<PAGE>
KEYSTONE GLOBAL OPPORTUNITIES FUND
PROSPECTUS JANUARY 30, 1996
Keystone Global Opportunities Fund (formerly named Keystone America Global
Opportunities Fund) (the "Fund") is a diversified, open-end management
investment company, commonly known as a mutual fund, that is authorized to issue
more than one series of shares ("Portfolios"). At this time, the Fund issues
shares of only one Portfolio, the Global Opportunities Portfolio (the
"Portfolio").
The Portfolio's objective is capital growth. The Portfolio's investments
are globally varied and primarily comprised of equity securities of small to
medium sized companies in a relatively early stage of development.
Generally, the Portfolio offers three classes of shares. Information on
share classes and their fee and sales charge structures may be found in the
Fund's fee table, "Alternative Sales Options," "Contingent Deferred Sales Charge
and Waiver of Sales Charges," "Distribution Plans" and "Fund Shares."
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
Additional information about the Fund, including information about
securities ratings, is contained in a statement of additional information dated
January 30, 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 GLOBAL OPPORTUNITIES FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 6
Global Opportunities Portfolio --
Investment Objective and Policies 6
Investment Restrictions 8
Risk Factors 8
Pricing Shares 9
Dividends and Taxes 10
Fund Management and Expenses 11
How to Buy Shares 13
Alternative Sales Options 14
Contingent Deferred Sales Charge and
Waiver of Sales Charges 18
Distribution Plans 20
How to Redeem Shares 21
Shareholder Services 23
Performance Data 25
Fund Shares 25
Additional Information 26
Additional Investment Information (i)
Exhibit A A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE GLOBAL OPPORTUNITIES FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plans" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- --------------- ----------------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C>
Sales Charge ...................................... 5.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(as a percentage of average net assets)
Management Fees ................................... 0.98% 0.98% 0.98%
12b-1 Fees ........................................ 0.25% 1.00%(7) 1.00%(7)
Other Expenses .................................... 0.60% 0.60% 0.60%
---- ---- ----
Total Fund Operating Expenses ..................... 1.83% 2.58% 2.58%
==== ==== ====
<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 ................................................................... $75.00 $112.00 $151.00 $260.00
Class B ................................................................... $76.00 $110.00 $157.00 N/A
Class C ................................................................... $36.00 $ 80.00 $137.00 $291.00
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A ................................................................... $75.00 $112.00 $151.00 $260.00
Class B ................................................................... $26.00 $ 80.00 $137.00 N/A
Class C ................................................................... $26.00 $ 80.00 $137.00 $291.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
- ----------
(1)Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See "Class B shares"
for more information.
(2)Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3 The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "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, but may be subject to a contingent deferred sales charge of 0.25%. See the
"Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of this prospectus for an
explanation of the charge.
(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 Fund's fiscal year ended September 30, 1995.
(7)Long-term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by the
National Association of Securities Dealers, Inc. ("NASD").
(8)The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual return
for the Fund may be greater or less than 5%.
</TABLE>
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FINANCIAL HIGHLIGHTS
KEYSTONE GLOBAL OPPORTUNITIES FUND -- CLASS A SHARES
GLOBAL OPPORTUNITIES PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
The following table contains important financial information relating to the
Portfolio and has been audited by KPMG Peat Marwick LLP, the Portfolio's
independent auditors. The table appears in the Portfolio's Annual Report and
should be read in conjunction with the Portfolio's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Portfolio's Annual Report. The Portfolio's financial statements,
related notes, and independent auditors' report are included in the statement of
additional information. Additional information about the Portfolio's performance
is contained in its Annual Report, which will be made available upon request and
without charge.
<TABLE>
<CAPTION>
MARCH 16, 1988
(COMMENCMENT OF
YEAR ENDED SEPTEMBER 30, OPERATIONS) TO
------------------------------------------------------------------------------------ SEPTEMBER 30,
1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
BEGINNING OF PERIOD .. $19.42 $18.02 $11.69 $12.89 $ 9.89 $11.17 $ 9.77 $10.00
----- ----- ----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment income
(loss) ............... (0.16) (0.04) (0.14) (0.08) 0.17 0.19 0.09 0.05
Net realized and
unrealized gains
(losses) on investment
and foreign currency
related transactions . 4.17 1.60 6.47 0.23 3.06 (1.27) 1.66 (0.28)
----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ........... 4.01 1.56 6.33 0.15 3.23 (1.08) 1.75 (0.23)
----- ----- ----- ----- ----- ----- ----- -----
Less distributions from:
Net investment income .. 0 0 0 0 (0.23) (0.12) (0.09) 0
Net realized gains
(losses) on
investments .......... 0 0 0 (1.35) 0 (0.08) (0.26) 0
----- ----- ----- ----- ----- ----- ----- -----
Total distributions .... 0 (0.16) 0 (1.35) (0.23) (0.20) (0.35) 0
----- ----- ----- ----- ----- ----- ----- -----
Net asset value end of
period ............... $23.43 $19.42 $18.02 $11.69 $12.89 $ 9.89 $11.17 $ 9.77
----- ----- ----- ----- ----- ----- ----- -----
TOTAL RETURN(b) ........ 20.65% 8.74% 54.15% 1.81% 32.71% (9.65%) 16.94% (1.20%)(c)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets:
Total expenses ....... 1.83%(d) 2.01% 2.84% 2.50%(a) 2.03%(a) 2.00%(a) 2.00%(a) 1.50%(a)(e)
Net investment income
(loss) .............. (0.83%) (0.86%) (1.72%) (0.69%) 1.49% 1.80% 0.86% 1.42%(a)(e)
Portfolio turnover rate 35% 32% 64% 75% 134% 51% 13% 19%
Net assets, end of
period (thousands) ... $94,679 $71,122 $29,942 $10,859 $2,159 $1,519 $1,378 $1,082
(a) Figures are net of expense reimbursement by Keystone in connection with voluntary expense limitations. Before the expense
reimbursement, the "Ratio of net operating and management expenses to average net assets" would have been 3.67%, 7.77%,
10.39%, 13.06%, and 5.54% for the years ended September 30, 1992, 1991, 1990, 1989 and the period March 16, 1988 (Commencement
of Operations) to September 30, 1988, respectively.
(b) Excluding applicable sales charges.
(c) Annualized total return from March 16, 1988 (Commencement of Operations) to September 30, 1988 is (2.20%).
(d) The expense ratio includes indirectly paid expenses for the year ended September 30, 1995. Excluding indirectly paid
expenses, the expense ratio would have been 1.81% for the year then ended.
(e) Annualized.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE GLOBAL OPPORTUNITIES FUND -- CLASS B SHARES
GLOBAL OPPORTUNITIES PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
The following table contains important financial information relating to the
Portfolio and has been audited by KPMG Peat Marwick LLP, the Portfolio's
independent auditors. The table appears in the Portfolio's Annual Report and
should be read in conjunction with the Portfolio's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Portfolio's Annual Report. The Portfolio's financial statements,
related notes, and independent auditors' report are included in the statement of
additional information. Additional information about the Portfolio'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 SEPTEMBER 30, (DATE OF INITIAL
---------------------------------- PUBLIC OFFERING) TO
1995 1994 SEPTEMBER 30, 1993
---- ---- ------------------
<S> <C> <C> <C>
NET ASSET VALUE: BEGINNING OF PERIOD ............................. $19.20 $17.95 $14.04
----- ----- -----
Income from investment operations:
Net investment income (loss) ..................................... (0.25) (0.15) (0.04)
Net realized and unrealized gains (losses) on investment and
foreign currency related transactions .......................... 4.05 1.56 3.95
----- ----- -----
Total from investment operations ................................. 3.80 1.41 3.91
----- ----- -----
Less distributions from:
Net investment income ............................................ 0 0 0
Net realized gains (losses) on investments ....................... 0 (0.16) 0
----- ----- -----
Total distributions .............................................. 0 (0.16) 0
----- ----- -----
Net asset value: end of period ................................... $23.00 $19.20 $17.95
====== ====== ======
TOTAL RETURN (b).................................................. 19.79% 7.93% 27.85%(a)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ................................................. 2.58%(c) 2.83% 3.35%(a)
Net investment income (loss) ................................... (1.59%) (1.61%) (1.86%)(a)
Portfolio turnover rate .......................................... 35% 32% 64%
Net assets: end of period (thousands) ............................ $238,320 $131,695 $15,534
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The expense ratio includes indirectly paid expenses for the year ended September 30, 1995. Excluding indirectly paid
expenses, the expense ratio would have been 2.56% for the year then ended.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE GLOBAL OPPORTUNITIES FUND -- CLASS C SHARES
GLOBAL OPPORTUNITIES PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
The following table contains important financial information relating to the
Portfolio and has been audited by KPMG Peat Marwick LLP, the Portfolio's
independent auditors. The table appears in the Portfolio's Annual Report and
should be read in conjunction with the Portfolio's financial statements and
related notes, which also appear, together with the independent auditor's
report, in the Portfolio's Annual Report. The Portfolio's financial statements,
related notes, and independent auditors' report are included in the statement of
additional information. Additional information about the Portfolio'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 SEPTEMBER 30, (DATE OF INITIAL
------------------------------------ PUBLIC OFFERING) TO
1995 1994 SEPTEMBER 30, 1993
---- ---- ------------------
<S> <C> <C> <C>
NET ASSET VALUE: BEGINNING OF PERIOD ........................... $19.26 $17.99 $14.04
----- ----- -----
Income from investment operations:
Net investment income (loss) ................................... (0.27) (0.15) (0.04)
Net realized and unrealized gains (losses) on investment and
foreign currency related transactions ........................ 4.05 1.58 3.99
----- ----- -----
Total from investment operations ............................... 3.78 1.43 3.95
----- ----- -----
Less distributions from:
Investment income -- net ....................................... 0 0 0
Net realized gains (losses) on investments ..................... 0 (0.16) 0
----- ----- -----
Total distributions ............................................ 0 (0.16) 0
----- ----- -----
Net asset value: end of period ................................. $23.04 $19.26 $17.99
====== ====== ======
TOTAL RETURN (b)................................................ 19.63% 8.02% 28.13%(a)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ............................................... 2.58%(c) 2.85% 3.04%(a)
Net investment income (loss) ................................. (1.59%) (1.62%) (1.55%)(a)
Portfolio turnover rate ........................................ 35% 32% 64%
Net assets: end of period (thousands) .......................... $86,339 $50,535 $6,217
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The expense ratio includes indirectly paid expenses for the year ended September 30, 1995. Excluding indirectly paid
expenses, the expense ratio would have been 2.56% for the year then ended.
</TABLE>
<PAGE>
THE FUND
The Fund is authorized to issue more than one Portfolio, each investing in a
different portfolio of securities. At this time, the Fund issues only shares of
the Portfolio. The Fund was formed as a Massachusetts business trust on June 17,
1987. The Fund is one of more than 30 funds advised by Keystone Investment
Management Company (formerly named Keystone Custodian Funds, Inc.) ("Keystone").
Keystone has retained the services of Credit Lyonnais International Asset
Management, North America ("Credit Lyonnais") to provide the Portfolio with
subadvisory services, subject to the supervision of the Fund's Board of Trustees
and Keystone.
GLOBAL OPPORTUNITIES PORTFOLIO --
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is capital growth. In selecting its
investments, the Portfolio attempts to identify those companies within various
countries and industries that have the best opportunities for above-average
increases in revenues and earnings and strong prospects for continued revenue
growth. In addition, the Portfolio seeks to identify those countries and
industries where economic and political factors, including currency movements,
are likely to produce above-average growth.
In pursuing its objective, the Portfolio may invest in securities of United
States ("U.S.") companies and of issuers located in certain foreign countries
with developed markets as well as those with emerging markets and the formerly
communist countries of Eastern Europe and the People's Republic of China. In its
investments in securities of issuers in the U.S. and other countries with
developed securities markets, the Portfolio seeks to achieve its objective by
investment in equity securities of small to medium sized companies (generally
under $1 billion in market capitalization) that are in a relatively early stage
of development. In its investments in foreign securities, the Portfolio seeks to
achieve its objective by investing in equity securities of issuers that are
managed and positioned to take advantage of opportunities for above average
increases in revenues and earnings and have strong prospects for continued
revenue growth. For this purpose, countries with emerging markets are generally
those where the per capita income is in the low to middle ranges, as determined
by the International Bank for Reconstruction and Development ("World Bank").
It is expected that, under ordinary circumstances, at least 65% of the
Portfolio's assets will be invested in securities of issuers located in at least
three countries, one of which may be the U.S. Under ordinary circumstances, the
Portfolio invests at least 65% of its assets in equity securities.
Some examples of the securities in which the Fund may invest are common
stocks, securities convertible into common stocks or having common stock
characteristics (consisting of rights, warrants and options), preferred stocks,
debt securities convertible into or exchangeable for preferred or common stock,
debt securities of the U.S. and any foreign governments, including their
political subdivisions, debt securities of any international agency (such as the
World Bank, Asian Development Bank or Inter-American Development Bank) and time
deposits with U.S. and foreign banks, and may hold cash and cash equivalents as
discussed below. The Portfolio's securities and other assets may be denominated
in U.S. currency or currency of any foreign nation. Except as described above,
there are no limitations on the type, size, operating history or dividend paying
record of companies or industries in which the Portfolio may invest. The
Portfolio's securities may be traded in the over-the-counter market as well as
being listed on a foreign exchange. The primary investment criterion used by the
Portfolio in the selection of portfolio securities is that the securities
provide opportunities for capital growth.
Although the Portfolio intends to invest primarily in common stocks and
securities convertible into common stocks to achieve its objective of growth of
capital, the Portfolio may invest in any security listed above. For example,
because the market value of debt obligations can be expected to vary inversely
with changes in prevailing interest rates, investing in debt securities may
provide an opportunity for capital appreciation when interest rates are expected
to decline. In addition, the Portfolio may hold cash and invest in cash
equivalents, including time deposits, for temporary purposes in order to meet
redemption requests or for such periods of time as are necessary to evaluate
market conditions and other factors.
OTHER ELIGIBLE INVESTMENTS
When, in the opinion of Keystone, market conditions warrant, the Portfolio
may invest 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 given by S&P), PRIME-1 (the highest grade given by Moody's) or, if not
rated by such services, is issued by a company that at the date of investment
has an outstanding issue rated A or better by S&P or Moody's; (2) obligations,
including certificates of deposit and bankers' acceptances, of banks or savings
and loan associations having at least $1 billion in deposits as of the date of
their most recently published financial statements and which 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 that 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 or by any agency or instrumentality
of the U.S. When the Portfolio's assets are being invested for temporary
defensive purposes, the Portfolio is not pursuing its investment objective.
The Portfolio may enter into repurchase and reverse repurchase agreements,
invest in master demand notes, lend portfolio securities, 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 and may employ new investment techniques with respect to such options.
The Portfolio may also enter into currency and other financial futures contracts
and related options transactions for hedging purposes and not for speculation,
and may employ new investment techniques with respect to such futures contracts
and related options.
The Portfolio intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including at this time (1) treating as illiquid securities that may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Portfolio has valued such securities on
its books and (2) limiting its holdings of such securities to 15% of net assets.
The Portfolio may invest in restricted securities, including securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 (the
"1933 Act"). Generally, Rule 144A establishes a safe harbor from the
registration requirements of the 1933 Act for resales by large institutional
investors of securities not publicly traded in the U.S. The Portfolio intends to
purchase Rule 144A securities when such securities present an attractive
investment opportunity and otherwise meet the Portfolio's selection criteria.
The Board of Trustees has adopted guidelines and procedures pursuant to which
Keystone determines the liquidity of the Portfolio's Rule 144A securities. The
Board monitors Keystone's implementation of such guidelines and procedures.
At the present time, the Portfolio cannot accurately predict exactly how the
market for Rule 144A securities will develop. A Rule 144A security that was
readily marketable upon purchase may subsequently become illiquid. In such an
event, the Board of Trustees will consider what action, if any, is appropriate.
For further information about the types of investments and investment
techniques available to the Portfolio, including the risks associated therewith,
see the sections of this prospectus entitled "Risk Factors" and "Additional
Investment Information" and the statement of additional information.
Of course, there can be no assurance that the Portfolio will achieve its
investment objective since there is uncertainty in every investment.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The Portfolio's investment objective is fundamental and may not be changed
without the vote of a majority (as defined in the Investment Company Act of 1940
("1940 Act")) of the Portfolio's outstanding shares.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions summarized
below, which may not be changed with respect to the Portfolio without the vote
of a majority (as defined in the 1940 Act) of the Portfolio's outstanding
shares. These restrictions and certain other fundamental and nonfundamental
restrictions are set forth in the statement of additional information.
The Portfolio may not do the following: (1) invest more than 5% of its total
assets in the securities of any one issuer (other than U.S. government
securities), except that up to 25% of its total assets may be invested without
regard to this limit; and (2) borrow, except from banks for temporary or
emergency purposes and/or enter into reverse repurchase agreements in aggregate
amounts up to one-third of the value of the Portfolio's net assets.
RISK FACTORS
Like any investment, your investment in the Portfolio involves some degree
of risk. Before you buy shares of the Portfolio, you should carefully evaluate
your ability to assume the risks your investment in the Portfolio poses. YOU CAN
LOSE MONEY BY INVESTING IN THE PORTFOLIO. YOUR INVESTMENT IS NOT GUARANTEED. A
DECREASE IN THE VALUE OF THE PORTFOLIO'S PORTFOLIO SECURITIES CAN RESULT IN A
DECREASE IN THE VALUE OF YOUR INVESTMENT.
The Portfolio seeks to provide growth of capital by investing principally
in globally varied equity securities of small to medium sized companies in a
relatively early stage of development.
The Portfolio is best suited for investors who can afford to maintain their
investment over a relatively long period of time, and who are seeking a fund
which is growth oriented and has the potential for returns. The Portfolio
involves risk and is not an appropriate investment for conservative investors
who are seeking preservation of capital and/or income.
Certain risks related to the Portfolio are discussed below. To the extent
not discussed in this section, specific risks attendant to individual securities
or investment practices are discussed in "Additional Investment Information".
Past performance should not be considered representative of results for any
future period of time.
FUND RISKS. Investing in companies with small to medium market
capitalizations in a relatively early stage of development involves greater risk
than investing in larger established companies. The stock prices of developing
companies with smaller market capitalizations can rise very quickly and drop
dramatically in a short period of time. This volatility results from a number of
factors, including reliance by these companies on limited product lines,
markets, and financial and management resources.
These and other factors may make small and mid cap companies more
susceptible to setbacks or downturns. These companies may experience higher
rates of bankruptcy or other failures than larger well established companies.
They may be more likely to be negatively affected by changes in management. In
addition, the stock of small and mid cap companies may be thinly traded.
A need for cash due to large liquidations from the Portfolio when the prices
of small and mid cap stocks are declining could result in losses to the
Portfolio.
Investing in the Portfolio involves the risk common to investing in any
security, that is that the value of the securities held by the Portfolio will
fluctuate in response to changes in economic conditions or public expectations
about those securities. The net asset value of the Portfolio's shares will
change accordingly.
Investing in securities of foreign issuers generally involves more risk
than investing in securities of domestic issuers for the following reasons: (1)
there may be less public information available about foreign companies than is
available about U.S. companies; (2) foreign companies are not generally subject
to the uniform accounting, auditing and financial reporting standards and
practices applicable to U.S. companies; (3) foreign stock markets have less
volume than the U.S. market, and the securities of some foreign companies are
much less liquid and much more volatile than the securities of comparable U.S.
companies; (4) foreign securities transactions may involve higher brokerage
commissions; (5) there may be less government regulation of stock markets,
brokers, listed companies and banks in foreign countries than in the U.S.; (6)
the Portfolio may incur fees on currency exchanges when it changes investments
from one country to another; (7) the Portfolio's foreign investments could be
affected by expropriation, confiscatory taxation, nationalization, establishment
of currency exchange controls, political or social instability or diplomatic
developments; (8) fluctuations in foreign exchange rates will affect the value
of the Portfolio's investments, the value of dividends and interest earned,
gains and losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments; and (9) interest and
dividends on foreign securities may be subject to withholding taxes in a foreign
country that could result in a reduction of net investment income available for
distribution.
Investing in securities of issuers in emerging markets countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging markets countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
companies in emerging markets countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities. Furthermore, investing in
securities of companies in the formerly communist countries of Eastern Europe
and the People's Republic of China involves additional risks to those associated
with investments in companies in non-formerly communist emerging markets
countries. Specifically, those countries could convert back to a single economic
system, and the claims of property owners prior to the expropriation by the
communist regime could be settled in favor of the former property owners, in
which case the Portfolio could lose its entire investment in those countries.
These risks are carefully considered by Keystone prior to the purchase of these
securities.
OTHER CONSIDERATIONS. The Portfolio, which invests in companies within
various countries and industries that have the best opportunities for
above-average growth, does not, by itself, constitute a balanced investment
plan. The Fund may be appropriate as part of an overall investment program.
Investors may wish to consult their financial advisers when considering what
portion of their total assets to invest in small cap stocks.
Past performance should not be considered representative of results for any
future period of time.
PRICING SHARES
The net asset value of a Portfolio 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 purposes of pricing Fund
shares) except on days when changes in the value of the Portfolio's securities
do not affect the current net asset value of its shares. The Exchange currently
is closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share of the Portfolio is arrived at by determining the value of
the Portfolio's assets, subtracting its liabilities and dividing the result by
the number of its shares outstanding.
Current values for the Portfolio's securities are determined in the
following manner:
1. securities that are traded on a national securities exchange or on
the over-the-counter National Market System ("NMS") are valued on the basis
of the last sales price on the exchange where primarily traded or NMS prior
to the time of the valuation, provided that a sale has occurred and that this
price reflects current market value according to procedures established by
the Board of Trustees;
2. securities traded in the over-the-counter market, other than NMS, for
which market quotations are readily available, are valued at the mean of the
bid and asked prices at the time of valuation;
3. instruments having maturities of more than sixty days for which
market quotations are readily available are valued at current market value;
where market quotations are not available, such instruments are valued at
fair value as determined by the Board of Trustees;
4. instruments that are purchased with maturities of sixty days or less
(including all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market;
instruments maturing in more than sixty days when purchased that are held on
the sixtieth day prior to maturity are valued at amortized cost (market value
on the sixtieth day adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market;
and which in either case reflects fair value as determined by the Fund's
Board of Trustees; and
5. the following securities are valued at prices deemed in good faith to
be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which complete quotations
are not readily available; (b) listed securities or those on NMS if, in the
Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and (c) other assets.
Foreign securities 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 such securities, quotations from
broker-dealers, market transactions in comparable securities and various
relationships between securities and yield to maturity in determining value.
DIVIDENDS AND TAXES
The Portfolio has qualified and intends to qualify in the future as a
regulated investment company under the Internal Revenue Code (the "Code"). The
Portfolio qualifies if, among other things, it distributes to its shareholders
at least 90% of its net investment income for its fiscal year. The Portfolio
also intends to make timely distributions, if necessary, sufficient in amount to
avoid the nondeductible 4% excise tax imposed on a regulated investment company
to the extent that it fails to distribute, with respect to each calendar year,
at least 98% of its ordinary income for such calendar year and 98% of its net
capital gains for the one-year period ending on October 31 of such calendar
year. Any taxable 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 shareholder as if paid on December 31
of the year in which such dividend was declared. If the Portfolio 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 Portfolio will make distributions from its net investment income and net
capital gains, if any, annually. 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, and income distributions paid by the Portfolio with
respect to Class A shares will generally be greater than those paid with respect
to Class B and Class C shares.
Shareholders receive Portfolio 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. Portfolio distributions in the form of additional
shares are made at net asset value without the imposition of a sales charge.
Dividends and distributions are taxable whether they are received in cash or in
shares. Income dividends and net short-term gains dividends are taxable as
ordinary income, and net long-term gains dividends are taxable as capital gains
regardless of how long the Portfolio's shares are held. If Portfolio shares held
for less than six months are sold at a loss, however, such loss will be treated
for tax purposes as a long-term capital loss to the extent of any long-term
capital gains dividends received. The Portfolio advises its shareholders
annually as to the federal tax status of all distributions made during the year.
If more than 50% of the value of the Portfolio's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the
Portfolio elects to make foreign tax credits available to its shareholders, a
shareholder will be required to include in his gross income both actual
dividends and the amount the Portfolio advises him is his pro rata portion of
income taxes withheld by foreign governments from interest and dividends paid on
the Portfolio's investments. The shareholder will be entitled, however, to take
the amount of such foreign taxes withheld as a credit against his U.S. income
tax, or to treat the foreign tax withheld as an itemized deduction from his
gross income, if that should be to his advantage. In substance, this policy
enables the shareholder to benefit from the same foreign tax credit or deduction
that he would have received if he had been the individual owner of foreign
securities and had paid foreign income tax on the income therefrom. As in the
case of individuals receiving income directly from foreign sources, the above
described tax credit and deductions are subject to certain limitations.
In the event the Fund establishes additional Portfolios, each Portfolio
will be considered, and intends to qualify as, a regulated investment company.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Fund's Board of Trustees, Keystone, the Fund's
investment adviser, provides investment advice, management and administrative
services to the Fund.
INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"), located at
200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and former
members of management and certain employees of Keystone and its affiliates.
The shares of Keystone Investments common stock beneficially owned by
management are held in a number of voting trusts, the trustees of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone Management, Inc.,
Keystone, their affiliates and the Keystone Investments Family of Funds.
Pursuant to its Investment Advisory and Management Agreement (the "Advisory
Agreement") with the Fund, Keystone provides investment advisory and
management services to the Fund. Keystone manages the investment and
reinvestment of the Fund's assets, supervises the operation of the Fund,
provides all necessary office space, facilities, equipment and personnel and
arranges, at the request of the Fund, for its employees to serve as officers
or agents of the Fund.
The Fund pays Keystone a fee for its services with respect to the Fund at
the annual rate set forth below:
Aggregate Net Asset Value
Management of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
1.00% of the first $200,000,000, plus
0.95% of the next $200,000,000, plus
0.85% of the next $200,000,000, plus
0.75% of amounts over $600,000,000;
computed as of the close of business each business day and payable daily.
During the fiscal year ended September 30, 1995, the Fund paid or accrued
to Keystone investment management and administrative services fees of
$3,009,974, which represented 0.98% of the Fund's average daily net assets on an
annualized basis. Of such amount, Keystone retained $1,557,883 for its services
to the Fund.
A management fee of 0.75% is higher than that paid by most other investment
companies. However, the Fund's fee structure is comparable to that of other
global and international funds subject to the higher costs involved in managing
a portfolio of predominantly international securities.
The Advisory Agreement continues in effect from year to year only so long
as such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund or Keystone or may be terminated by a vote of shareholders of the Fund. The
Advisory Agreement will terminate automatically upon its assignment.
SUBADVISER
Keystone has entered into a Subadvisory Agreement with Credit Lyonnais
International Asset Management, North America ("CLIAM"), an international
investment management firm located at 1301 Avenue of the Americas, New York,
New York 10019. CLIAM is a subsidiary of Credit Lyonnais, which is among the
world's largest banks, with $250 billion in assets and offices in 76
countries. Under the Subadvisory Agreement, CLIAM provides the Fund with
certain investment advisory services, and Keystone pays CLIAM at the beginning
of each fiscal quarter a fee for its services that represents 50% of the
management fee paid by the Fund to Keystone for the preceding quarter on Fund
assets of up to $250,000,000 and 30% of the management fee paid by the Fund to
Keystone for the preceding quarter on Fund assets in excess of $250,000,000.
The Fund has no responsibility to pay CLIAM's fee.
The Subadvisory Agreement continues in effect from year to year only so
long as such continuance is specifically approved at least annually by the Board
of Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Subadvisory Agreement and continuance thereof must
be approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Subadvisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund or Keystone or may be terminated by a vote of shareholders of the Fund. The
Subadvisory Agreement will terminate automatically upon its assignment.
For the year ended September 30, 1995, Keystone paid or accrued $1,432,091
to CLIAM for its services as subadviser to the Fund.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Christopher R. Ely has been the Fund's Portfolio Manager since 1995. He is
a Keystone Senior Vice President and Senior Portfolio Manager and has more than
15 years' experience in equity investing.
FUND EXPENSES
The Portfolio will pay all of its expenses. In addition to the investment
management and distribution plan fees discussed herein, the principal expenses
that the Portfolio is expected to pay include, but are not limited to, expenses
of certain of its Trustees; transfer, dividend disbursing and shareholder
servicing agent expenses; custodian expenses; fees of its independent auditors
and legal counsel to its Trustees; fees payable to government agencies,
including registration and qualification fees attributable to the Portfolio and
its shares under federal and state securities laws; and certain extraordinary
expenses. In addition, each class will pay all of the expenses attributable to
it. Such expenses are currently limited to Distribution Plan expenses. The
Portfolio also pays its brokerage commissions, interest charges and taxes.
For the fiscal year ended September 30, 1995, the Portfolio's Class A,
Class B and Class C shares paid 1.83%, 2.58% and 2.58%, respectively, of their
respective average class net assets in expenses.
During the fiscal year ended September 30, 1995, the Portfolio paid or
accrued to Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer
and dividend disbursing agent, and Keystone Investments, $22,704 for certain
accounting and printing services and $1,214,494 for shareholder services. KIRC
is a wholly-owned subsidiary of Keystone.
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
Portfolio, Keystone may follow a policy of considering as a factor the number of
shares of the Portfolio sold by such broker-dealer. In addition, broker-dealers
executing portfolio transactions may, from time to time, be affiliated with the
Fund, Keystone, CLIAM, the Fund's principal underwriter, or their affiliates.
The Portfolio may pay higher commissions to broker-dealers that provide
research services. Keystone may use these services in advising the Portfolio as
well as in advising its other clients.
PORTFOLIO TURNOVER
The Portfolio's portfolio turnover rate for the fiscal years ended
September 30, 1994 and 1995 were 32% and 35%, respectively. High portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which would be borne directly by the Portfolio, as well as
additional realized gains and/or losses to shareholders. For further information
about brokerage and distributions, see the statement of additional information.
HOW TO BUY SHARES
You may purchase shares of the Portfolio from any broker-dealer that has a
selling agreement with Keystone Investment Distributors Company (formerly named
Keystone Distributors, Inc.) (the "Principal Underwriter"), the Portfolio's
principal underwriter. The Principal Underwriter, a wholly-owned subsidiary of
Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the
Portfolio by mailing to the Portfolio c/o Keystone Investor Resource Center,
Inc., P.O. Box 2121, Boston, Massachusetts 02106-2121, a completed account
application and a check payable to the Portfolio, or you may 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 or by an electronic funds transfer ("EFT").
Orders for the purchase of shares of the Portfolio will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Principal Underwriter (generally as
of the close of the Exchange on that day) plus, in the case of Class A shares,
the front end sales charge. Orders received by dealers or other firms prior to
the close of the Exchange and received by the Principal Underwriter prior to the
close of its business day will be confirmed at the offering price effective as
of the close of the Exchange on that day. The Portfolio reserves the right to
determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received by broker-dealers prior to that day's close of
trading on the Exchange and transmitted to the Portfolio prior to its close of
business that day will receive the offering price equal to the net asset value
per share computed at the close of trading on the Exchange on the same day plus,
in the case of Class A shares, the front end sales charge. Orders received by
broker-dealers after that day's close of trading on the Exchange and transmitted
to the Portfolio prior to the close of business on the next business day will
receive the next business day's offering price.
Orders for shares received directly by the Portfolio from you will receive
the offering price equal to the net asset value per share next computed after
the Portfolio receives the purchase order plus, in the case of Class A shares,
the front end sales charge.
The initial purchase must be at least $1,000. There is no minimum amount
for subsequent purchases.
The Portfolio reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free
1-800-343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Generally, the Portfolio offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class
A shares are not subject to a deferred sales charge when they are redeemed
except as follows: Class A shares purchased on or after April 10, 1995 (1) in an
amount equal to or exceeding $1,000,000 or (2) by a corporate qualified
retirement plan or a non-qualified deferred compensation plan sponsored by a
corporation having 100 or more eligible employees (a "Qualifying Plan"), in
either case without a front end sales charge, will be subject to a contingent
deferred sales charge for the 24 month period following the date of purchase.
Certain Class A shares purchased prior to April 10, 1995 may be subject to a
deferred sales charge upon redemption during the one year period following the
date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
they are redeemed. Class B shares purchased on or after June 1, 1995 are subject
to a contingent deferred sales charge if redeemed during the 72 month period
commencing with 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 dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its Distribution Plan or other plan, pays
an annual service fee of 0.25% of the Fund's average daily net assets
attributable to that class. In addition to the 0.25% service fee, the Class B
and C Distribution Plans provide for the payment of an annual distribution fee
of up to 0.75% of the average daily net assets attributable to their respective
classes. As a result, income distributions paid by the Fund with respect to
Class B and Class C shares will generally be less than those paid with respect
to Class A shares.
Investors who would rather pay the entire cost of distribution at the time
of investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the intended length of investment.
The Portfolio 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 $50,000 ......... 5.75% 6.10% 5.25%
$50,000 but less than
$100,000 .................. 4.75% 4.99% 4.25%
$100,000 but less than
$250,000 .................. 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 .................. 2.50% 2.56% 2.25%
$500,000 but less than
$1,000,000 ................ 1.50% 1.52% 1.50%
- ----------
*Rounded to the nearest one-hundredth percent.
----------------------------------------------
Purchases of the Portfolio'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 (a "TSA Plan") will be at net asset value without the
imposition of a front-end sales charge (each such purchase, an "NAV Purchase").
In addition, purchases of the Portfolio's Class A shares made for the
benefit of a Chilean retirement plan (a "Chilean Retirement Plan") in the
amount of $1 million or more will be a NAV Purchase.
With respect to NAV Purchases, the Principal Underwriter will pay broker/
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
1.00% of the investment amount up to $2,999,999; plus 0.50% of the investment
amount between $3,000,000 and $4,999,999; plus 0.25% of the investment amount
over $4,999,999. Upon redemption within two years of NAV Purchases by a Chilean
Retirement Plan of any shares upon which the payment of a concession was based,
a prorated portion of such concession shall be refunded to the Principal
Underwriter.
With the exception of Class A shares acquired by a TSA Plan or a Chilean
Retirement Plan Class A shares acquired on or after April 10, 1995 in an NAV
Purchase are subject to a contingent deferred sales charge of 1.00% upon
redemption during the 24 month period commencing on the date the shares were
originally purchased. Class A shares acquired by a TSA Plan or a Chilean
Retirement Plan in an NAV Purchase are not subject to a contingent deferred
sales charge. Certain Class A shares purchased without a front-end sales charge
prior to April 10, 1995 are subject to a contingent deferred sales charge of
0.25% upon redemption during the one year period commencing on the date such
shares were originally purchased.
The sales charge is paid to the Principal Underwriter, which in turn
normally reallows a portion to your broker-dealer. In addition, your broker-
dealer currently will be paid periodic service fees at an annual rate of up to
0.25% of the average daily net asset value of Class A shares maintained by such
recipient 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 which are included in a broker-dealer or investment adviser managed fee
based program (a "wrap account") with broker dealers or investment advisers who
have entered into special agreements with the Principal Underwriter. Initial
sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of the Portfolio alone or in combination with Class A
shares of other Keystone America Funds. See Exhibit A to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates, where the
amount invested represents redemption proceeds from such unrelated registered
open-end investment company, and the shareholder either (1) paid a front end
sales charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds. This
special net asset value purchase is currently being offered on a calendar month
by month basis and may be modified or terminated in the future.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after a change in the registered representative's employment, where the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front end sales charge, or (2)
was at some time subject to, but did not actually pay, a contingent deferred
sales charge with respect to the redemption proceeds.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund,
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers), as
service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipients outstanding on the books of
the Fund for specified periods.
Since January 1, 1996 through March 31, 1996 ("Offering Period"), the
Principal Underwriter will reallow to brokers or others a commission based on
the price paid for each Class A Fund share sold, at the following rates: full
reallowance plus an additional .50% for each Class A Fund share sold with
respect to purchases in an amount not exceeding $499,999, and full reallowance
for each Class A Fund share sold with respect to purchases in an amount in
excess of $499,999. Such payments will be made to those dealers and others
selling such shares who pay to their registered representatives making such
sales a portion of the additional amount payable under this special dealer
offer, determined in accordance with their regular payment arrangements with
such persons for sales not made under a special dealer offer.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with
the following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period ................... 5.00%
Second twelve month period .................. 4.00%
Third twelve month period ................... 3.00%
Fourth twelve month period .................. 3.00%
Fifth twelve month period ................... 2.00%
Sixth twelve month period ................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, the Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charges and Waiver of
Sales Charges" below.
Class B shares purchased on or after June 1, 1995 that have been
outstanding for eight years 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. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to KIRC.) 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 such Class B shareholders.
In addition to the exchange privileges described in the section of the
prospectus entitled "Exchanges," Class B shares purchased prior to June 1, 1995
that have been outstanding during seven calendar years, as a general matter, may
be exchanged for Class A shares of the Fund without imposition of a front end
sales charge.
The Class B shares so converted or exchanged will no longer be subject to
the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion or exchange,
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 or exchanged.
For more information on current exchange privileges, see "Exchanges."
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 dealers) (1) as commissions
for Class B shares sold and (2) as shareholder service fees. Amounts paid or
accrued to the Principal Underwriter under (1) and (2) in the aggregate may not
exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party will receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
Since January 1, 1996 through March 31, 1996 ("Offering Period"), the
Principal Underwriter will reallow to brokers or others a commission equal to
4.75% of the price paid for each Class B Fund share sold as well as payment in
advance of a shareholder service fee at a rate of 0.25% per annum of the net
asset value of shares maintained by such recipients outstanding on the books of
the Fund for specified periods, as described in each Fund's prospectus. Such
payments will be made to those dealers and others selling such shares who pay to
their registered representatives making such sales a portion of the additional
amount payable under this special dealer offer, determined in accordance with
their regular payment arrangements with such persons for sales not made under a
special dealer offer.
CLASS C SHARES
Class C shares are offered only through dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Portfolio imposes a deferred sales charge of 1.00% on shares
redeemed within one year after the date of purchase. No deferred sales charge is
imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is
deducted from the redemption proceeds otherwise payable to you. The deferred
sales charge is retained by the Principal Underwriter. See "Contingent Deferred
Sales Charges and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares
(the "Class C Distribution Plan") that provides for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the distribution of Class C shares. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) (1) as commissions for 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 brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold, and, beginning approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules
- -- see "Distribution Plans") plus service fees which are paid at the annual rate
of 0.25%, respectively, of the average daily net asset value of each Class C
share maintained by the recipients outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE
AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class
A, Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of purchase
of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of 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 one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held for more than four consecutive calendar years or more than 72 months after
purchase, as the case may be; or (5) Class C shares held for more than one year
from the date of purchase. Upon request for redemption, shares not subject to
the contingent deferred sales charge will be redeemed first. Thereafter, shares
held the longest will be the first to be redeemed.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under
an automatic withdrawal plan of up to 1 1/2% per month of the shareholder's
initial account balance; (6) withdrawals consisting of loan proceeds to a
retirement plan participant; (7) financial hardship withdrawals made by a
retirement plan participant; or (8) withdrawals consisting of returns of excess
contributions or excess deferral amounts made to a retirement plan participant.
The Portfolio 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.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of Fund shares. In addition, dealers may, from time to time, receive
additional cash payments. The Principal Underwriter may also provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency such as the NASD. Dealers to whom substantially the entire sales charge
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 dealers which satisfy certain criteria
established from time to time by the Principal Underwriter. These conditions
relate to increasing sales of shares of the Keystone funds over specified
periods and certain other factors. Such payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to 0.25% of
the value of shares sold by such dealer.
The Principal Underwriter may also pay a transaction fee (up to the level
of payments allowed to dealers for the sale of shares, as described above) to
banks and other financial services firms that facilitate transactions in shares
of the Fund for their clients.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, the Portfolio bears some of the costs of selling its
shares under Distribution Plans adopted with respect to its Class A, Class B and
Class C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that a fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of its
shares, of which 0.75% may be used to pay such distribution costs and 0.25% may
be used to pay shareholder service fees. The NASD also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the 12b-1 Distribution Plan, plus interest at the
prime rate plus 1% on such amounts (less any deferred sales charges paid by
shareholders to the Principal Underwriter), remaining unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Portfolio. The Principal Underwriter
intends to seek full payment of such charges from the Portfolio (together with
annual interest thereon at the prime rate plus one percent) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
the permitted limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Distribution Plan. If a Distribution Plan is
terminated, the Principal Underwriter will ask the Independent Trustees to take
whatever action they deem appropriate under the circumstances with respect to
payment of such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares, unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. Unpaid distribution costs at fiscal year end September
30, 1995 were: $9,557,717 for Class B purchased prior to June 1, 1995 (4.01% of
net class assets of such Class B shares); $2,611,116 for Class B shares
purchased on or after June 1, 1995 (1.10% of net class assets of such Class B
shares); and $5,094,255 for Class C shares (5.90% of Class C net class assets).
During the fiscal year ended September 30, 1995, the Portfolio paid the
Principal Underwriter: $185,409 under its Class A Distribution Plan; $1,606,135
for Class B shares sold prior to June 1, 1995; $64,006 for Class B shares sold
on or after June 1, 1995; and $636,417 under its Class C Distribution Plan.
These amounts were used to pay commissions and service fees. The Portfolio makes
no payments in connection with the sale of its shares other than the fee paid to
its Principal Underwriter.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Portfolio shares for cash at their net asset value upon
written order to the Portfolio c/o KIRC, and presentation to the Portfolio of a
properly endorsed share certificate (if certificates have been issued). Your
signature(s) on the written order and certificates must be guaranteed as
described below. In order to redeem by telephone or to engage in telephone
transactions generally, you must complete the authorization in your account
application. Proceeds for shares redeemed on telephonic order will be deposited
by wire or EFT only to the bank account designated in your account application.
The redemption value equals the net asset value per share then determined
and may be more or less than your cost depending upon changes in the value of
the Portfolio's portfolio securities between purchase and redemption.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Portfolio may be requested to redeem shares for which
it has not yet received good payment. In such a case, the Portfolio will mail
the redemption proceeds upon clearance of the purchase check, which may take 15
days or more. Any delay may be avoided by purchasing shares either with a
certified check or by Federal Reserve or bank wire of funds or by EFT. Although
the mailing of a redemption check or the wiring or EFT of redemption proceeds
may be delayed, the redemption value will be determined and the redemption
processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after the redemption and prior to the release of
the proceeds, no appreciation or depreciation will occur in the value of the
redeemed shares, and no interest will be paid on the redemption proceeds. If the
payment of a redemption has been delayed, the check will be mailed or the
proceeds wired or sent EFT promptly after good payment has been collected.
The Portfolio computes the amount due you at the close of the Exchange at
the end of the day on which it has received all proper documentation from you.
Payment of the amount due on redemption, less any applicable contingent deferred
sales charge (as described above), will be made within seven days thereafter
except as discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Portfolio, stands ready to repurchase
Portfolio shares upon orders from dealers and will calculate the net asset value
on the same terms as those orders for the purchase of shares received from
broker- dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. The Principal Underwriter
charges no fee for this service. Your broker-dealer, however, may charge a
service fee.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Portfolio or KIRC may
waive this requirement, but also 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 Portfolio receives a redemption order, but you have not clearly
indicated the amount of money or number of shares involved, the Portfolio cannot
execute the order. In such cases, the Portfolio will request the missing
information from you and process the order on the day such information is
received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your
account by telephone by calling toll free 1-800-343-2898. You must complete the
Telephone Redemptions section of the application to enjoy telephone redemption
privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by
check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to
your previously designated bank account as you direct. If you do not specify how
you wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Portfolio 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 Portfolio reserves
the right to redeem your account if its value has fallen below $1,000, the
current minimum investment level, as a result of your redemptions (but not as a
result of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Portfolio to pay
for all redemptions in cash, the Portfolio 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 Portfolio's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
The Portfolio 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 Portfolio, 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 Portfolio, 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 Portfolio 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
Portfolio 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 Portfolio 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 original 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
(i) Class A shares acquired in an NAV Purchase or otherwise without a front
end sales charge,
(ii) Class B shares that have been held for less than 72 months or four
years, as the case may be, or
(iii) 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. Shares purchased by check are eligible for exchange
after 15 days. 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 Portfolio reserves the right, after providing
the required notice to shareholders, to terminate this exchange offer or to
change its terms, including the right to change the fee for any exchange.
Orders to exchange a certain class of shares of the Portfolio for the
corresponding class of shares of KLT will be executed by redeeming the shares of
the 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 Portfolio
prior to 4:00 p.m. eastern time on any day the Portfolio 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 Portfolio.
Therefore, the Portfolio, in addition to its right to reject any exchange,
reserves the right to terminate the exchange privilege of any shareholder who
makes more than five exchanges of shares of the funds in a year or three in a
calendar quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Portfolio with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in
your Keystone America account. Once proper authorization is given, your bank
account will be debited to purchase shares in the Portfolio. You will receive
confirmation from the Principal Underwriter for every transaction.
To change the amount of a Keystone America Money Line or to terminate the
service (which could take up to 30 days), you must write to KIRC and include
account numbers.
RETIREMENT PLANS
The Portfolio has various retirement plans available to investors,
including Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified
Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"), 403(b)
Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Portfolio shares
in your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Moreover, because of the effect
of the applicable sales charge, a Class A investor should not make continuous
purchases of the Portfolio's shares while participating in the Automatic
Withdrawal Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more shares
being purchased when the selected fund's net asset value is relatively low and
fewer shares being purchased when the fund's net asset value is relatively high
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 EARNINGS AND IS NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. Total return and current yield are computed separately for
each class of shares of the Fund. Total return refers to average annual
compounded rates of return over specified periods determined by comparing the
initial amount invested in a particular class to the ending redeemable value of
that amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Portfolio may also include comparative performance data for each class
of shares in advertising or marketing the Portfolio's shares, such as data from
Lipper Analytical Services, Inc., Morningstar, Inc., Standard & Poor's
Corporation, Ibbotson Associates or other industry publications.
FUND SHARES
Generally, the Fund currently issues one series of shares, which offers
three classes of shares that participate proportionately based on their relative
net asset values in dividends and distributions and have equal voting,
liquidation and other rights except that (1) expenses related to the
distribution of each series or 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 series or class; (2) each series or class of shares has exclusive voting
rights with respect to its Distribution Plan; (3) each series or class has
different exchange privileges; and (4) each series or class generally has a
different designation. When issued and paid for, the shares will be fully paid
and nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services", but will have no other preference, conversion, exchange
or preemptive rights. Shares are redeemable, transferable and freely assignable
as collateral. The Fund is authorized to issue additional series 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 Fund's Declaration of Trust, shareholders have the right to remove Trustees
by an affirmative vote of two-thirds of the outstanding shares. A special
meeting of the shareholders will be held when 10% of the outstanding shares
request a meeting for the purpose of removing a Trustee. The Fund is prepared to
assist shareholders in communications with one another for the purpose of
convening such a meeting as prescribed by Section 16(c) of the 1940 Act.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Portfolio 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 also may 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 Portfolio may be subject to the risks
associated with the holding of such property overseas. 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.
TIME DEPOSITS
The Portfolio may acquire time deposits or obligations issued by
international agencies, such as the International Bank for Reconstruction and
Development, the Asian Development Bank or the Inter-American Bank.
Additionally, the Portfolio may purchase certificates of deposit, bankers'
acceptances, time deposits or other similar obligations issued by foreign banks.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Portfolio at varying rates of interest pursuant to
direct arrangements between the Portfolio, 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 Portfolio 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, and the borrower may repay up to
the full amount of the note without penalty. Notes purchased by the Portfolio
permit the Portfolio to demand payment of principal and accrued interest at any
time (on not more than seven days' notice). Notes acquired by the Portfolio may
have maturities of more than one year, provided (1) the Portfolio 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 the borrower, such instruments are not normally traded and there is no
secondary market for these notes, although they are repayable by the borrower at
face value plus accrued interest at any time. Accordingly, the Portfolio'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 Portfolio will
invest in them only if the issuer meets the criteria established for commercial
paper.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements; i.e., the Portfolio
purchases a security subject to the Fund's obligation to resell and the seller's
obligation to repurchase that security at an agreed upon price and date, such
date usually being not more than seven days from the date of purchase. The
resale price is based on the purchase price plus an agreed upon current market
rate of interest that (for purposes of the transaction) is generally unrelated
to the coupon rate or maturity of the purchased security. A repurchase agreement
imposes an obligation on the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security. The
value of the underlying security is at least equal to the amount of the agreed
upon resale price and marked to market daily to cover such amount. The Portfolio
may enter into such agreements only with respect to U.S. government and foreign
government securities, which may be denominated in U.S. or foreign currencies.
The Portfolio may enter into such repurchase agreements with foreign banks and
securities dealers approved in advance by the Fund's Trustees. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been definitively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. It does not
presently appear possible to eliminate all risks involved in repurchase
agreements. These risks include the possibility of an increase in the market
value of the underlying securities or inability of the repurchaser to perform
its obligation to repurchase coupled with an uncovered decline in the market
value of the collateral, including the underlying securities, as well as delay
and costs to the Portfolio in connection with enforcement or bankruptcy
proceedings. Therefore, it is the policy of the Portfolio to enter into
repurchase agreements only with large, well-capitalized banks that are members
of the Federal Reserve System and with primary dealers in U.S. government
securities (as designated by the Federal Reserve Board) whose creditworthiness
has been reviewed and found satisfactory by the Portfolio's advisers.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Portfolio would sell securities
and agree to repurchase them at a mutually agreed upon date and price. The
Portfolio 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 Portfolio enters into a reverse repurchase
agreement, it will establish a segregated account with the Portfolio's custodian
containing liquid assets 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 which the Portfolio is obligated to
repurchase may decline below the repurchase price. Borrowing and reverse
repurchase agreements magnify the potential for gain or loss on the securities
of the Portfolio and, therefore, increase the possibility of fluctuation in the
Portfolio's net asset value. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Portfolio's obligation to repurchase the securities and
the Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such determination. The staff of the SEC has
taken the position that, unless fully secured or collateralized, reverse
repurchase agreements are a form of leverage and, therefore, subject to the
percentage limit on borrowings imposed on a fund under the 1940 Act. The Fund
intends to only invest in fully secured or collateralized reverse repurchase
agreements.
FOREIGN SECURITIES
The Portfolio may invest in securities principally traded in securities
markets outside the United States. 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, particularly emerging market country companies, than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the United States. Investments
in foreign securities may also be subject to other risks different from those
affecting U.S. investments, including local political or economic developments,
particularly with respect to companies in the formerly communist countries of
Eastern Europe and the People's Republic of China, 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 United States).
"WHEN ISSUED" SECURITIES
The Portfolio may also purchase and sell securities or currencies on a when
issued and delayed delivery basis. When issued and delayed delivery transactions
arise when securities or currencies are purchased or sold by the Portfolio with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time of
entering into the transaction. When the Portfolio engages in when issued and
delayed delivery transactions, the Portfolio relies on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the
Portfolio missing the opportunity to obtain a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. No payment or delivery is made by
the Fund however, until it receives payment or delivery from the other party to
the transaction. The Fund will maintain a separate account of liquid assets
equal to the value of such commitments will be maintained until payment is made.
When issued and delayed delivery agreements are subject to risks from changes in
value based upon changes in the level of interest rates and other market
factors, both before and after delivery. The Portfolio does not accrue any
income on such securities prior to their delivery. To the extent the Portfolio
engages in when issued and delayed delivery transactions, it will do so for the
purposes consistent with its investment objective and policies and not for the
purpose of investment leverage.
DERIVATIVES
The Portfolio 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 Portfolio 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 Portfolio is permitted to use derivatives
for one or more of these purposes, although the Portfolio generally uses
derivatives primarily as direct investments in order to enhance yields and
broaden portfolio diversification. Each of these uses entails greater risk than
if derivatives were used solely for hedging purposes. The Portfolio uses futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to Portfolio
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Portfolio. However, the Portfolio may take positions in those derivatives
that are within its investment policies if, in Keystone's judgement, this
represents an effective response to current or anticipated market conditions.
Keystone's use of derivatives is subject to continuous risk assessment and
control from the standpoint of the Portfolio's investment objectives and
policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options,
futures, forwards and swaps -- from which virtually any type of derivative
transaction can be created. Further information regarding options and futures is
provided later in this section and is provided in the Portfolio's statement of
additional information. The Portfolio does not presently engage in the use of
swaps.
While the judicious use of derivatives by experienced investment managers
such as Keystone can be beneficial, derivatives also involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments.
Following is a general discussion of important risk factors and issues
concerning the use of derivatives that investors should understand before
investing in the Portfolio.
* Market Risk -- This is the general risk attendant to all investments that
the value of a particular investment will decline or otherwise change in a way
detrimental to the Portfolio's interest.
* Management Risk -- Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Portfolio'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
Portfolio as a result of the failure of another party to a derivative (usually
referred to as a "counterparty") to comply with the terms of the derivative
contract. The credit risk for exchange traded derivatives is generally less
than for privately negotiated derivatives, since the clearing house, which is
the issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Portfolio 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 Risk -- 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 Portfolio. Derivatives
do not always perfectly or even highly correlate or track the value of the
assets, rates or indices they are designed to closely track. Consequently, the
Portfolio's use of derivatives may not always be an effective means of, and
sometimes could be counterproductive to, furthering the Fund's investment
objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Portfolio may write (i.e., sell) covered call
and put options. By writing a call option, the Portfolio becomes obligated
during the term of the option to deliver the securities underlying the option
upon payment of the exercise price. By writing a put option, the Portfolio
becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. The
Portfolio also may write straddles (combinations of covered puts and calls on
the same underlying security).
The Portfolio may only write "covered" options. This means that so long as
the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option or, in the case of call options on
U.S. Treasury bills, the Portfolio might own substantially similar U.S. Treasury
bills. If the Portfolio has written options against all of its securities that
are available for writing options, the Portfolio may be unable to write
additional options unless it sells a portion of its portfolio holdings to obtain
new securities against which it can write options. If this were to occur, higher
portfolio turnover and correspondingly greater brokerage commissions and other
transaction costs may result. The Portfolio does not expect, however, that this
will occur.
The Portfolio will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains 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 Portfolio receives a premium from writing a
call or put option which it retains whether or not the option is exercised. By
writing a call option, the Portfolio might lose the potential for gain on the
underlying security while the option is open, and by writing a put option, the
Portfolio might become obligated to purchase the underlying security for more
than its current market price upon exercise.
PURCHASING OPTIONS
The Portfolio may purchase put or call options for the purpose of
offsetting previously written put or call options of the same series.
If the Portfolio is unable to effect a closing purchase transaction with
respect to covered options it has written, the Portfolio will not be able to
sell the underlying securities 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 Portfolio 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 Portfolio's
ability to use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options which the Portfolio will trade are
generally listed on national securities exchanges. Exchanges on which such
options currently are traded, include the Chicago Board Options Exchange and the
New York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any Exchange but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to the Portfolio. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, the Portfolio is subject to the investment restrictions
described in this prospectus and the statement of additional information.
The staff of the SEC 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 relating to illiquid
securities.
FUTURES TRANSACTIONS
The Portfolio may enter into currency and other financial futures contracts
and write options on such contracts. The Portfolio intends to enter into such
contracts and related options for hedging purposes. The Portfolio will enter
into futures for securities, currencies 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 Portfolio does not make payment or deliver
securities upon entering into a futures contract. Instead, it puts down a margin
deposit, which is adjusted to reflect changes in the value of the contract and
which remains in effect until the contract is terminated.
The Portfolio may sell or purchase currency and other financial futures
contracts. When a futures contract is sold by the Portfolio, the value of the
contract will tend to rise when the value of the underlying securities or
currencies declines and to fall when the value of such securities or currencies
increases. Thus, the Portfolio 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 Portfolio, 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 Portfolio
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 Portfolio intends to purchase.
The Portfolio also intends to purchase put and call options on currency and
other financial futures contracts for hedging purposes. A put option purchased
by the Portfolio would give it the right to assume a position as the seller of a
futures contract. A call option purchased by the Portfolio would give it the
right to assume a position as the purchaser of a futures contract. The purchase
of an option on a futures contract requires the Portfolio to pay a premium. In
exchange for the premium, the Portfolio becomes entitled to exercise the
benefits, if any, provided by the futures contract, but is not required to take
any action under the contract. If the option cannot be exercised profitably
before it expires, the Portfolio's loss will be limited to the amount of the
premium and any transaction costs.
The Portfolio may enter into closing purchase and sale transactions in
order to terminate a futures contract and may sell put and call options for the
purpose of closing out its options positions. The Portfolio's ability to enter
into closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Portfolio will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Portfolio is not able to enter into an offsetting transaction, the Portfolio
will continue to be required to maintain the margin deposits on the contract and
to complete the contract according to its terms, in which case it would continue
to bear market risk on the transaction.
Although futures and options transactions are intended to enable the
Portfolio to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates, exchange rates or market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone correctly predicts interest or exchange rate movements, a hedge could
be unsuccessful if changes in the value of the Portfolio's futures position did
not correspond to changes in the value of its investments. This lack of
correlation between the Portfolio's futures and securities or currencies
positions may be caused by differences between the futures and securities or
currencies markets or by differences between the securities or currencies
underlying the Portfolio's futures position and the securities or currencies
held by or to be purchased for the Portfolio. In addition, futures contracts
transactions involve the remote risk that a party participating in a transaction
will not be able to fulfill its obligations and the amount of the obligation
will exceed the ability of the clearing broker to satisfy. Keystone will attempt
to minimize these risks through careful selection and monitoring of the
Portfolio's futures and options positions.
The Portfolio does not intend to use futures transactions for speculation
or leverage. The Portfolio has the ability to write options on futures, but
intends to write such options only to close out options purchased by the
Portfolio. The Portfolio will not change these policies without supplementing
the information in its prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Portfolio may invest in securities of foreign
issuers. When the Portfolio invests in foreign securities they usually will be
denominated in foreign currencies, and the Portfolio temporarily may hold funds
in foreign currencies. Thus, the value of Portfolio shares will be affected by
changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Portfolio may enter into forward currency
exchange contracts (agreements to purchase or sell currencies at a specified
price and date). The exchange rate for the transaction (the amount of currency
the Portfolio will deliver and receive when the contract is completed) is fixed
when the Portfolio enters into the contract. The Portfolio usually will enter
into these contracts to stabilize the U.S. dollar value of a security it has
agreed to buy or sell. The Portfolio intends to use these contracts to hedge the
U.S. dollar value of a security it already owns, particularly if the Portfolio
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Portfolio will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on Keystone's ability
to predict accurately the future exchange rates between foreign currencies and
the U.S. dollar. The value of the Portfolio's investments denominated in foreign
currencies will depend on the relative strength of those currencies and the U.S.
dollar, and the Portfolio may be affected favorably or unfavorably by changes in
the exchange 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 Portfolio. The Portfolio may also purchase and sell options
related to foreign currencies in connection with hedging strategies.
LOANS OF SECURITIES
The Portfolio may lend securities to brokers and 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 Portfolio if as a result the
aggregate of all outstanding securities loans exceeds 15% of the value of the
Portfolio's total assets taken at their current value. The Portfolio 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 Portfolio if, in the
opinion of the Portfolio, 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.
ZERO COUPON BONDS
A zero coupon (interest) "stripped" bond represents ownership in serially
maturing interest or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. These bonds mature on the payment
dates of the interest or principal which they represent. 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
individally against the issuer and are not required to act in concert with other
holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds
(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 allocaable 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 zero coupon bonds representing separate interests in the coupon
(interest) payments and the principal payments from 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
values at the time of sale) may apply to determine the gain or loss on a sale of
any such zero coupon bonds.
If and when the Fund invests in zero coupon bonds, the Fund does not expect
to have enough zero coupon bonds to have a material effect on dividends. The
Fund has undertaken to a state securities authority to disclose that zero coupon
securities pay no interest to holders prior to maturity, and that the interest
on these securities is reported as income to the Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income producing securities with cash used to
make such distributions, and its current income ultimately may be reduced as a
result.
<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 irrevocably constitutes and
appoints KIRC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC
that a Letter of Intent is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[logo]
KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5045
GOF-P 1/96 [RECYCLE LOGO]
KEYSTONE
GLOBAL
OPPORTUNITIES FUND
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE GLOBAL OPPORTUNITIES FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE GLOBAL OPPORTUNITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 30, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Global Opportunities Fund (the "Fund") dated January 30, 1996. A copy of the
prospectus may be obtained from Keystone Investment Distributors Company
(formerly named Keystone Distributors, Inc.) (the "Principal Underwriter"), the
Fund's principal underwriter, 200 Berkeley Street, Boston, Massachusetts
02116-5034.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Objective and Policies 2
Investment Restrictions 3
Distributions and Taxes 6
Valuation of Securities 7
Brokerage 8
Sales Charges 10
Distribution Plans 13
Trustees and Officers 17
Investment Adviser 21
SubAdviser 23
Principal Underwriter 24
Declaration of Trust 25
Standardized Total Return
and Yield Quotations 27
Additional Information 28
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-17
<PAGE>
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THE FUND
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The Fund is a diversified, open-end management investment company
commonly known as a mutual fund that is authorized to issue more than one series
of shares (the "Portfolios"), each series investing in different portfolios of
securities. At this time, the Fund issues only shares of its Global
Opportunities Portfolio. The Global Opportunities Portfolio (the "Portfolio")
seeks capital growth.
The Fund was formed as a Massachusetts business trust on June 17, 1987.
The Fund is managed and advised by Keystone Investment Management Company
(formerly named Keystone Custodian Funds, Inc.) ("Keystone") and has as its
subadviser Credit Lyonnais International Asset Management, North America
("CLIAM").
The essential information about the Fund is contained in its
prospectus. This statement of additional information provides additional
information about the Fund that may be of interest to some investors.
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INVESTMENT OBJECTIVE AND POLICIES
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It is expected that under ordinary circumstances at least 65% of the
Portfolio's assets will be invested in securities of issuers of at least three
different countries, one of which may be the United States ("U.S"). Certain
types of investments, investment techniques and ratings criteria applicable to
the Portfolio are more fully explained in the appendix to this statement of
additional information.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The investment objective of the Portfolio is fundamental and may not be
changed without approval of the holders of a majority of the Portfolio's
outstanding voting shares (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).
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INVESTMENT RESTRICTIONS
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The following investment restrictions are fundamental and may not be
changed with respect to any Portfolio without the vote of a majority (as defined
in the Investment Company Act of 1940 (the "1940 Act")) of the affected
Portfolio's outstanding voting shares. Unless otherwise stated, all references
to the assets of a Portfolio are in terms of current market value.
The Portfolio may not do any of the following:
(1) purchase any security of any issuer (other than any security issued
or guaranteed as to principal or interest by the United States ("U.S."), its
agencies or instrumentalities [U.S. government securities]) 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, except that the Portfolio may borrow money from banks
and/or enter into reverse repurchase agreements for temporary or emergency
purposes in aggregate amounts up to one-third of the value of the Portfolio's
net assets provided that no additional investments shall be made at any time
that outstanding borrowings (including amounts payable under reverse repurchase
agreements) exceed 5% of the Portfolio's assets;
(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 Portfolio may purchase or hold debt
securities, including nonpublicly offered debt securities and convertible debt
securities, consistent with its investment objective, lend portfolio securities
valued at not more than 15% of its total assets to broker-dealers, and enter
into repurchase agreements;
(8) purchase any security 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 U.S. government securities; (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 it may engage in
currency and other financial futures contracts and related options transactions;
(12) underwrite securities of other issuers, except that the Portfolio
may purchase securities from the issuer or others and dispose of such securities
in a manner consistent with its investment objectives;
(13) purchase any security (other than U.S. government securities) of
any issuer if as a result the Portfolio would hold more than 10% of the voting
securities of the issuer; and
(14) purchase any security for the purpose of control or
management.
Additional restrictions adopted by the Fund, which may be changed by
the Board of Trustees, provide that the Portfolio may not purchase or retain
securities of an issuer if, to the knowledge of the Fund, any officer, Trustee
or Director of the Fund or Keystone, each owning beneficially more than one-half
of 1% of the securities of such issuer, own in the aggregate more than 5% of the
securities of such issuer, or such persons or management personnel of the Fund
or, Keystone or Keystone Management, Inc. ("Keystone Management") have a
substantial beneficial interest in the securities of such issuer. Portfolio
securities of the Portfolio may not be purchased from or sold or loaned to
Keystone or any affiliate thereof or any of their Directors, officers or
employees; and the Portfolio may not purchase or sell interests in oil, gas or
other mineral exploration or development programs, except that the Portfolio
may, pursuant to its investment objectives and policies, purchase publicly
traded securities of companies engaging in such activities.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in the value of
a security or a decrease in the Portfolio's assets is not a violation of the
limit.
In order to permit the sale of the Portfolio's shares in certain
states, the Fund may make commitments more restrictive than the investment
restrictions described above. Should the Fund determine that any such commitment
is no longer in the best interests of the Fund, it will revoke the commitment by
terminating sales of the Portfolio's shares in the state involved.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has agreed that, so long as certain state
authorities require and shares of the Portfolio are registered for sale in those
states, the Portfolio will (1) not write puts and calls on securities unless (a)
the option is issued by the Options Clearing Corporation, (b) the security
underlying the put or call is within the investment policies of the Portfolio,
and (c) the aggregate value of the securities underlying the calls or
obligations underlying the puts, determined as of the date of sale, does not
exceed 25% of its net assets; (2) not buy and sell puts and calls written by
others unless (a) the options are listed on a national securities or commodities
exchange or offered through certain approved national securities associations,
and (b) the aggregate premiums paid on such options held at any time do not
exceed 20% of the Portfolio's net assets; (3) not write put options; (4) limit
its purchases of put and call options written by others to 2% of its net assets
calculated at the time of payment; (5) limit its purchase of warrants to 5% of
net assets, of which 2% may be warrants not listed on the New York or American
Stock Exchange; (6) not invest in real estate limited partnership interests; (7)
not invest in gas, oil or other mineral leases; (8) not invest more than 5% of
its assets in securities of issuers which the Portfolio may not sell to the
public without registration under the federal Securities Act of 1933; and (9)
maintain 300% asset coverage on any leverage or bank borrowings.
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DISTRIBUTIONS AND TAXES
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The Fund distributes to the Portfolio's shareholders dividends from net
investment income and net realized capital gains annually in shares or, at the
option of the shareholder, in cash. Shareholders who have not opted to receive
cash prior to the record date for any distribution will have the number of such
shares determined on the basis of the Portfolio's net asset value per share
computed at the end of the day on the record date after adjustment for the
distribution. Net asset value is used in computing the number of shares in both
gains and income distribution reinvestments. Account statements and/or checks as
appropriate will be mailed to shareholders within seven days after the Portfolio
pays the distribution. Unless the Portfolio receives instructions to the
contrary from a shareholder before the record date, it will assume that the
shareholder wishes to receive that distribution and future gains and income
distributions in shares. Instructions continue in effect until changed in
writing.
Distributed long-term capital gains are taxable as such to the
shareholder regardless of the period of time Portfolio shares have been held by
the shareholder. However, if such shares are held less than six months and
redeemed at a loss, the shareholder will recognize a long-term capital loss on
such shares to the extent of the long-term capital gain distribution received in
connection with such shares. If the net asset value of the Portfolio'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 Portfolio, they may
or may not occur. The foregoing comments relating to the taxation of dividends
and distributions paid on the Portfolio's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Portfolio makes a distribution, it intends to distribute only
the Portfolio'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 Portfolio will be advised annually of the federal income tax status of
distributions.
If more than 50% of the value of the Portfolio's total assets at the
end of a fiscal year is represented by securities of foreign corporations and
the Portfolio elects to make foreign tax credits available to its shareholders,
a shareholder will be required to include in his gross income both actual
dividends and the amount the Portfolio advises him is his pro rata portion of
income taxes withheld by foreign governments from interest and dividends paid on
the Portfolio's investments. The shareholder will be entitled, however, to take
the amount of such foreign taxes withheld as a credit against his U.S. income
tax, or to treat the foreign tax withheld as an itemized deduction from his
gross income, if that should be to his advantage. In substance, this policy
enables the shareholder to benefit from the same foreign tax credit or deduction
that he would have received if he had been the individual owner of foreign
securities and had paid foreign income tax on the income therefrom. As in the
case of individuals receiving income directly from foreign sources, the above
described tax credit and deductions are subject to certain limitations.
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VALUATION OF SECURITIES
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Current values for the Portfolio's securities are determined in the
following manner:
(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;
(2) securities traded in the over-the-counter market, other than on
NMS, for which market quotations are readily available, are valued at the mean
of the bid and asked prices at the time of valuation;
(3) short-term investments that are purchased with maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market; short-term investments maturing in more
than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market; and which in either case reflects fair
value as determined by the Board of Trustees;
(4) short-term investments having maturities of more than sixty day for
which market quotations are readily available, are valued at current market
value; where market quotations are not available, such investments are valued at
fair value as determined by the Board of Trustees; and
(5) the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which complete quotations are
not readily available; (b) listed securities or those on NMS if, in the Fund's
opinion, the last sales price does not reflect a current market value or if no
sale occurred; and (c) other assets.
Foreign securities 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 such securities, quotations from
broker-dealers, market transactions in comparable securities and various
relationships between securities and yield to maturity in determining value.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are judgmental and 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 or Keystone is considered to be in
addition to and not in lieu of services required to be performed by Keystone
under its Investment Advisory and Management Agreement with the Fund. The cost,
value and specific application of such information are indeterminable and cannot
practicably allocated among the Fund and other clients of Keystone who may
indirectly benefit from the availability of such information. Similarly, the
Fund may indirectly benefit from information made available as a result of
transactions effected for such other clients. Under the Investment Advisory and
Management Agreement, Keystone is permitted to pay higher brokerage commissions
for brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone does follow such a
practice, they will do so on a basis which is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities usually will be
effected through brokerage transactions for which commissions are payable.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark up or reflect a dealer's mark down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities for the Portfolio in
order to take advantage of the lower purchase price available to members of such
a group.
Neither Keystone nor the Fund intend to place securities transactions
with any particular broker-dealer or group thereof. The Fund's Board of
Trustees, however, has determined that the Fund may follow a policy of
considering sales of shares as a factor in the selection of broker-dealers to
execute portfolio transactions, subject to the requirements of best execution,
including best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
from those of the other funds and investment accounts managed by Keystone. It
may frequently develop that the same investment decision is made for more than
one fund. Simultaneous transactions are inevitable when the same security is
suitable for the investment objective of more than one account. When two or more
funds or accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
During the fiscal years ended September 30, 1993, 1994 and 1995, the
Portfolio paid approximately $-0-, $668,228, and $454,203, respectively, in
brokerage commissions.
In no instance are portfolio securities purchased from or sold to
Keystone, the Principal Underwriter or any of their affiliated persons, as
defined in the Investment Company Act of 1940 (the "1940 Act") and rules and
regulations issued thereunder.
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SALES CHARGES
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GENERAL
Generally, the Portfolio offers three classes of shares. Class A shares
are offered with a maximum sales charge of 5.75% payable at the time of purchase
("Front End Load Option"). Class B shares purchased on or after June 1, 1995 are
subject to a contingent deferred sales charge payable upon redemption during the
72 month period following the month of purchase. Class B shares purchased prior
to June 1, 1995 are subject to a contingent deferred sales charge payable upon
redemption during the four calendar years following the purchase. ("Back End
Load Option"). Class B shares purchased on or after June 1, 1995 that have been
outstanding eight years from and including the month of purchase will
automatically convert to Class A shares without imposition of a front end sales
charge or exchange fee. Class B shares purchased prior to June 1, 1995 that have
been outstanding during seven calendar years will similarly convert to Class A
shares. (Conversion of Class B shares represented by stock certificates will
require the return of the stock certificates to Keystone Investor Resource
Center, Inc, the Fund's transfer and dividend disbursing agent ("KIRC").) Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Funds as well as a table of
applicable sales charges for Class A shares; a discussion of reduced sales
charges that may apply to subsequent purchases; and a description of applicable
contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plan"), a contingent deferred sales charge
may be imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after
April 10, 1995 (1) in an amount equal to or exceeding $1,000,000, and/or (2)
purchased by a corporate qualified retirement plan or a non-qualified deferred
compensation plan sponsored by a corporation having 100 or more eligible
employees (a "Qualifying Plan"), in either case without a front-end sales
charge, will be subject to a contingent deferred sales charge of 1.00% during
the 24 month period following the date of purchase. Certain Class A shares
purchased without a front-end sales charge prior to April 10, 1995 may be
subject to a contingent deferred sales charge of 0.25% upon redemption during
the one year period commencing on the date such shares were originally
purchased. The contingent deferred sales charge will be retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of net asset value or net cost of such Class B shares redeemed during
succeeding twelve-month periods following the month of purchase as follows: 5%
during the first period; 4% during the second period; 3% during the third
period; 3% during the fourth period; 2% during the fifth period, and 1% during
the sixth period. No deferred sales charge is imposed on amounts redeemed
thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the
Fund, with certain exceptions, may impose a deferred sales charge of 3% on
shares redeemed during the calendar year of purchase and the first calendar year
after the year of purchase; 2% on shares redeemed during the second calendar
year after the year of purchase; and 1% on shares redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales charges and
Waiver of Sales Charges" below.
CLASS C SHARES
With certain exceptions, the Fund will impose a deferred sales charge
of 1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share 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 one or two years,
as the case may be, from the date of purchase; (4) Class B shares held during
more than four consecutive calendar years or more than 72 months after the month
of purchase, as the case may be; or (5) Class C shares held for more than one
year from the date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase of the shares of the fund exchanged into is
assumed to be the year shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Portfolio 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 or sales representatives of the Fund,
Keystone, Keystone Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone
Investments"), Keystone Management, certain of their subsidiaries and affiliates
or the Principal Underwriter and who have been such for not less than ninety
days; (2) a pension and profit-sharing plan established by such companies, their
subsidiaries and affiliates, for the benefit of their Directors, Trustees,
officers, full-time employees and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with the Principal Underwriter;
provided, however, that all such sales are made upon the written assurance that
the purchase is made for investment purposes and that the securities will not be
resold except through redemption by the Fund.
No initial sales charge is charged on purchases of shares of the
Portfolio by a bank or trust company in a single account in the name of such
bank or trust company as trustee, if the initial investment in shares of the
Portfolio or any Fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1% of the amount invested.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no contingent
deferred sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; or (5) automatic withdrawals under an automatic withdrawal
plan of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
REDEMPTION OF SHARES
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder up to the lesser of
$250,000 or 1% of the Fund's assets in any 90 day period.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1.
DISTRIBUTION PLANS IN GENERAL
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1% of the aggregate average daily net asset value
of its shares, of which 0.75% may be used to pay such distribution costs and
0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the 12b-1 Plan, plus interest at the
prime rate plus 1% on such amounts (less any contingent deferred sales charges
paid by shareholders to the Principal Underwriter).
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Portfolio may expend daily amounts at an annual rate, which is currently limited
to up to 0.25% of the Portfolio's average daily net asset value attributable to
Class A shares, to finance any activity which is primarily intended to result in
the sale of Class A shares, including, without limitation, expenditures
consisting of payments to the principal underwriter of the Fund (currently the
Principal Underwriter) to enable the Principal Underwriter to pay or to have
paid to others (dealers) who sell Class A shares a service or other fee, at such
intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipients and outstanding on the books of the
Fund for specified periods.
Amounts paid by the Portfolio under the Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.25% of the average net asset value of Class A shares maintained by such
others outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS. The Portfolio has adopted Distribution Plans for its
Class B shares. Each Class B Distribution Plan provides that the Portfolio may
expend daily amounts at an annual rate of up to 1.00% of the Portfolio's average
daily net asset value attributable to Class B shares to finance any activity
which is primarily intended to result in the sale of Class B shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter of the Fund (currently the Principal Underwriter) (1) to enable the
Principal Underwriter to pay to others (dealers) commissions in respect of Class
B shares sold since inception of the Distribution Plans; 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 brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods.
The Principal Underwriter intends, but its 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. The Principal Underwriter intends to
seek full payment of such charges 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 Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Portfolio may expend daily amounts at an annual rate of up to 1.00% of the
Fund's average daily net asset value attributable to Class C shares to finance
any activity that is primarily intended to result in the sale of Class C shares,
including, without limitation, expenditures consisting of payments to the
principal underwriter of the Fund (currently the Principal Underwriter) (1) to
enable the Principal Underwriter to pay to others (dealers) commissions in
respect of Class C shares sold since inception of the Distribution Plan; and (2)
to enable the Principal Underwriter to pay or to have paid to others a service
fee, at such intervals as the Principal Underwriter may determine, in respect of
Class C shares maintained by any such recipients and outstanding on the books of
the Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Portfolio's total operating
expenses for purposes of determining compliance with state expense limits.
Each of the Distribution Plans may be terminated at any time by a vote
of the Rule 12b-1 Trustees, or may be terminated with respect to the Portfolio
by vote of a majority of the outstanding voting shares of the respective class
of the Portfolio.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Portfolio provided for in a Distribution Plan
requires shareholder approval. Otherwise, a Distribution Plan may be amended by
the Trustees, including the Rule 12b-1 Trustees. Unpaid distribution costs at
fiscal year end September 30, 1995 were: $9,557,717 for Class B shares purchased
prior to June 1, 1995 (4.01% of net class assets of such Class B shares);
$2,611,116 for Class B shares purchased on or after June 1, 1995 (1.10% of net
class assets of such Class B shares); and $5,094,255 for Class C shares (5.90%
of Class C net class assets).
During the year ended September 30, 1995, the Portfolio paid the
Principal Underwriter: $185,409 under its Class A Distribution Plan; $1,606,135
for Class B shares sold prior to June 1, 1995; $64,006 for Class B shares sold
on or after June 1, 1995; and $636,417 under its Class C Distribution Plan.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by the Portfolio 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 Rule 12b-1 Trustees quarterly. The Rule 12b-1 Trustees may
require or approve changes in the implementation or operation of a Distribution
Plan, and may also require that total expenditures by the Portfolio under a
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above.
The Independent Trustees of the Fund have determined that the sales of
the Portfolio's shares resulting from payments under the Distribution Plans have
benefited the Portfolio.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, President,
Director and Chief Executive Officer of Keystone Investments,
Inc. ("Keystone Investments"); President, Chief Executive
Officer and Trustee or Director of all 30 Funds in the
Keystone Investments Family of Funds; Director and Chairman of
the Board, Chief Executive Officer and Vice Chairman of
Keystone Investment Management Company ("Keystone"); Chairman
of the Board and Director of Keystone Institutional Company,
Inc. ("Keystone Institutional") (formerly named Keystone
Investment Management Corporation), and Keystone Fixed Income
Advisors ("KFIA"); Director, Chairman of the Board, Chief
Executive Officer and President of Keystone Management, Inc.
("Keystone Management"), Keystone Software Inc. ("Keystone
Software"); Director and President of Keystone Asset
Corporation, Keystone Capital Corporation, and Keystone Trust
Company; Director of Keystone Investment Distributors Company
("the Principal Underwriter"), Keystone Investor Resource
Center, Inc. ("KIRC"), and Fiduciary Investment Company, Inc.
("FICO"); Director of Boston Children's Services Association;
Trustee of Anatolia College, Middlesex School, and Middlebury
College; Member, Board of Governors, New England Medical
Center; former Trustee of Neworld Bank; former Director and
President of Hartwell Keystone Advisers, Inc. ("Hartwell
Keystone"); and former Director and Vice President of Robert
Van Partners, Inc.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation
(investment advice) and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other Keystone Investments Funds; Director and Chairman of the
Board of Hartwell Keystone; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital (and Chairman of its
Investment Committee); former Chairman of the Board and Chief Executive
Officer of Keystone Investments; and former Chief Executive Officer of
the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of
all other Keystone Investments Funds; Executive Director,
Coalition of Essential Schools, Brown University; Director and
former Executive Vice President, National Alliance of
Business; former Vice President, Educational Testing Services;
and former Dean, School of Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of
all other Keystone Investments Funds; former Group Vice
President, Textron Corp.; and former Director, Peoples Bank
(Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman of the Board, Director and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the
Board and Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation,
Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central
Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont;
former Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of
all other Keystone Investments Funds; Executive Vice
President, DHR International, Inc. (executive recruitment);
former Senior Vice President, Boyden International Inc.
(executive recruitment); and Director, Commerce and Industry
Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director
of Connecticut Natural Gas Corporation, Trust Company of Connecticut,
Hartford Hospital, Old State House Association and Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford
School and Greater Hartford YMCA; former Director, Executive Vice
President and Vice Chairman of The Travelers Corporation; and former
Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all
other Keystone Investments Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; former Presi-
dent, Nassau County Bar Association; former Associate Dean and
Professor of Law, St. John's University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice
President of all other Keystone Investments Funds; Director,
Senior Vice President, Chief Financial Officer and Treasurer
of Keystone Investments, the Principal Underwriter, Keystone
Asset Corporation, Keystone Capital Corporation, Keystone
Trust Company; Treasurer of Keystone Institutional and FICO;
Treasurer and Director of Keystone Management and Keystone
Software; Vice President and Treasurer of KFIA; Director of
KIRC; former Treasurer of Robert Van Partners, Inc.; and former
Treasurer and Director of Hartwell Keystone.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice
President of all other Keystone Investments Funds; and
President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other
Keystone Investments Funds; Vice President of Keystone
Investments; Assistant Treasurer of FICO and Keystone; and
former Vice President and Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone;
Senior Vice President, General Counsel, Secretary and Director of the
Principal Underwriter, Keystone Management and Keystone Software;
Senior Vice President and General Counsel of Keystone Institutional;
Senior Vice President, General Counsel and Director of FICO and KIRC;
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.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended September 30, 1995, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund.
During the same period, the unaffiliated Trustees received approximately $24,154
in retainers and fees from the Fund. Annual retainers and meeting fees paid by
all funds in the Keystone Investments Family of Funds (which includes 30 mutual
funds) for the fiscal year ended September 30, 1994, totalled approximately
$463,916. As of October 31, 1995, the Trustees and officers beneficially owned
less than 1.0% the Fund's then outstanding Class A, Class B and Class C shares.
The address of the Fund's Trustees and officers and the address of the
Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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INVESTMENT ADVISER
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Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and
former members of management and certain employees of Keystone and its
affiliates. The shares of Keystone Investments common stock beneficially owned
by management are held in a number of voting trusts, the trustees of which are
George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to an Investment Advisory and
Management Agreement with the Fund (the "Advisory Agreement"), and subject to
the supervision of the Fund's Board of Trustees, Keystone manages and
administers the Fund's operation and manages the investment and reinvestment of
the Fund's assets in conformity with the Fund's investment objective and
restrictions. The Advisory Agreement stipulates that Keystone shall provide
office space, all necessary office facilities, equipment and personnel in
connection with its services under the Advisory Agreement and pay or reimburse
the Fund for the compensation of officers and trustees of the Fund who are
affiliated with the investment adviser as well as pay all expenses of Keystone
incurred in connection with the provision of its services. All charges and
expenses, other than those specifically referred to as being borne by Keystone,
will be paid by the Fund, including, but not limited to, custodian charges and
expenses; bookkeeping and auditors' charges and expenses; transfer agent charges
and expenses; fees of Independent Trustees; brokerage commissions; brokers' fees
and expenses; issue and transfer taxes; costs and expenses under the
Distribution Plans; taxes and trust fees payable to governmental agencies; the
cost of share certificates; fees and expenses of the registration and
qualification of the Fund and its shares with the Securities and Exchange
Commission (sometimes referred herein as the "SEC" or the "Commission") or under
state or other securities laws, expenses of preparing, printing and mailing
prospectuses, statements of additional information, notices, reports and proxy
materials to shareholders of the Fund; expenses of shareholders' and Trustees'
meetings; charges and expenses of legal counsel for the Fund and for the
Trustees of the Fund on matters relating to the Fund; charges and expenses of
filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
During the fiscal year ended September 30, 1993, the Fund paid or
accrued, investment management and administrative services fees of $179,783,
which represented 1.00% of the Fund's average net assets. Of such amount,
$89,891 was paid or accrued to CLIAM for its services as subadviser.
During the fiscal year ended September 30, 1994, the Fund paid or
accrued investment management and administrative services fees of $1,618,327
which represented 1.00% of the Fund's average net assets. Of such amount,
$809,163 was paid or accrued to CLIAM for its services as subadviser.
During the fiscal year ended September 30, 1995, the Fund paid or
accrued investment management and administrative services fees of $3,009,974,
which represented 0.98% of the Fund's average net assets. Of such amount,
$1,577,883 was paid or accrued to Keystone and $1,432,091 was paid or accrued to
CLIAM for its services as subadviser.
The Fund pays Keystone a fee for its services at the annual rate set
forth below:
Aggregate Net Asset
Management Value of the
Fee Shares of the Fund
- --------------------------------------------------------------------------------
1.00% of the first $ 200,000,000, plus
0.95% of the next $ 200,000,000, plus
0.85% of the next $ 200,000,000, plus
0.75% of amounts over $ 600,000,000;
computed as of the close of business each business day and payable daily.
As a continuing condition of registration of shares in a state,
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of certain percentages of the Fund's
average daily net assets. However, Keystone is not required to make such
reimbursements to an extent which would result in the Fund's inability to
qualify as a regulated investment company under provisions of the Internal
Revenue Code. This condition may be modified or eliminated in the future.
The Fund is subject to certain annual state expense limitations imposed
on each of its Portfolios, the most restrictive of which is currently:
2.50% of the first $30 million of a Portfolio's average net assets;
2.00% of the next $70 million of a Portfolio's average net assets; and
1.50% of a Portfolio's average net assets over $100 million.
Under the Advisory Agreement any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence, or reckless disregard of its
duties.
Since August 7, 1991, Keystone, provided investment management and
advisory services to the Fund and has been paid a management fee computed and
paid daily, calculated by applying percentage rates, starting at 1.00% and
declining as net assets increase, to 0.75%, to the net asset value of the Fund.
The fee charged to the Fund is higher than that charged to most other investment
companies. The fee is comparable, however, to fees charged to other global and
international funds, which, together with the Fund, are subject to the higher
costs involved in managing a portfolio of predominantly international
securities.
The Advisory Agreement continues in effect only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
outstanding shares, and such renewal has been approved by the vote of a majority
of the Independent Trustees cast in person at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be terminated, without
penalty on 60 days' written notice by the Fund's Board of Trustees or by a vote
of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
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SUBADVISER
- --------------------------------------------------------------------------------
Pursuant to the Advisory Agreement, Keystone has delegated certain
investment advisory services to CLIAM and has entered into a SubAdvisory
Agreement with CLIAM (the "SubAdvisory Agreement") under which CLIAM provides
those investment advisory services to the Fund.
CLIAM, located at 1301 Avenue of the Americas, New York, New York
10019, is an international investment management firm, established in April
1991, which is wholly-owned by Credit Lyonnais, Paris, France, a financial
institution with assets of $250 billion and over 500 branches in 70 countries.
Pursuant to the SubAdvisory Agreement, Keystone pays CLIAM at the beginning of
each fiscal quarter a fee for its services that represents 50% of the management
fee paid by the Fund to Keystone for the preceding quarter on Fund assets of up
to $250,000,000 and 30% of the management fee paid by the Fund to Keystone for
the preceding quarter on Fund assets in excess of $250,000,000. The Fund has no
responsibility to pay CLIAM's subadvisory fee.
Pursuant to the SubAdvisory Agreement, CLIAM will, subject to the
supervision of the Fund's Board of Trustees and Keystone, furnish a continuous
investment program for the Fund's non-North American portfolio, will determine
what securities will be purchased for or sold from the non-North American
portfolio of the Fund and will recommend what portion of the Fund's non-North
American assets shall be held uninvested.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with Keystone Investment Distributors Company, a
wholly-owned subsidiary of Keystone.
The Principal Underwriter, located at 200 Berkeley Street, Boston,
Massachusetts, 02116-5034, is a Delaware corporation. The Principal Underwriter,
as agent, currently has the right to obtain subscriptions for and to sell shares
of the Fund to the public. In so doing, the Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from brokers, dealers and others, acting as principals, for sales of
shares. No such representative, dealer or broker has any authority to act as
agent for the Fund. The Principal Underwriter has not undertaken to buy or to
find purchasers for any specific number of shares. The Principal Underwriter may
receive payments from the Fund pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Fund's Declaration of Trust, By-Laws, current prospectus, and
statement of additional information. All orders are subject to acceptance by the
Fund and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Underwriting Agreement, the Fund is not liable to
anyone for failure to accept any order.
The Fund has agreed under the Underwriting 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.
The Principal Underwriter has agreed to reimburse certain expenses
incurred by Mariner Financial Services, Inc. in connection with its sales of the
Fund's shares.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may use its
discretion in providing to selected dealers promotional materials and selling
aids, including, but not limited to, personal computers, related software and
Fund data files.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares and will indemnify and hold harmless the Fund and each person who has
been, is or may be a Trustee or officer of the Fund against expenses reasonably
incurred by any of them in connection with any claim or in connection with any
action, suit or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material act 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 will remain in effect as long as their
terms and continuance are approved by a majority of the Fund's Independent
Trustees at least annually at a meeting called for that purpose, and if their
continuance is approved annually by vote of a majority of Trustees, or by vote
of a majority of the outstanding shares.
The 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.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated June 17, 1987. A copy of the Declaration of Trust
(the "Declaration of Trust") is filed as an exhibit to the Registration
Statement of which this statement of additional information is a part. This
summary is qualified in its entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, 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. Generally, the Fund
currently issues three classes of shares, but may issue additional classes or
series of shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
(1) the Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for obligations of the Fund and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (2) because the Declaration of
Trust provides for indemnification out of the Fund's property for any
shareholder held personally liable for the obligations of the Fund.
VOTING RIGHTS
Under 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 which 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, unless and until such time as less than a majority of the Trustees
holding office have been elected by Shareholders at which time the Trustees then
in office will call a shareholders meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful malfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten years periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added and 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 cumulative total returns of Class A shares for the five year period
ended September 30, 1995 and the period from March 16, 1988 (commencement of
operations) to September 30, 1995 were 157.53% and 168.83%, respectively. The
compounded average annual rates of return for Class A shares for the one and
five year periods ended September 30, 1995 and the period from commencement of
operations to September 30, 1995 were 13.71%, 20.83% and 14.01%, respectively.
The cumulative total returns for Class B and Class C shares for the
period February 1, 1993 (commencement of operations) through fiscal year ended
September 30, 1995 were 62.30% (including applicable contingent deferred sales
charges), and 65.58%, respectively. The compounded average annual rates of
return for Class B and Class C shares for the one year period ended September
30, 1995 were 15.79% (including applicable contingent deferred sales charge) and
19.63%, respectively. The compounded average annual rates of return for Class B
and Class C shares for the period beginning February 1, 1993 (commencement of
operations) through September 30, 1994 were 19.91% (including applicable
contingent deferred sales charges) and 20.82%, 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 Portfolio computed by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Portfolio does not
presently intend to advertise current yield.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is custodian of all securities and cash of the Fund (the
"Custodian"). The Custodian performs no investment management functions for the
Fund but, in addition to its custodial services, is responsible for accounting
and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the Independent Auditors
of the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone Custodian Funds, Inc. and acts as
transfer agent and dividend disbursing agent for the Fund.
As of October 31, 1995, the following owned of record 5% or more of the
outstanding Class A shares of the Fund: Merrill Lynch Pierce, Fenner & Smith,
Attn: Book Entry, 4800 Deer Lake Dr. E 3rd, FL, Jacksonville, Fl 32246-6484
owned 23.93%.
As of October 31, 1995, the following owned of record 5% or more of the
outstanding Class B shares of the Fund: Merrill Lynch Pierce, Fenner & Smith,
Atten: Book Entry, 4800 Deer Lake Dr E 3rd Fl, Jacksonville, Fl 32246-6484 owned
23.19%.
As of October 31, 1995, the following owned 5% or more of the
outstanding Class C shares of the Fund: Merrill Lynch Pierce, Fenner & Smith,
Atten: Book Entry, 4800 Deer Lake Dr E 3rd Fl, Jacksonville, Fl 32246-6484 owned
47.57%.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Securities
and Exchange Commission's principal office in Washington, D.C. upon payment of
the fee prescribed by the rules and regulations promulgated by the Securities
and Exchange Commission.
The Fund is one of 15 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
The Keystone America Fund Family consists of the following Funds having the
various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities (up to
50%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital
preservation from U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada), and Latin America (Mexico and countries in South and Central
America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
<PAGE>
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APPENDIX
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MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the United States ("U.S.") government, its agencies or
instrumentalities, some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper, including commercial paper of foreign issuers, will
consist of issues rated at the time of purchase A-1 by Standard & Poor's
Corporation (S&P), or PRIME-1 by Moody's Investors Service, Inc., (Moody's); or,
if not rated, will be issued by companies which have an outstanding debt issue
rated at the time of purchase Aaa, Aa or A by Moody's, or AAA, AA or A by S&P,
or will be determined by Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
a. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated PRIME-1 (or related supporting institutions) are deemed
to have a superior capacity for repayment of short term promissory obligations.
Repayment capacity of PRIME- 1 issuers is normally evidenced by the following
characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate
reliance on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and
5) well established access to a range of financial markets
and assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
U.S. CERTIFICATES OF DEPOSIT
U.S. Certificates of deposit are receipts issued by a U.S. bank in
exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market prior
to maturity.
U.S. Certificates of deposit will be limited to U.S. dollar-
denominated certificates of U.S. banks, including their branches abroad, which
are members of the Federal Reserve System or the Federal Deposit Insurance
Corporation, and of U.S. branches of foreign banks, each of which have total
assets at the time of purchase in excess of $1 billion as of the date of their
most recently published financial statements.
TIME DEPOSITS
The Portfolio may acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Interamerican Development Bank. Additionally, the Fund may purchase
time deposits certificates of deposit, bankers' acceptances or other similar
obligations issued by non U. S. branches of 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 Portfolio must have been accepted by
commercial banks, having total deposits at the time of purchase in excess of $1
billion.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association ("GNMA").
Treasury bills have maturities of one year or less. Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
greater than ten years at the date of issuance. GNMA securities include GNMA
mortgage pass-through certificates. Such securities are supported by the full
faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the United States government is not
obligated by law to provide support to an instrumentality it sponsors, the 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. While the Fund may invest in such instruments, United
States government securities do not include international agencies or
instrumentalities in which the United States government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the InterAmerican Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees. Ratings of foreign obligors
do not take into account currency exchange and related uncertainties. The
ratings are based on current information furnished by the issuer or obtained by
S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
3. A - Bonds which are rated A possess many favorable invest attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
4. Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principle payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
COMMON AND PREFERRED STOCK RATINGS
A. S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources and financial policy,
with results that make some common stocks more highly esteemed than others, S&P
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. S&P rankings,
however, do not reflect all of the factors, tangible or intangible, that bear on
stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on pershare
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A Above Average B Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
B. MOODY'S COMMON STOCK RANKINGS
Moody's presents a concise statement of the important characteristics
of a company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten year comparative
statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. aa: An issue which is rated "aa" is considered a high- grade
preferred stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
3. a: An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater then in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. baa: An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be questionable
over any great length of time.
5. ba: An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. b: An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
7. caa: An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. ca: An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS
The Portfolio writes only covered options. Options written by the
Portfolio will normally have expiration dates of not more than nine months from
the date written. The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities at the times the
options are written.
Unless the option has been exercised, the Portfolio may close out an
option it has written by effecting a closing purchase transaction, whereby it
purchases an option covering the same underlying security and having the same
exercise price and expiration date ("of the same series") as the one it has
written. If the Portfolio desires to sell a particular security on which it has
written a call option, it will effect a closing purchase transaction prior to or
concurrently with the sale of the security. If the Portfolio is able to enter
into a closing purchase transaction, the Portfolio will realize a profit (or
loss) from such transaction if the cost of such transaction is less (or more)
than the premium received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Portfolio will generally write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular option
at any particular time, and for some options no secondary market may exist. In
such event it might not be possible to effect a closing transaction in a
particular option. If the Portfolio as a covered call option writer is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying securities until the option expires or it delivers the underlying
securities upon exercise.
Because the Portfolio intends to qualify as a regulated investment
company under the Internal Revenue Code, the extent to which the Portfolio may
write covered call options and enter into so-called "straddle" transactions
involving put and call options may be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation ("OCC"),
a clearing corporation which assumes responsibility for the completion of
options transactions.
PURCHASING PUT AND CALL OPTIONS
The Portfolio can close out a put option it has purchased by effecting
a closing sale transaction; for examle, the Portfolio may close out a put option
it has purchased by selling a put option. If, however, a secondary market does
not exist at a time the Portfolio wishes to effect a closing sale transaction,
the Portfolio will have to exercise the option to realize any profit. In
addition, in a transaction in which the Portfolio does not own the security
underlying a put option it has purchased, the Portfolio would be required, in
the absence of a secondary market, to purchase the underlying security before it
could exercise the option. In each such instance, the Portfolio would incur
additional transaction costs.
The Portfolio may also purchase call options for the purpose of
offsetting previously written call options of the same series.
The Portfolio 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 Portfolio'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 Portfolio 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 that 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 plus the
premium 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 less the premium but assumes an
obligation to purchase the underlying security from the buyer of the put option
at the exercise price, even though 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 received paid
for the put effectively reduces the cost of the underlying security, thus
increasing the yield otherwise available from such securities.
Because the Portfolio can write only covered options, it may at times
be unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available, the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction
OPTIONS TRADING MARKETS
Options which the Portfolio will trade are generally listed on
Exchanges. Exchanges on which such options currently are traded are the Chicago
Board Options Exchange and the New York, American, Pacific and Philadelphia
Stock Exchanges. Options on some securities may not be listed on any Exchange
but traded in the over the counter market. Options traded in the
over-the-counter market involve the additional risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Portfolio. The use of options traded in the over-the-counter market may be
subject to limitations imposed by certain state securities authorities. In
addition to the limits on its use of options discussed herein, the Portfolio is
subject to the investment restrictions described in the Fund's prospectus and in
the statement of additional information.
The staff of the Commission currently is of the view that the premiums
which the Portfolio pays for the purchase of unlisted options, and the value of
securities used to cover unlisted options written by the Portfolio are
considered to be invested in illiquid securities or assets for the purpose of
calculating whether the 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 Portfolio intends to request that the Commission staff reconsider its
current view. It is the intention of the Fund to comply with the staff's current
position and the outcome of such reconsideration.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Portfolio holds a long position
in U.S. Treasury bills with a principal amount corresponding to the option
contract size, the Portfolio may be hedged from a risk standpoint. In addition,
the Portfolio 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 Portfolio may purchase and write such
options in the over the counter market or, should they commence trading, on any
Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Portfolio, as a writer of a
covered GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Portfolio will enter into a closing
purchase transaction or will purchase additional GNMA certificates from the same
pool (if obtainable) or replacement GNMA certificates in the cash market in
order to remain covered.
A GNMA certificate held by the Portfolio to cover an option position in
any but the nearest expiration month may cease to 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 Portfolio will no longer be covered, and the Portfolio will
either enter into a closing purchase transaction or replace the GNMA certificate
with a certificate which represents cover. When the Portfolio closes its
position or replaces the GNMA certificate, it may realize an unanticipated loss
and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Portfolio will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any particular
time, and for some options no secondary market may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and may incur transaction costs in connection therewith. If
the Portfolio as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of facilities of an Exchange or a broker to
handle current trading volume; or (vi) a decision by one or more Exchanges or
brokers to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market in that class or series of
options would cease to exist, although outstanding options that had been issued
as a result of trades would generally continue to be exercisable in accordance
with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Portfolio intends to engage in currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates, to seek relative stability of principal and to
establish more definitely the effective return on securities held or intended to
be acquired to the Portfolio or as a hedge against changes in the prices of
securities or currencies held by the Portfolio or to be acquired by the
Portfolio. The Portfolio's hedging may include sales of futures as an offset
against the effect of expected increases in interest or currency exchange rates
or securities prices and purchases of futures as an offset against the effect of
expected declines in interest or currency exchange rates.
For example, when the Portfolio anticipates a significant market or
market sector advance, the Portfolio will purchase a stock index futures
contract as a hedge against not participating in such advance at a time when the
Portfolio 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 Portfolio 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 Portfolio's portfolio. To the extent
that the Portfolio's 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 so doing,
provide an alternative to the liquidation of the Portfolio's securities
positions and the resulting transaction costs.
The Fund intends to engage on behalf of the Portfolio in options
transactions which are related to currency and other financial futures contracts
for the hedging purposes and in connection with the hedging strategies described
above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Portfolio'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 Portfolio does not
intend to take delivery of the instruments underlying futures contracts its
Portfolio holds, the Portfolio does not intend to engage in such futures
contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed 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 Portfolio, 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 Portfolio, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, GNMA certificates, 90-day domestic bank
certificates of deposit, 90-day commercial paper, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be authorized. The standard contract size
is $100,000 for futures contracts in U.S. Treasury bonds, U.S. Treasury notes
and GNMA certificates, and $1,000,000 for the other designated contracts. While
U.S. Treasury bonds, U.S. Treasury bills and U.S. Treasury notes are backed by
the full faith and credit of the U.S. government and GNMA certificates are
guaranteed by a U.S. government agency, the futures contracts in U.S. government
securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently, stock index futures contracts can be purchased or sold on
the 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 Portfolio will sell interest rate index
and other index based futures contracts to hedge against changes which are
expected to affect the Portfolio'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 cotract
amount must be deposited by the Fund on behalf of the Portfolio 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
Portfolio 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
Portfolio 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 Portfolio will receive from the Broker a variation margin payment
equal to that increase in value. Conversely, where the Portfolio 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 Portfolio would be
required to make a variation margin payment to the Broker. At any time prior to
expiration of the futures contract, the Portfolio 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 Portfolio
realizes a loss or gain.
The Fund on behalf of the Portfolio 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 Portfolio 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 Portfolio is paid the difference and thus realizes a
gain. If the offsetting purchase price exceeds the sale price, the Portfolio
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
Portfolio enters into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Portfolio realizes a gain. If the purchase price
exceeds the offsetting sale price the Fund realizes a loss. The amount of the
Portfolio's gain or loss on any transaction is reduced or increased,
respectively, by the amount of any transaction costs incurred by the Portfolio.
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 Portfolio.
There can be no assurance, however, that the Portfolio will be able to
enter into an offsetting transaction with respect to a particular contract at a
particular time. If the Portfolio is not able to enter into an offsetting
transaction, the Portfolio will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms in
which case it would continue to bear market risk on the transaction.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Portfolio intends to purchase call and put options on currency and
other financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures are similar to options
on stocks except that an option on a currency and other financial futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
stock, 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 commodity.
The Portfolio intends to use options on currency and other financial
futures contracts in connection with hedging strategies. In the future the
Portfolio may use such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS.
The purchase of protective put options on currency and other financial
futures contracts is analagous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Portfolio. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS.
The purchase of a call option on a currency and 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 currency and other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Portfolio is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER
FINANCIAL FUTURES CONTRACTS OR RELATED OPTIONS
The Portfolio may employ new investment techniques involving currency
and other financial futures contracts and related options. The Portfolio intends
to take advantage of new techniques in these areas which may be developed from
time to time and which are consistent with the Portfolio's investment objective.
The Portfolio believes that no additional techniques have been identified for
employment by the Portfolio in the foreseeable future other than those described
above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED
OPTIONS ON SUCH FUTURES CONTRACTS
The Portfolio will not enter into a futures contract if, as a result
thereof, more than 5% of the Portfolio's total assets (taken at market value at
the time of entering into the contract) would be committed to margin deposits on
such futures contracts.
The Portfolio intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Portfolio owns, or futures contracts will be purchased to
protect the Portfolio against an increase in the price of securities it intends
to purchase. The Portfolio does not intend to enter into futures contracts for
speculation.
In instances involving the purchase of futures contracts by the
Portfolio, 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 Portfolio is required to recognize
as income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Portfolio to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income. Any net gain realized from
the closing out of futures contracts, for purposes of the 90% requirement, will
be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Portfolio's annual gross income. The Tax Reform Act of 1986
added a provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge" increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Portfolio may be
required to defer the closing out of a contract beyond the time when it would
otherwise be advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Portfolio. In addition futures
contract transactions involve the remote risk that a party would not be able to
fulfill its obligations under the contract 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 judgement, and
even a well conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Portfolio would presumably have sustained comparable losses if,
instead of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Portfolio has
sufficient assets to satisfy its obligations under a futures contract, the
Portfolio will establish a segregated account in connection with its futures
contracts which will hold cash or cash equivalents equal in value to the current
value of the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Portfolio will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contacts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Portfolio because the maximum amount
at risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Portfolio, even though the use of a futures contract
would not, such as when there is no movement in the level of the futures
contract.
FOREIGN CURRENCY TRANSACTIONS
The Portfolio may invest in securities of foreign issuers. When the
Portfolio invests in foreign securities they usually will be denominated in
foreign currencies and the Portfolio temporarily may hold funds in foreign
currencies. Thus, the value of a Portfolio share will be affected by changes in
exchange rates.
FORWARD CURRENCY EXCHANGE CONTRACTS
As one way of managing exchange rate risk, the Portfolio may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Portfolio will deliver or receive when
the contract is completed) is fixed when the Portfolio enters into the contract.
The Portfolio usually will enter into these contracts to stabilize the U.S.
dollar value of a security it has agreed to buy or sell. The Portfolio also may
use these contracts to hedge the U.S. dollar value of a security it already
owns, particularly if the Portfolio expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Portfolio
will attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Portfolio's investments denominated in foreign currencies will depend on the
relative strength of those currencies and the U.S. dollar, and the Portfolio may
be affected favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and the dollar. Changes
in foreign currency exchange rates also may affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to shareholders by the
Portfolio.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Portfolio intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The hedging strategies which will be
used by the Fund in connection with foreign currency futures contracts are
similar to those described above for forward foreign currency exchange
contracts.
Currently currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc, and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark and Swiss Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the United States and Europe. On the Philadelphia
Stock Exchange, for example, contracts for half the size of the corresponding
futures contracts on the Chicago Board - Options Exchange are traded with up to
nine months maturity in marks, sterling, yen, Swiss Francs, and Canadian
dollars. Options can be exercised at any time during the contract life, and
require a deposit subject to normal margin requirements. Since a futures
contract must be exercised, the Fund must continually make up the margin
balance. As a result, a wrong price move could result in the Portfolio losing
more than the original investment, as it cannot walk away from the futures
contract as it can an option contract.
The Portfolio will purchase call and put options and sell such options
to terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
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 Portfolio intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES.
The purchase of protective put options on a foreign currency is
analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Portfolio. Put options may be purchased to hedge a
portfolio of foreign stocks or foreign debt instruments or a position in the
foreign currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES.
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments,
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Portfolio would purchase a call option
on a foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Portfolio is not fully invested.
The Portfolio may employ new investment techniques involving forward
foreign currency exchange contracts, foreign currency futures contracts and
options on foreign currencies in order to take advantage of new techniques in
these areas which may be developed from time to time and which are consistent
with the Portfolio's investment objective. The Portfolio believes that no
additional techniques have been identified for employment by the Portfolio in
the foreseeable future other than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Portfolio faces are exchange rate risk, interest rate risk,
credit risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the
Portfolio buys or sells a foreign currency, an exposure called an open position
is created. Until the time that position can be "covered" by selling or buying
an equivalent amount of the same currency, the 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 Portfolio to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Portfolio's foreign exchange currency holdings, which
is the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Portfolio enters into a foreign exchange contract, it
faces a risk, however small, that the counterparty will not perform under the
contract. As a result there is a credit risk, although no extension of "credit"
is intended. To limit credit risk, the 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 Portfolio's counterparty may be unable
or unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Portfolio relies
on each contract being completed. If the contract is not performed, then the
Portfolio's hedge is eliminated, and the Portfolio is exposed to any changes in
exchange rates since the contract was originated. To put itself in the same
position it would have been in had the contract been performed, the Portfolio
must arrange a new transaction. However, the new transaction may have to be
arranged at an adverse exchange rate. The trustee for a bankrupt company may
elect to perform those contracts which are advantageous to the company but
disclaim those contracts which are disadvantageous, resulting in losses to the
Portfolio.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Portfolio sells sterling it
generally must pay pounds to a counterparty earlier in the day than it will be
credited with dollars in New York. In the intervening hours, the buyer can go
into bankruptcy or can be declared insolvent. Thus, the dollars may never be
credited to the Portfolio.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents, or limits on inflows of investment funds from abroad. Governments
take such measures, for example, to improve control over the domestic banking
system, or to influence the pattern of receipts and payments between residents
and foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
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 Portfolio might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Portfolio.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years, or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom, and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and nonresidents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Portfolio may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed, and can result
in unanticipated cost to the Portfolio. This aspect of country risk is a major
element in the Portfolio's credit judgment as to with whom it will deal and in
what amounts.
<PAGE>
EXHIBIT A
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or seller 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 to a broker-dealer or if the
writer holds on a share for share basis a put on the same security as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written, or, if less than the exercise price of the
put written, the difference is maintained by the writer in cash, U.S. Treasury
bills, or other high grade, short term obligations in a segregated account with
the writer's broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange, American Stock Exchange, New York Stock Exchange, Philadelphia Stock
Exchange and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange, in the
Netherlands, the European Options Exchange, and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for 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 a Clearing Corporation or
broker 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 a broker 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.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Portfolio will generally write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular option
at any particular time, and for some options no secondary market may exist. In
such event it might not be possible to effect a closing transaction in a
particular option. If the Portfolio as a covered call option writer is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying securities until the option expires or it delivers the underlying
securities upon exercise.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer
and writer or their agents.
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>
PAGE 11
- ---------------------------------------------------------------------
SCHEDULE OF INVESTMENTS--September 30, 1995
Number Market
of Shares Value
====================================================================
UNITED STATES (58.4%)
AIR TRANSPORTATION (0.1%)
Midwest Express Holdings, Inc. (a) 20,000 $ 450,000
--------------------------------------------------------------------
AMUSEMENTS (0.5%)
Hollywood Casino Corp. (a) 88,250 601,203
Players International, Inc. (a) 117,500 1,689,063
--------------------------------------------------------------------
2,290,266
--------------------------------------------------------------------
AUTOMOTIVE (1.9%)
Exide Securities Corp. 72,600 3,630,000
Lear Seating Corp. (a) 150,000 4,406,250
--------------------------------------------------------------------
8,036,250
--------------------------------------------------------------------
BUILDING MATERIALS (0.4%)
Centex Construction Products, Inc. (a) 62,000 813,750
Congoleum Corp. (a) 97,700 1,025,850
--------------------------------------------------------------------
1,839,600
--------------------------------------------------------------------
BUSINESS SERVICES (0.5%)
Thermedics, Inc. (a) 100,000 1,987,500
--------------------------------------------------------------------
CAPITAL GOODS (1.7%)
AGCO Corp. 157,500 7,166,250
--------------------------------------------------------------------
CONSUMER GOODS (1.4%)
Blyth Industries, Inc. (a) 71,700 3,351,975
Duracraft (a) 51,000 2,307,750
--------------------------------------------------------------------
5,659,725
--------------------------------------------------------------------
DRUGS (2.2%)
Agouron Pharmaceuticals, Inc. (a) 62,200 1,796,025
Autoimmune, Inc. (a) 40,000 620,000
Bio Vascular, Inc. (a) 100,000 1,812,500
Cephalon, Inc. (a) 50,000 1,368,750
Gilead Sciences, Inc. (a) 108,100 2,378,200
Idexx Labs, Inc. (a) 17,000 626,875
Sequus Pharmaceuticals, Inc. (a) 50,000 578,125
--------------------------------------------------------------------
9,180,475
--------------------------------------------------------------------
ELECTRONICS PRODUCTS (11.2%)
Alliance Semiconductor Corp. (a) 100,000 3,987,500
Electroglas, Inc. (a) 80,000 5,430,000
KLA Instruments Corp. (a) 100,000 8,050,000
Microchip Technology, Inc. (a) 135,000 5,121,563
Solectron Corp. (a) 200,000 7,900,000
Teradyne, Inc. (a) 200,000 7,200,000
Xilinx, Inc. (a) 190,900 9,199,002
--------------------------------------------------------------------
46,888,065
--------------------------------------------------------------------
FINANCE (0.4%)
Independent Bank Corp. 200,000 $ 1,475,000
--------------------------------------------------------------------
HEALTH CARE SERVICES (3.0%)
Chad Therapeutics, Inc. (a) 90,000 1,845,000
Health Management Associates, Inc. (a) 99,750 3,204,469
Mariner Health Group, Inc. (a) 150,000 2,137,500
Ostech, Inc. (a) 100,000 1,812,500
Phamis, Inc. (a) 135,000 3,670,313
--------------------------------------------------------------------
12,669,782
--------------------------------------------------------------------
INSURANCE (0.4%)
HCC Insurance Holdings, Inc. (a) 51,100 1,692,688
--------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (1.3%)
EMC Corp. (a) 300,000 5,437,500
--------------------------------------------------------------------
OIL SERVICES (2.3%)
Dual Drilling Co. (a) 200,000 1,937,500
ENSCO International, Inc. (a) 125,000 2,125,000
Global Marine, Inc. (a) 453,600 3,231,900
Noble Drilling Corp. (a) 300,000 2,306,250
--------------------------------------------------------------------
9,600,650
--------------------------------------------------------------------
RESTAURANTS (1.7%)
Applebee's International, Inc. 153,600 4,166,400
Outback Steakhouse, Inc. (a) 100,000 3,087,500
--------------------------------------------------------------------
7,253,900
--------------------------------------------------------------------
RETAIL (6.2%)
Corporate Express, Inc. (a) 200,000 4,850,000
Discount Auto Parts, Inc. (a) 55,500 1,678,875
Michael's Stores, Inc. (a) 10,700 174,544
Office Max, Inc. (a) 300,000 7,275,000
Petsmart, Inc. (a) 187,500 6,281,250
Sunglass Hut International, Inc. (a) 100,000 5,012,500
Tractor Supply Co. (a) 32,500 633,750
--------------------------------------------------------------------
25,905,919
--------------------------------------------------------------------
SOFTWARE SERVICES (15.6%)
Adobe Systems, Inc. 150,000 7,790,625
Applix, Inc. (a) 155,000 3,410,000
BDM International, Inc. (a) 65,700 1,806,750
Business Objects S.A., ADR (a) 44,000 1,881,000
Dendrite International, Inc. (a) 70,000 1,085,000
Desktop Data, Inc. (a) 100,000 3,500,000
Edmark Corp. (a) 75,000 3,581,250
Inference Corp. (a) 89,000 1,301,625
INSO Corp. (a) 162,200 5,190,400
Integrated Silicon Systems, Inc. (a) 200,000 5,900,000
See Notes to Schedule of Investments. (continued on next page)
<PAGE>
PAGE 12
--------------------------------------------------------------------
Keystone Global Opportunities Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
Number Market
of Shares Value
====================================================================
SOFTWARE SERVICES--continued
MapInfo Corp. (a) 99,500 $ 2,052,188
Maxis, Inc. (a) 100,000 4,387,500
Mercury Interactive Corp. (a) 125,000 3,468,750
Parametric Technology Corp. (a) 120,000 7,410,000
Project Software & Development, Inc.
(a) 150,000 3,871,875
Symantec Corp. (a) 50,000 1,496,875
Synopsys, Inc. (a) 120,200 3,726,200
UUnet Technologies, Inc. (a) 40,000 1,860,000
Vantive Corp. (a) 100,000 1,575,000
--------------------------------------------------------------------
65,295,038
--------------------------------------------------------------------
TELECOMMUNICATIONS (7.5%)
3Com Corp. (a) 162,200 7,390,238
California Amplifier, Inc. (a) 150,000 3,159,375
Cascade Communications Corp. (a) 50,000 2,450,000
Cidco Group, Inc. (a) 100,000 3,512,500
Colonial Data Technologies (a) 150,000 2,775,000
Netcom Online Communications (a) 50,000 2,181,250
Netmanage, Inc. (a) 320,000 7,580,000
Winstar Communications, Inc. (a) 127,600 2,544,025
--------------------------------------------------------------------
31,592,388
--------------------------------------------------------------------
TRANSPORTATION (0.1%)
Trism, Inc. (a) 70,000 490,000
--------------------------------------------------------------------
TOTAL UNITED STATES
(Cost--$158,654,952) 244,910,996
====================================================================
FOREIGN (38.4%)
AUSTRALIA (1.3%)
ADVERTISING & PUBLISHING (0.1%)
West Australia Newspaper Holdings Ltd. 150,000 428,507
--------------------------------------------------------------------
FINANCE (0.5%)
Advance Bank of Australia 300,000 2,208,283
--------------------------------------------------------------------
METALS & MINING (0.6%)
Capral Aluminum 600,000 1,410,217
Delta Gold NL (a) 450,000 993,047
--------------------------------------------------------------------
2,403,264
--------------------------------------------------------------------
OIL (0.1%)
Oil Search Ltd. 300,000 278,869
--------------------------------------------------------------------
TOTAL AUSTRALIA 5,318,923
--------------------------------------------------------------------
CANADA (2.1%)
BUSINESS SERVICES (1.0%)
Loewen Group, Inc. 100,000 $ 4,125,000
--------------------------------------------------------------------
SOFTWARE SERVICES (1.1%)
Fulcrum Technologies, Inc. (a) 200,000 4,700,000
--------------------------------------------------------------------
TOTAL CANADA 8,825,000
--------------------------------------------------------------------
CHILE (0.8%)
BUSINESS SERVICES (0.6%)
A.F.P. Provida S.A. (ADR) 100,000 2,437,500
A.F.P. Provida S.A. 10,582 248,099
--------------------------------------------------------------------
2,685,599
--------------------------------------------------------------------
FINANCE (0.1%)
Banco de Credito 38,393 332,136
--------------------------------------------------------------------
PAPER & PACKAGING (0.1%)
Companhia de Manufactuers de Papeles Y
Cartones 17,201 271,731
--------------------------------------------------------------------
TOTAL CHILE 3,289,466
--------------------------------------------------------------------
FINLAND (0.8%)
CAPITAL GOODS (0.8%)
Benefon Oyvappa S.I. 91,400 3,205,818
--------------------------------------------------------------------
FRANCE (2.0%)
ADVERTISING & PUBLISHING (0.2%)
Filipacchi Medias 7,354 903,476
--------------------------------------------------------------------
AUTOMOTIVE (0.5%)
Sylea 23,974 2,132,320
--------------------------------------------------------------------
CAPITAL GOODS (0.6%)
Norbert Destressangle 24,260 2,596,207
--------------------------------------------------------------------
ELECTRONICS PRODUCTS (0.2%)
Faiveley S.A. (a) 3,199 217,619
Ugc Droits Audiovisuels 10,200 449,467
--------------------------------------------------------------------
667,086
--------------------------------------------------------------------
INSURANCE (0.2%)
Union Assurance Federal 8,213 842,231
--------------------------------------------------------------------
TEXTILES & APPAREL (0.3%)
Chaine et Trame S.A. 18,868 674,336
ICBT Groupe 14,793 600,792
--------------------------------------------------------------------
1,275,128
--------------------------------------------------------------------
TOTAL FRANCE 8,416,448
- ---------------------------------------------------------------------
See Notes to Schedule of Investments.
<PAGE>
PAGE 13
--------------------------------------------------------------------
SCHEDULE OF INVESTMENTS--September 30, 1995
Number Market
of Shares Value
====================================================================
GERMANY (1.8%)
BUILDING MATERIALS (1.2%)
Plettac AG 8,100 $ 2,148,286
Praktikerbau (a) 65,000 2,240,203
Tarkett AG (a) 34,400 819,678
--------------------------------------------------------------------
5,208,167
--------------------------------------------------------------------
INSURANCE (0.2%)
Marschollek, Lautenschlager und Partner
AG 1,500 964,661
--------------------------------------------------------------------
METALS & MINING (0.3%)
SGL Carbon (a) 20,500 1,326,977
--------------------------------------------------------------------
TOTAL GERMANY 7,499,805
--------------------------------------------------------------------
HONG KONG (0.5%)
AMUSEMENTS (0.3%)
Cdl Hotels International 2,500,000 1,131,703
--------------------------------------------------------------------
FINANCE (0.1%)
Wing Hang Bank Ltd. 100,000 338,218
--------------------------------------------------------------------
RETAIL (0.1%)
Dickson Concepts International Ltd. 400,000 289,716
--------------------------------------------------------------------
SERVICES (0.0%)
Pico Far East Hldgs. Ltd. 1,200,000 119,507
Pico Far East Hldgs. Ltd., warrants (a) 240,000 1,242
--------------------------------------------------------------------
120,749
--------------------------------------------------------------------
TOTAL HONG KONG 1,880,386
--------------------------------------------------------------------
HUNGARY (0.1%)
DRUGS (0.1%)
Egis Gyogyszergyar (a) 20,000 520,965
--------------------------------------------------------------------
ITALY (0.4%)
AUTOMOTIVE (0.3%)
Brembo SPA (a) 120,000 1,282,977
--------------------------------------------------------------------
CAPITAL GOODS (0.1%)
Stayer Group SPA (a) 200,000 490,543
--------------------------------------------------------------------
TOTAL ITALY 1,773,520
--------------------------------------------------------------------
JAPAN (11.1%)
BUILDING MATERIALS (0.5%)
Hibiya Engineering, Ltd. 200,000 2,180,607
--------------------------------------------------------------------
CAPITAL GOODS (0.9%)
Kanamoto Co., Ltd. 150,000 $ 2,210,893
Max Co. 80,000 1,647,570
--------------------------------------------------------------------
3,858,463
--------------------------------------------------------------------
CONSUMER GOODS (1.8%)
Daiwa Industries Ltd. 165,000 1,565,797
Maruko Co. 90,000 5,542,375
Sekido Co. 31,000 219,070
--------------------------------------------------------------------
7,327,242
--------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.3%)
Takuma Co., Ltd. 100,000 1,362,879
--------------------------------------------------------------------
ELECTRONICS PRODUCTS (1.1%)
Aucnet, Inc. 80,000 4,765,030
--------------------------------------------------------------------
FINANCE (2.9%)
Nichiei Co., Ltd. 105,000 6,741,709
Shokoh Fund 30,000 5,542,375
--------------------------------------------------------------------
12,284,084
--------------------------------------------------------------------
FOODS (0.6%)
MOS Food Services, Inc. 105,000 2,703,044
--------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (0.7%)
Riso Kagaku Corp. 34,000 2,903,841
--------------------------------------------------------------------
RESTAURANTS (0.5%)
Ohsho Food Service Corp. 99,000 1,998,889
--------------------------------------------------------------------
RETAIL (1.8%)
Ministop Co., Ltd. 140,000 3,250,719
Nissen Co. 150,000 4,149,210
--------------------------------------------------------------------
7,399,929
--------------------------------------------------------------------
TOTAL JAPAN 46,784,008
--------------------------------------------------------------------
MALAYSIA (1.6%)
AIR TRANSPORTATION (0.0%)
Malaysian Helicopter Services Bhd 96,000 148,280
--------------------------------------------------------------------
BUILDING MATERIALS (0.8%)
Ho Hup Construction Co. Bhd 140,000 445,860
Hume Industries (Malaysia) Bhd 288,000 1,616,560
IJM Corp. Bhd 140,000 249,681
Leader Universal Holdings Bhd 273,333 837,844
Road Builder (M) Hldgs. Bhd 60,000 191,083
--------------------------------------------------------------------
3,341,028
- ---------------------------------------------------------------------
See Notes to Schedule of Investments. (continued on next page)
<PAGE>
PAGE 14
--------------------------------------------------------------------
Keystone Global Opportunities Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
Number Market
of Shares Value
====================================================================
CHEMICALS (0.4%)
Nylex (Malaysia) SDN Bhd 580,000 $1,697,054
--------------------------------------------------------------------
FINANCE (0.4%)
Affin Holdings Bhd 240,000 456,688
MBF Capital Bhd 1,000,000 1,074,840
--------------------------------------------------------------------
1,531,528
--------------------------------------------------------------------
TOTAL MALAYSIA 6,717,890
--------------------------------------------------------------------
MEXICO (0.0%)
DRUGS (0.0%)
Far Beneficial S.A. de C.V. (a) 141,000 173,266
--------------------------------------------------------------------
NETHERLANDS (1.7%)
DRUGS (0.2%)
Gist Brocades N.V. 30,000 796,925
--------------------------------------------------------------------
FINANCE (0.2%)
Wegener N.V. 10,000 814,426
--------------------------------------------------------------------
FOODS (0.1%)
Van Melle N.V. 6,130 419,548
--------------------------------------------------------------------
RETAIL (0.7%)
Ceteco Holding N.V. 15,000 487,530
Hagemeyer N.V. 54,000 2,477,405
--------------------------------------------------------------------
2,964,935
--------------------------------------------------------------------
SOFTWARE SERVICES (0.5%)
Baan Co. N.V. (ADR) (a) 50,000 2,250,000
--------------------------------------------------------------------
TOTAL NETHERLANDS 7,245,834
--------------------------------------------------------------------
NORWAY (1.0%)
ADVERTISING & PUBLISHING (0.3%)
Schibsted AS 100,000 1,162,420
--------------------------------------------------------------------
RETAIL (0.7%)
Elkjop Norge AS 110,000 3,152,866
--------------------------------------------------------------------
TOTAL NORWAY 4,315,286
--------------------------------------------------------------------
PERU (1.1%)
FINANCE (0.3%)
Banco de Credito del Peru 741,277 1,388,344
--------------------------------------------------------------------
FOODS (0.3%)
La Fabril S.A. (a) 1,024,201 1,233,458
--------------------------------------------------------------------
TELECOMMUNICATIONS (0.4%)
Compania Peruana de Telefonos 815,487 1,563,698
--------------------------------------------------------------------
TELEPHONE UTILITIES (0.1%)
Tele 2000 (a) 498,181 $ 486,518
--------------------------------------------------------------------
TOTAL PERU 4,672,018
--------------------------------------------------------------------
SINGAPORE (0.1%)
DIVERSIFIED COMPANIES (0.1%)
Natsteel Ltd. 150,000 310,919
--------------------------------------------------------------------
SPAIN (2.1%)
AMUSEMENTS (0.8%)
Azkoyen S.A. 50,650 3,318,759
--------------------------------------------------------------------
BUILDING MATERIALS (0.3%)
Tableros de Fibras S.A. 43,108 549,224
Zardoya-Otis S.A. 6,600 682,851
Zardoya-Otis S.A. (rights) (a) 660 68,285
--------------------------------------------------------------------
1,300,360
--------------------------------------------------------------------
BUSINESS SERVICES (0.2%)
Estacionamientos Subterraneo S.A. 50,078 925,645
--------------------------------------------------------------------
RETAIL (0.3%)
Cortefiel S.A. 48,541 1,401,807
--------------------------------------------------------------------
UTILITIES (0.5%)
Hidroelectrica del Cantabrico S.A. 60,450 1,833,745
--------------------------------------------------------------------
TOTAL SPAIN 8,780,316
--------------------------------------------------------------------
SWEDEN (2.2%)
BUSINESS SERVICES (0.0%)
Securitas Teknik AB 3,000 107,845
--------------------------------------------------------------------
CAPITAL GOODS (0.7%)
Hoganas AB 90,000 2,676,638
--------------------------------------------------------------------
FINANCE (0.4%)
Finnveden Invest AB (a) 143,500 1,501,999
--------------------------------------------------------------------
METALS & MINING (0.1%)
Celsius Industriar AB 23,000 393,483
--------------------------------------------------------------------
MISCELLANEOUS (0.0%)
Assa AB (a) 3,000 19,707
--------------------------------------------------------------------
RETAIL (0.5%)
Lindex AB (a) 148,000 1,955,072
--------------------------------------------------------------------
TRANSPORTATION (0.5%)
ASG AB 103,100 1,994,543
--------------------------------------------------------------------
TOTAL SWEDEN 8,649,287
- ---------------------------------------------------------------------
See Notes to Schedule of Investments.
<PAGE>
PAGE 15
--------------------------------------------------------------------
SCHEDULE OF INVESTMENTS--September 30, 1995
Number Market
of Shares Value
====================================================================
SWITZERLAND (0.6%)
CONSUMER GOODS (0.3%)
Phoenix Meccano AG 2,750 $ 1,355,969
--------------------------------------------------------------------
PAPER & PACKAGING (0.3%)
SIG Schweizerische Industrie HG AG 510 1,072,059
--------------------------------------------------------------------
TOTAL SWITZERLAND 2,428,028
--------------------------------------------------------------------
TAIWAN, PROV. OF CHINA (0.6%)
ELECTRONICS PRODUCTS (0.5%)
Taiwan Semiconductor 284,400 1,035,175
United Microelectronics Corp., Ltd. (a) 339,000 920,736
--------------------------------------------------------------------
1,955,911
--------------------------------------------------------------------
FINANCE (0.1%)
Chronicle 2001 Mutual Fund (a) 1,653,374 658,013
--------------------------------------------------------------------
TOTAL TAIWAN 2,613,924
--------------------------------------------------------------------
THAILAND (0.0%)
FINANCE (0.0%)
Phatra Thanakit Co., Ltd. 9,000 65,272
--------------------------------------------------------------------
UNITED KINGDOM (6.5%)
ADVERTISING & PUBLISHING (0.5%)
Cia Group PLC 945,000 2,015,721
--------------------------------------------------------------------
BUILDING MATERIALS (0.8%)
Berkeley Group (The) PLC 250,000 1,615,579
Halma PLC 578,776 1,572,909
--------------------------------------------------------------------
3,188,488
--------------------------------------------------------------------
BUSINESS SERVICES (2.0%)
Compass Group PLC 647,368 4,321,583
Serco Group PLC 125,000 720,888
Takare PLC 1,004,000 3,553,420
--------------------------------------------------------------------
8,595,891
--------------------------------------------------------------------
CAPITAL GOODS (0.7%)
Critchley Group PLC 305,000 3,060,120
--------------------------------------------------------------------
CONSUMER GOODS (0.6%)
Chamberlain Phipps Hldgs. PLC 1,000,000 2,433,243
--------------------------------------------------------------------
ELECTRICAL PRODUCTS (0.2%)
Blick PLC 108,888 891,199
--------------------------------------------------------------------
FINANCE (0.5%)
3I Group PLC 335,000 2,133,117
--------------------------------------------------------------------
FOODS (0.2%)
Devro International Ltd. 200,000 $ 761,574
--------------------------------------------------------------------
HEALTH CARE SERVICES (0.1%)
Westminster Healthcare Hldgs. PLC 120,000 659,820
--------------------------------------------------------------------
PAPER & PACKAGING (0.1%)
Jarvis Porter Group PLC 100,000 440,038
--------------------------------------------------------------------
RETAIL (0.2%)
Brown N Group PLC 180,000 725,233
--------------------------------------------------------------------
TELECOMMUNICATIONS (0.6%)
NYNEX Cablecommunications 1,085,000 2,524,351
--------------------------------------------------------------------
TOTAL UNITED KINGDOM 27,428,795
--------------------------------------------------------------------
TOTAL FOREIGN (Cost--$148,100,242) 160,915,174
--------------------------------------------------------------------
Maturity
Value
====================================================================
SHORT-TERM INVESTMENTS (3.1%)
Investments in repurchase agreements,
in a joint trading account, purchased
9/29/95, 6.39%, maturing 10/02/95
(Cost--$12,980,000) (b) $12,986,817 $ 12,980,000
--------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost--$319,735,194) (c) 418,806,170
FOREIGN CURRENCY HOLDINGS
(Cost--$2,291,171) (0.5%) 2,214,426
OTHER ASSETS AND LIABILITIES--
NET (-0.4%) (1,682,466)
--------------------------------------------------------------------
NET ASSETS (100%) $419,338,130
====================================================================
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income-producing security.
(b) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at September 30, 1995.
(c) The cost of investments for federal income tax purposes is $319,743,069.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at September 30, 1995 are as follows:
Gross unrealized
appreciation $113,109,370
Gross unrealized
depreciation (14,046,268)
----------
$ 99,063,102
==========
See Notes to Financial Statements.
<PAGE>
PAGE 16
- ------------------------------
Keystone Global Opportunities Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
March 16, 1988
Year Ended September 30, (Commencement of
----------------------------------------------------------------- Operations) to
September 30,
1995 1994 1993 1992 1991 1990 1989 1988
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of
period $ 19.42 $ 18.02 $ 11.69 $ 12.89 $ 9.89 $11.17 $ 9.77 $10.00
- -----------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment
income (loss) (0.16) (0.04) (0.14) (0.08) 0.17 0.19 0.09 0.05
Net realized and
unrealized
gains (losses)
on investment
and foreign
currency
related
transactions 4.17 1.60 6.47 0.23 3.06 (1.27) 1.66 (0.28)
- -----------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 4.01 1.56 6.33 0.15 3.23 (1.08) 1.75 (0.23)
- -----------------------------------------------------------------------------------------------------------------------
Less
distributions
from:
Net investment
income 0 0 0 0 (0.23) (0.12) (0.09) 0
Net realized
gains (losses)
on investments 0 (0.16) 0 (1.35) 0 (0.08) (0.26) 0
- -----------------------------------------------------------------------------------------------------------------------
Total
distributions 0 (0.16) 0 (1.35) (0.23) (0.20) (0.35) 0
- -----------------------------------------------------------------------------------------------------------------------
Net asset value
end of period $ 23.43 $ 19.42 $ 18.02 $ 11.69 $12.89 $ 9.89 $11.17 $ 9.77
=======================================================================================================================
Total return (b) 20.65% 8.74% 54.15% 1.81% 32.71% (9.65%) 16.94% (1.20%)(c)
Ratios/supplemental
data
Ratios to
average net
assets:
Total expenses 1.83%(d) 2.01% 2.84% 2.50%(a) 2.03%(a) 2.00%(a) 2.00%(a) 1.50%(a)(e)
Net investment
income (loss) (0.83%) (0.86%) (1.72%) (0.69%) 1.49% 1.80% 0.86% 1.42%(a)(e)
Portfolio
turnover rate 35% 32% 64% 75% 134% 51% 13% 19%
- -----------------------------------------------------------------------------------------------------------------------
Net assets end
of period
(thousands) $94,679 $71,122 $29,942 $10,859 $2,159 $1,519 $1,378 $1,082
=======================================================================================================================
</TABLE>
(a) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of net operating and management expenses to average net assets" would have
been 3.67%, 7.77%, 10.39%, 13.06%, and 5.54% for the years ended September
30, 1992, 1991, 1990, 1989 and the period March 16, 1988 (Commencement of
Operations) to September 30, 1988, respectively.
(b) Excluding applicable sales charges.
(c) Annualized total return from March 16, 1988 (Commencement of Operations) to
September 30, 1988 is (2.20%)
(d) The expense ratio includes indirectly paid expenses for the year ended
September 30, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 1.81% for the year then ended.
(e) Annualized.
See Notes to Financial Statements.
<PAGE>
PAGE 17
- ------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended Public Offering)
September 30, to
------------------ September 30,
1995 1994 1993
====================================================================================================
<S> <C> <C> <C>
Net asset value beginning of period $ 19.20 $ 17.95 $ 14.04
----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.25) (0.15) (0.04)
Net realized and unrealized gains (losses) on investment
and foreign currency related transactions 4.05 1.56 3.95
----------------------------------------------------------------------------------------------------
Total from investment operations 3.80 1.41 3.91
----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0 0 0
Net realized gains (losses) on investments 0 (0.16) 0
----------------------------------------------------------------------------------------------------
Total distributions 0 (0.16) 0
----------------------------------------------------------------------------------------------------
Net asset value end of period $ 23.00 $ 19.20 $ 17.95
====================================================================================================
Total return (b) 19.79% 7.93% 27.85%(a)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.58%(c) 2.83% 3.35%(a)
Net investment income (loss) (1.59%) (1.61%) (1.86%)(a)
Portfolio turnover rate 35% 32% 64%
----------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $238,320 $131,695 $15,534
====================================================================================================
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The expense ratio includes indirectly paid expenses for the year ended
September 30, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.56% for the year then ended.
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ------------------------------
Keystone Global Opportunities Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Year Ended (Date of Initial
September 30, Public Offering)
----------------- to
September 30,
1995 1994 1993
=====================================================================================================
<S> <C> <C> <C>
Net asset value beginning of period $ 19.26 $ 17.99 $14.04
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.27) (0.15) (0.04)
Net realized and unrealized gains (losses) on investment
and foreign currency related transactions 4.05 1.58 3.99
- -----------------------------------------------------------------------------------------------------
Total from investment operations 3.78 1.43 3.95
- -----------------------------------------------------------------------------------------------------
Less distributions from:
Investment income--net 0 0 0
Net realized gains (losses) on investments 0 (0.16) 0
- -----------------------------------------------------------------------------------------------------
Total distributions 0 (0.16) 0
- -----------------------------------------------------------------------------------------------------
Net asset value end of period $ 23.04 $ 19.26 $17.99
=====================================================================================================
Total return (b) 19.63% 8.02% 28.13%(a)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.58%(c) 2.85% 3.04%(a)
Net investment income (loss) (1.59%) (1.62%) (1.55%)(a)
Portfolio turnover rate 35% 32% 64%
- -----------------------------------------------------------------------------------------------------
Net assets end of period (thousands) $86,339 $50,535 $6,217
=====================================================================================================
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
(c) The expense ratio includes indirectly paid expenses for the year ended
September 30, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.56% for the year then ended. See Notes to Financial
Statements.
See Notes to Financial Statements.
<PAGE>
PAGE 19
- ------------------------------
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
========================================================================
Assets:
Investments at market value
(identified cost--$319,735,194) (Note 1) $418,806,170
Foreign currency holdings
(identified cost--$2,291,171) (Note 1) 2,214,426
-----------------------------------------------------------------------
Total investments and foreign currency holdings 421,020,596
-----------------------------------------------------------------------
Cash 814
Receivable for:
Investments sold 490,660
Fund shares sold 3,979,008
Foreign currency related contracts (Note 5) 5,947
Dividends and interest 267,366
Foreign tax reclaim 138,865
Prepaid expenses 3,526
-----------------------------------------------------------------------
Total assets 425,906,782
-----------------------------------------------------------------------
Liabilities:
Payable for:
Investments purchased 6,083,985
Fund shares redeemed 324,763
Foreign taxes to be withheld 57,304
Accrued reimbursable expenses 6,369
Other accrued expenses (Note 4) 96,231
-----------------------------------------------------------------------
Total liabilities 6,568,652
-----------------------------------------------------------------------
Net assets $419,338,130
========================================================================
Net assets represented by: (Note 1)
Paid-in capital $330,622,811
Accumulated distributions in excess of investment
income--net (2,960,939)
Accumulated realized gains (losses) on investment and
foreign currency related transactions--net (7,321,617)
Net unrealized appreciation on investments and other
assets and liabilities 98,991,928
Net unrealized appreciation on foreign currency
exchange contracts 5,947
-----------------------------------------------------------------------
Total net assets $419,338,130
========================================================================
Net asset value and redemption price per share: (Note 2)
Class A Shares ($23.43 on 4,040,958 shares outstanding) $ 94,679,332
Class B Shares ($23.00 on 10,363,289 shares
outstanding) 238,320,238
Class C Shares ($23.04 on 3,747,906 shares outstanding) 86,338,560
-----------------------------------------------------------------------
$419,338,130
========================================================================
Offering price per share:
Class A Shares (including sales charge of 5.75%)
(Note 2) $24.86
========================================================================
Class B Shares $23.00
========================================================================
Class C Shares $23.04
========================================================================
STATEMENT OF OPERATIONS
Year Ended September 30, 1995
========================================================================
Investment income (Note 1):
Dividends (net of foreign taxes
of $444,914) $ 2,294,588
Interest 681,463
-----------------------------------------------------------------------
Total income 2,976,051
-----------------------------------------------------------------------
Expenses: (Notes 2 and 4)
Management fee $ 3,009,974
Transfer agent fees 1,214,494
Accounting 22,704
Auditing and legal 27,468
Custodian fees 315,314
Printing 36,402
Trustees' fees and expenses 24,154
Distribution Plan expenses 2,491,967
Registration fees 158,510
Miscellaneous expenses 32,499
-----------------------------------------------------------------------
Total expenses 7,333,486
-----------------------------------------------------------------------
Less: Expenses paid indirectly (Note 4) (71,147)
-----------------------------------------------------------------------
Net expenses 7,262,339
-----------------------------------------------------------------------
Net loss from operations (Note 1) (4,286,288)
-----------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment and foreign
currency related transactions:
(Notes 1 and 3)
Net realized gain (loss) on:
Investments (4,090,326)
Foreign currency related transactions (2,909,685)
-----------------------------------------------------------------------
Net realized loss on investment and
foreign currency related
transactions (7,000,011)
-----------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments and
foreign currency related
transactions 73,894,167
-----------------------------------------------------------------------
Net gain on investment and foreign
currency related transactions 66,894,156
-----------------------------------------------------------------------
Net increase in net assets resulting
from operations $62,607,868
========================================================================
See Notes to Financial Statements.
<PAGE>
PAGE 20
- ------------------------------
Keystone Global Opportunities Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994
======================================================================================================
<S> <C> <C>
Operations:
Net investment loss from operations (Note 1) ($ 4,286,288) ($ 2,191,168)
Net realized loss on investment and foreign currency related
transactions (Note 3) (7,000,011) (3,409,703)
Net change in unrealized appreciation (depreciation) on investments and
foreign currency related transactions 73,894,167 17,263,860
------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 62,607,868 11,662,989
------------------------------------------------------------------------------------------------------
Distributions to shareholders from: (Notes 1 and 5)
Net investment income:
Class A Shares 0 (326,668)
Class B Shares 0 (244,277)
Class C Shares 0 (83,063)
------------------------------------------------------------------------------------------------------
Total distributions to shareholders 0 (654,008)
------------------------------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Proceeds from shares sold:
Class A Shares 35,039,374 51,373,426
Class B Shares 105,034,904 121,266,409
Class C Shares 38,024,895 49,422,917
Payments for shares redeemed:
Class A Shares (26,560,885) (14,654,789)
Class B Shares (33,012,757) (10,376,196)
Class C Shares (15,147,033) (6,924,492)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 0 274,341
Class B Shares 0 200,189
Class C Shares 0 68,432
------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from capital share transactions 103,378,498 190,650,237
------------------------------------------------------------------------------------------------------
Total increase in net assets 165,986,366 201,659,218
------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period 253,351,764 51,692,546
------------------------------------------------------------------------------------------------------
End of period [including accumulated distributions in excess of net
investment income as follows: September, 1995--($2,960,939) and
September, 1994--($180,181)] (Note 1) $419,338,130 $253,351,764
======================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 21
- ------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Global Opportunities Fund (formerly Keystone America Global
Opportunities Fund) (the "Fund") is a Massachusetts Business Trust. The Fund
was organized on June 17, 1987 and had no operations prior to March 16, 1988.
It is registered under the Investment Company Act of 1940 as a diversified
open-end investment company. Keystone Investment Management Company (formerly
Keystone Custodian Funds, Inc.) ("Keystone") provides investment advisory
services to the Fund pursuant to an Investment Advisory and Management
Agreement.
The Fund currently issues three classes of shares. Class A shares are
offered at a public offering price which includes a maximum sales charge of
5.75% payable at the time of purchase. Class B shares are sold subject to a
contingent deferred sales charge payable upon redemption which varies
depending on when shares were purchased and how long they have been held.
Class C shares are sold subject to a contingent deferred sales charge payable
upon redemption within one year of purchase. Class C shares are available
only through dealers who have entered into special distribution agreements
with Keystone Investment Distributors Company, (formerly Keystone
Distributors, Inc.) ("KIDC") the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII") a Delaware corporation. KII is
privately owned by an investor group consisting of current and former members
of management of Keystone and its affiliates. Keystone has retained Credit
Lyonnais International Asset Management North America ("CLIAM"), an
international portfolio management firm, to provide the Fund with
sub-advisory services, subject to the supervision of the Fund's Board of
Trustees and Keystone. Keystone Investor Resource Center, Inc. ("KIRC"), a
wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments, including American Depository Receipts ("ADRs") are
usually valued at the closing sales price, or in the absence of sales and for
over-the-counter securities, the mean of bid and asked quotations. Management
values the following securities at prices it deems in good faith to be fair:
(a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value,
or if no sale occurred. ADRs, which are certificates representing shares of
foreign securities deposited in domestic and foreign banks, are traded and
valued in United States dollars.
Short-term investments purchased with maturities of sixty days or less,
are valued at amortized cost (original purchase price adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market. Short-term investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Short-term investments maturing in more than
sixty days (when purchased) 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.
Investments denominated in foreign currencies are adjusted daily to
reflect changes in exchange rates.
<PAGE>
PAGE 22
- ------------------------------
Keystone Global Opportunities Fund
Those securities traded in foreign currency amounts are translated into
United States dollars as follows; market value of investments, assets, and
liabilities at the daily rate of exchange; and purchases and sales of
investments, income, and expenses at the rate of exchange prevailing on the
respective dates of such transactions. Market quotations are not considered
to be readily available for long-term corporate bonds and notes; such
investments are stated at fair value on the basis of valuations furnished by
a pricing service, approved by the Board of Trustees, which determines
valuations for normal, institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders.
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or, in the
case of a stock index, cash at a set price on a future date. Upon entering
into a futures contract, the Fund is required to deposit with a broker an
amount ("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income.
B. Securities transactions are accounted for on the day after trade date.
Realized gains and losses are computed on the identified cost basis. Interest
income is recorded on the accrual basis and dividend income is recorded on
the ex-dividend date. Distributions to the shareholders are recorded by the
Fund at the close of business on the record date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund is relieved of any federal
income or excise tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
<PAGE>
PAGE 23
- ------------------------------
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury and/or Federal Agency obligations.
E. In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Fund may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time the Fund
may enter into contracts to hedge certain foreign currency assets. Contracts
are recorded at market value and marked-to-market daily. Realized gains and
losses arising from such transactions are included in net realized gain
(loss) on foreign currency related transactions. The Fund is subject to the
credit risk that the other party will not complete the obligations of the
contract.
F. The Fund distributes net income and net capital gains, if any, annually.
Distributions from net investment income are determined in accordance with
income tax regulations. Distributions from taxable net investment income and
net capital gains can exceed book basis net investment income and net capital
gains.
The significant differences between financial statement amounts available
for distribution and distributions made in accordance with income tax
regulations are due to the treatment of foreign currency gains and losses and
net operating losses generated by the Fund.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the Fund
were as follows:
Class A Shares
------------------------
Year Ended September 30,
1995 1994
------------------------------------------
Shares sold 1,705,057 2,770,072
Shares redeemed (1,325,323) (785,508)
Shares issued
in reinvestment
of dividends
and distributions 0 15,404
------------------------------------------
Net increase 379,684 1,999,968
==========================================
Class B Shares
------------------------
Year Ended September 30,
1995 1994
------------------------------------------
Shares sold 5,208,875 6,542,500
Shares redeemed (1,702,740) (562,130)
Shares issued
in reinvestment
of dividends
and distributions 0 11,292
------------------------------------------
Net increase 3,506,135 5,991,662
==========================================
Class C Shares
----------------------
Year Ended September 30,
1995 1994
----------------------------------------
Shares sold 1,900,476 2,647,913
Shares redeemed (775,826) (373,983)
Shares issued
in reinvestment
of dividends
and distributions 0 3,846
----------------------------------------
Net increase 1,124,650 2,277,776
========================================
<PAGE>
PAGE 24
- ------------------------------
Keystone Global Opportunities Fund
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 Investment Company Act of 1940 ("1940 Act").
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of up to 0.25% of
the average net asset value of shares sold by such others and remaining
outstanding on the books of the Fund for specific periods.
The Class B Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class B shares to pay
expenses of the distribution of Class B shares. Amounts paid by the Fund
under the Class B Distribution Plan are currently used to pay others
(dealers) (i) a commission at the time of purchase normally equal to 4.00% of
the value of each Class B share sold plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of a Class B share, the
broker or other party will receive service fees at an annual rate of 0.25% of
the average net asset value of such Class B shares maintained by the
recipient outstanding on the Fund's books for specified periods. A contingent
deferred sales charge will be imposed, if applicable, on Class B shares
purchased after June 1, 1995 at rates ranging from a maximum of 5.00% of
amounts redeemed during the first 12 months following the date of purchase to
1.00% of amounts redeemed during the sixth twelve month period following the
date of purchase. Class B shares purchased on or after June 1, 1995 that have
been outstanding for eight years following the month of purchase will
automatically convert to Class A shares without a front end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 will retain
their existing conversion rights.
The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase of 0.75% of the price of each
Class C share sold, plus the first year's service fee in advance in the
amount of 0.25% of the price paid of each Class C share, and, beginning
approximately 15 months after purchase, a commission at an annual rate of
0.75% (subject to applicable limitations imposed by the rules of the National
Association of Securities Dealers, Inc.) ("NASD Rule") and service fees at an
annual rate of 0.25%, respectively, of the average net asset value of each
Class C maintained by the recipient outstanding on the Fund's books for
specified periods.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan payments to KIDC may, at the discretion of the Board of
Trustees, continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
For the year ended September 30, 1995, the Fund paid KIDC $185,409 under its
Class A Distribution Plan. The Fund paid KIDC $1,606,135 for Class B shares
sold prior to June 1, 1995, and $64,006 for Class B shares sold on or after
June 1, 1995. The Fund paid KIDC $636,417 under its Class C Distribution
Plan.
<PAGE>
PAGE 25
- ------------------------------
Under the NASD Rule, the maximum uncollected amounts for which KIDC may seek
payment from the Fund under its Distribution Plans were $9,557,717 for Class
B shares purchased prior to June 1, 1995, and $2,611,116 for Class B shares
purchased on or after June 1, 1995. The maximum uncollected amount for which
KIDC may seek payment from the Fund under its Class C Distribution Plan was
$5,094,255 as of September 30, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
As of September 30, 1995, the Fund had a capital loss carryforward for
federal income tax purposes of approximately $4,525,000 which expires as
follows: 2003--$4,525,000. Purchases and sales of investment securities
(including proceeds received at maturity) for the year ended September 30,
1995 were as follows:
Cost of Proceeds
Purchases from Sales
-----------------------------------------------------
Portfolio securities $ 204,464,496 $ 103,189,294
Short-term
investments 2,808,986,612 2,811,699,000
-----------------------------------------------------
$3,013,451,108 $2,914,888,294
=====================================================
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund dated August 7, 1991, Keystone receives a management
fee calculated by applying percentage rates starting at 1.00% and declining,
as net assets increase, to 0.75% of the net assets of the Fund. For the year
ended September 30, 1995, the Fund paid or accrued investment management and
administrative services fees of $3,009,974 which represented 0.98% of the
Fund's average net assets. Of such amount, $1,577,883 was paid or accrued to
Keystone and $1,432,091 was paid or accrued to CLIAM for its services as
subadviser.
During the year ended September 30, 1995, the Fund paid or accrued to KIRC
$22,704 as reimbursement for certain accounting and printing services, and
$1,214,494 for transfer agent fees.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of Fund
assets, 2.0% of the next $70 million of Fund assets, and 1.5% of Fund assets
over $100 million.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended September 30, 1995, the Fund paid custody fees
in the amount of $244,167 and received a credit of $71,147 pursuant to the
expense offset arrangement, resulting in a total expense of $315,314. The
assets deposited with the custodian under the expense offset arrangement
could have been invested in an income-producing asset.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
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PAGE 26
- ------------------------------
Keystone Global Opportunities Fund
(5.) Foreign Currency Exchange Contracts
At September 30, 1995, the Fund had entered into the following currency
exchange contracts that obligate the Fund to deliver currencies at specified
future dates. The unrealized appreciation of $5,947 on these contracts is
included in the accompanying financial statements. The terms of the open
contracts are as follows:
<TABLE>
<CAPTION>
U.S. $ value
Exchange Currency to as of Currency to U.S. $ value
date be delivered 9/30/95 be received as of 9/30/95
=====================================================================================
<S> <C> <C> <C> <C>
10/03/95 387,285 $ 78,644 78,859 $ 78,859
French Franc U.S. $
10/03/95 307,279 307,279 30,829,278 311,234
U.S. $ Japanese Yen
10/03/95 89,136 89,136 56,702 89,591
U.S. $ Pound Sterling
10/04/95 46,060 72,777 72,479 72,479
Pound Sterling U.S. $
10/06/95 224,367 224,367 297,924 225,154
U.S. $ Australian Dollar
10/06/95 393,082 393,082 989,783 394,022
U.S. $ Malaysian Ringitt
10/10/95 76,775 76,775 192,590 76,668
U.S. $ Malaysian Ringitt
--------- ---------
$1,242,060 $1,248,007
========= =========
</TABLE>
(6.) Distributions to Shareholders
The Fund intends to distribute to its shareholders dividends from net
investment income annually and all net realized long-term capital gains, if
any, annually. Any taxable distribution which is declared in December and
paid before the next February 1 will be taxable to shareholders in the year
declared.
<PAGE>
PAGE 27
- ------------------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Global Opportunities Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Global Opportunities Fund (formerly Keystone America Global
Opportunities Fund), including the schedule of investments, as of September
30, 1995, and the related statement of operations for the year then ended,
the statements of changes in net asset for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
seven-year period then ended and the period from March 16, 1988 (Commencement
of Operations) to September 30, 1988 for Class A shares, and for each of the
years in the two-year period ended September 30, 1995 and for the period from
February 1, 1993 (Date of Initial Public Offering) to September 30, 1993 for
Class B and Class C shares. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1995 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Global Opportunities Fund as of September 30, 1995, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 27, 1995
