMS-ASSETS> 12,367
<TOTAL-ASSETS> 38,431,443
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 355,526
<TOTAL-LIABILITIES> 355,526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,042,418
<SHARES-COMMON-STOCK> 1,484,576
<SHARES-COMMON-PRIOR> 1,639,106
<ACCUMULATED-NII-CURRENT> 32,979
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (2,065,751)
<ACCUM-APPREC-OR-DEPREC> (51,372)
<NET-ASSETS> 12,958,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,055,680
<OTHER-INCOME> 0
<EXPENSES-NET> (149,398)
<NET-INVESTMENT-INCOME> 906,282
<REALIZED-GAINS-CURRENT> 7,826
<APPREC-INCREASE-CURRENT> (240,545)
<NET-CHANGE-FROM-OPS> 673,563
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (898,299)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 258,497
<NUMBER-OF-SHARES-REDEEMED> (465,961)
<SHARES-REINVESTED> 52,934
<NET-CHANGE-IN-ASSETS> (1,613,347)
<ACCUMULATED-NII-PRIOR> 13,389
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (2,061,970)
<GROSS-ADVISORY-FEES> (90,116)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (210,259)
<AVERAGE-NET-ASSETS> 13,787,961
<PER-SHARE-NAV-BEGIN> 8.88
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> (0.58)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.73
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> KEYSTONE INTERMEDIATE TERM BOND FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 38,329,483
<INVESTMENTS-AT-VALUE> 37,633,106
<RECEIVABLES> 702,355
<ASSETS-OTHER> 83,615
<OTHER-ITEMS-ASSETS> 12,367
<TOTAL-ASSETS> 38,431,443
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 355,526
<TOTAL-LIABILITIES> 355,526
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,475,350
<SHARES-COMMON-STOCK> 1,833,529
<SHARES-COMMON-PRIOR> 2,022,636
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (29,974)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,060,814)
<ACCUM-APPREC-OR-DEPREC> (350,795)
<NET-ASSETS> 16,033,767
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,378,420
<OTHER-INCOME> 0
<EXPENSES-NET> (330,249)
<NET-INVESTMENT-INCOME> 1,048,171
<REALIZED-GAINS-CURRENT> 12,034
<APPREC-INCREASE-CURRENT> (314,031)
<NET-CHANGE-FROM-OPS> 746,174
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,028,103)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 555,555
<NUMBER-OF-SHARES-REDEEMED> (808,199)
<SHARES-REINVESTED> 63,537
<NET-CHANGE-IN-ASSETS> (1,956,099)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (65,196)
<OVERDIST-NET-GAINS-PRIOR> (1,057,693)
<GROSS-ADVISORY-FEES> (117,691)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (413,783)
<AVERAGE-NET-ASSETS> 18,000,145
<PER-SHARE-NAV-BEGIN> 8.89
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.74
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 103
<NAME> KEYSTONE INTERMEDIATE TERM BOND FUND CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<INVESTMENTS-AT-COST> 41,916,028
<INVESTMENTS-AT-VALUE> 42,683,924
<RECEIVABLES> 1,710,922
<ASSETS-OTHER> 93,596
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 44,488,442
<PAYABLE-FOR-SECURITIES> 997,320
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 150,996
<TOTAL-LIABILITIES> 1,148,316
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,587,914
<SHARES-COMMON-STOCK> 1,191,465
<SHARES-COMMON-PRIOR> 1,145,600
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (62,368)
<ACCUMULATED-NET-GAINS> (724,917)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65,305
<NET-ASSETS> 10,865,934
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 394,624
<OTHER-INCOME> 0
<EXPENSES-NET> (95,120)
<NET-INVESTMENT-INCOME> 299,504
<REALIZED-GAINS-CURRENT> 79,712
<APPREC-INCREASE-CURRENT> 209,034
<NET-CHANGE-FROM-OPS> 588,250
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (319,351)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 190,512
<NUMBER-OF-SHARES-REDEEMED> (168,445)
<SHARES-REINVESTED> 23,798
<NET-CHANGE-IN-ASSETS> 681,272
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (43,099)
<OVERDIST-NET-GAINS-PRIOR> (804,628)
<GROSS-ADVISORY-FEES> (34,074)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (119,075)
<AVERAGE-NET-ASSETS> 10,392,161
<PER-SHARE-NAV-BEGIN> 8.89
<PER-SHARE-NII> 0.26
<PER-SHARE-GAIN-APPREC> 0.25
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.12
<EXPENSE-RATIO> 1.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
