<PAGE>
KEYSTONE CAPITAL PRESERVATION
AND INCOME FUND
PROSPECTUS JANUARY 27, 1995
AS SUPPLEMENTED JUNE 1, 1995
Keystone Capital Preservation and Income Fund (formerly Keystone America
Capital Preservation and Income Fund) (the "Fund") is a mutual fund that seeks a
high level of current income consistent with low volatility of principal by
investing under ordinary circumstances at least 65% of its assets in adjustable
rate securities issued or guaranteed by the United States ("U.S.") government,
its agencies or instrumentalities, such as adjustable rate mortgage securities,
loan pools and collateralized mortgage obligations. The Fund does not attempt to
maintain a constant price per share. The Fund does, however, follow a strategy
that seeks to minimize changes in its net asset value per share by investing
primarily in adjustable rate securities whose interest rates are periodically
reset when market rates change. The Fund seeks to maintain a relatively stable
net asset value while providing high current income relative to high quality,
short-term investment alternatives. Of course, there can be no assurance that
the Fund will achieve its objective.
Generally, the Fund offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in the Fund's fee
table, "How to Buy Shares," "Alternative Sales Options," "Contingent Deferred
Sales Charge and Waiver of Sales Charges," "Distribution Plans," and "Fund
Shares."
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
KEYSTONE CAPITAL PRESERVATION
AND INCOME FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
Additional information about the Fund is contained in a statement of
additional information dated January 27, 1995, as supplemented June 1, 1995,
which has been filed with the Securities and Exchange Commission and is
incorporated by reference into this prospectus. For a free copy, or for other
information about the Fund, write to the address or call the telephone number
listed below.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
TABLE OF CONTENTS Page
Fee Table 2
Financial Highlights 3
The Fund 5
Investment Objective and Policies 5
Risk Factors 9
Investment Restrictions 11
Pricing Shares 11
Dividends and Taxes 12
Fund Management and Expenses 13
How to Buy Shares 15
Alternative Sales Options 15
Contingent Deferred Sales Charge and
Waiver of Sales Charges 19
Distribution Plans 20
How to Redeem Shares 21
Shareholder Services 23
Performance Data 26
Fund Shares 26
Additional Information 27
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 CAPITAL PRESERVATION AND INCOME FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- -------------- -------------
<S> <C> <C> <C>
Sales Charge ....................................... 3.00% None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ................... 0.00%<F3> 3.00% in the first 12 1.00% in the first
(as a percentage of the lesser of cost or month period declining year and 0.00%
market value of shares redeemed) to 1.00% in the fourth thereafter
12 month period and
0.00% thereafter
<S> <C> <C> <C>
Exchange Fee (per exchange)<F4> .................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F5>
After Expense Reimbursements
(as a percentage of average net assets)
Management Fees .................................... 0.59% 0.59% 0.59%
12b-1 Fees ......................................... 0.00% 0.60%<F6> 0.60%<F6>
Other Expenses ..................................... 0.31% 0.31% 0.31%
------ ------ ------
Total Fund Operating Expenses ...................... 0.90% 1.50% 1.50%
====== ====== ======
<S> <C> <C> <C> <C>
EXAMPLES<F7> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period:
Class A .......................................................... $44.00 $63.00 $83.00 $142.00
Class B .......................................................... $45.00 $67.00 $82.00 N/A
Class C .......................................................... $25.00 $47.00 $82.00 $179.00
You would pay the following expenses on the same investment, assuming
no redemption at the end of each period:
Class A .......................................................... $44.00 $63.00 $83.00 $142.00
Class B .......................................................... $15.00 $47.00 $82.00 N/A
Class C .......................................................... $15.00 $47.00 $82.00 $179.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN.
- ---------------
<FN>
<F1> Class B shares purchased on or after June 1, 1995 convert to Class A shares after eight years. See "Class B
Shares" for more information.
<F2> Class C shares are available only through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company, the Fund's principal underwriter.
<F3> Purchase of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifing
retirement or other plans are not subject to a sales charge, but are subject to a contingent deferred sales
charge. See the "Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of
this prospectus for an explanation of the charge.
<F4> There is no exchange 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.")
<F5> Expense ratios (annualized as appropriate) are estimated for the fiscal year ended September 30, 1995 after
giving effect to the reimbursement by Keystone Investment Management Company ("Keystone") of expenses in
accordance with certain voluntary expense limitations. The estimated ratios above assume Keystone's extension of
these voluntary expense limitations to September 30, 1995, which Keystone is under no obligation to do. Prior to
reimbursement, expense ratios (annualized as appropriate) for the fiscal year ended September 30, 1995 for the
Fund's Class A, B and C shares, respectively, are estimated to be 1.17%, 1.92% and 1.92%. For an explanation of
expense reimbursements, see "Fund Management and Expenses."
<F6> Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted
by rules adopted by the National Association of Securities Dealers, Inc. ("NASD").
<F7> The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example.
Actual return for the Fund may be greater or less than 5%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report (under a former name of the Fund, Keystone America Capital Preservation
and Income Fund-II). The Fund's financial statements, related notes, and
independent auditors' report are included in the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
JULY 1, 1991
YEAR ENDED SEPTEMBER 30, (COMMENCEMENT OF
----------------------------------- OPERATIONS) TO
1994 1993 1992 SEPTEMBER 30, 1991
------- -------- -------- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ... $9.910 $9.880 $10.060 $10.000
Income from investment operations
Investment income -- net ............... 0.466 0.457 0.579 0.179
Net gains (losses) on investments ...... (0.409) (0.054) (0.213) 0.062
------ ------ ------- -------
Total from investment operations ....... 0.057 0.403 0.366 0.241
------ ------ ------- -------
Less distributions from <F3>:
Investment income -- net ............... (0.339) (0.373) (0.546) (0.181)
In excess of investment income -- net... (0.008) --0-- --0-- --0--
------ ------ ------- -------
Total distributions .................... (0.347) (0.373) (0.546) (0.181)
------ ------ ------- -------
Net asset value end of period .......... $9.620 $9.910 $ 9.880 $10.060
====== ====== ======= =======
TOTAL RETURN ........................... 0.58% 4.16% 3.71% 2.43%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Operating and management expenses <F2> 1.50% 1.50% 1.36% 1.19%<F1>
Net investment income ................ 4.05% 4.44% 5.50% 6.42%<F1>
Portfolio turnover rate ................ 34% 60% 41% 2%
Net assets, end of period (thousands) .. $95,761 $144,725 $186,742 $25,769
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<FN>
<F1> Annualized for the period July 1, 1991 (Commencement of Operations) to September 30, 1991.
<F2> Figures are net of expense reimbursement by Keystone Investment Management Company (formerly
Keystone Custodian Funds, Inc.) in connection with the voluntary expense limitations. Before
the expense reimbursement the "Ratio of operating and management expenses to average net
assets" would have been 1.93%, 1.94%, 2.03% and 3.19% (annualized) for the years ended
September 30, 1994, 1993 and 1992, and the period July 1, 1991 (Commencement of Operations)
to September 30, 1991, respectively.
<F3> Effective October 1, 1993 the Fund adopted Statement of Position 93-2: "Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies." As a result, distribution amounts exceeding book
basis net investment income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a temporary basis) are
presented as "Distributions in excess of realized capital gains."
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important information relating to the Fund and
has been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The
table appears in the Fund's Annual Report and should be read in conjunction with
the Fund's financial statements and related notes, which also appear, together
with the independent auditors' report, in the Fund's Annual Report (under a
former name of the Fund, Keystone America Capital Preservation and Income
Fund-II). The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
FEBRUARY 1, 1993
YEAR (DATE OF INITIAL
ENDED PUBLIC OFFERING) TO
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------ ------------------
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 9.900 $ 9.820
Income from investment operations
Investment income -- net ................ 0.403 0.228
Net gains (losses) on investments ....... (0.356) 0.092
------- -------
Total from investment operations ........ 0.047 0.320
------- -------
Less distributions from <F3>:
Investment income -- net ................ (0.338) (0.240)
In excess of investment income -- net ... (0.009) --0--
------- -------
Total distributions to shareholders ..... (0.347) (0.240)
------- -------
Net asset value end of period ........... $ 9.600 $ 9.900
======= =======
TOTAL RETURN ............................ 0.48% 3.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Operating and management expenses <F2> 1.50% 1.50%<F1>
Net investment income ................. 4.08% 2.91%<F1>
Portfolio turnover rate ................. 34% 60%
Net assets, end of period (thousands) ... $ 2,874 $ 2,077
- ---------------
<F1> Annualized.
<F2> Figures are net of expense reimbursement by Keystone Investment Management
Company (formerly Keystone Custodian Funds, Inc.) in connection with the
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.94% and 1.67% (annualized) for the year ended September 30, 1994 and for
the period February 1, 1993 (Date of Initial Public Offering) to September
30, 1993.
<F3> Effective October 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net investment
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized capital gains."
<PAGE>
THE FUND
The Fund is a diversified open-end management investment company, commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust on
December 19, 1990. The Fund is one of thirty funds managed or advised by
Keystone Investment Management Company (formerly named Keystone Custodian Funds,
Inc.) ("Keystone"), the Fund's investment adviser.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of current income,
consistent with low volatility of principal. The Fund pursues its investment
objective by investing under ordinary circumstances at least 65% of its assets
in loan pool securities ("Loan Pool(s)") or in mortgage securities or other
securities collateralized by, or representing an interest in, a pool of
mortgages (collectively, "Mortgage Securities") that have interest rates that
reset at periodic intervals and are issued or guaranteed by the U.S. government,
its agencies or instrumentalities. The Fund does not attempt to maintain a
constant price per share. The Fund follows a strategy that seeks to minimize
changes in its net asset value per share by investing primarily in adjustable
rate securities, the interest rates of which are periodically reset when market
rates change. The average dollar weighted reset period of adjustable rate
securities held by the Fund will not exceed one year. The Fund seeks to provide
a relatively stable net asset value while providing high current income relative
to high quality, short-term investment alternatives. Of course, there is no
assurance that the Fund will achieve its objective.
INVESTMENT POLICIES AND APPROACH
Keystone believes that by investing primarily in Mortgage Securities and
Loan Pools with adjustable rates of interest issued or guaranteed by the U.S.
government, its agencies or instrumentalities, the Fund will achieve a less
volatile net asset value per share than is characteristic of mutual funds that
invest primarily in U.S. government securities paying a fixed rate of interest.
Although the Fund does not attempt to maintain a constant price per share, this
strategy seeks to minimize the extent of changes in the Fund's net asset value
per share by investing in a diverse portfolio of securities, which Keystone
believes will, when combined, experience relatively low price volatility.
Keystone also believes that the offsetting price behavior of the Fund's other
permitted investments will provide opportunity for increased yields from
increases or decreases in market rates consistent with low volatility of
principal.
Unlike fixed rate mortgages and loans, which generally decline in value
during periods of rising interest rates, adjustable rate mortgage securities
("ARMS") and adjustable rate Loan Pools ("AR Loan Pools") allow the Fund to
participate in increases in interest rates through periodic adjustments in the
coupons of the underlying mortgages or loans, resulting in both higher current
yields and lower price fluctuations in the Fund's net asset value per share. The
Fund is also affected by decreases in interest rates through periodic decreases
in the coupons of the underlying mortgages or loans resulting in lower income to
the Fund. This downward adjustment results in lower price fluctuations in the
net asset value per share in a decreasing interest rate environment. As the
interest rates on the mortgages or loans underlying the Fund's investments are
reset periodically, coupons of portfolio securities will gradually align
themselves to reflect changes in market rates and should cause the net asset
value per share of the Fund to fluctuate less dramatically than it would if the
Fund invested in more traditional long-term, fixed rate mortgages.
The portion of the Fund that is not invested in ARMS and AR Loan Pools is
intended to add incremental yield from changes in market rates while not
materially increasing the volatility of the net asset value per share. Although
this portion of the Fund is expected to include securities that individually
have greater market volatility than adjustable rate securities, investments
included in this portion would generally have offsetting price patterns. The
Fund would seek to combine investments with higher price volatility so that
their aggregate contribution to the Fund's volatility is minimal. As a result,
the overall impact on the Fund of this portion of the Fund's portfolio is
expected to be neutral in terms of price risk.
For example, the Fund may invest in GNMA (as hereinafter defined) fixed
rate Mortgage Securities and in FHLMC (as hereinafter defined) and FNMA (as
hereinafter defined) stripped interest only Mortgage Securities (hereinafter
defined as "IOs"). Both securities generally have higher yields than those
available on adjustable rate Mortgage Securities. The expected price behavior of
fixed rate GNMA Mortgage Securities is like that of other fixed rate debt
securities in that their principal value rises as market interest rates fall and
declines as market interest rates rise. IOs have the opposite expected price
behavior, i.e., their value generally increases as market interest rates rise,
while their principal value declines as market interest rates fall. When the
fixed rate GNMAs are combined with IOs, the expected result is to offset
expected price patterns which continuously offset one another in changing
interest rate environments. For further information, see "Permitted Investments"
and "Other Permitted Investments."
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including at this time (1) treating as illiquid, securities that may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of net assets.
PERMITTED INVESTMENTS
LOAN POOL SECURITIES
A loan pool security is an interest in a pool of loans. Loans underlying
the Loan Pools generally include working capital loans, equipment loans and real
estate loans. Most Loan Pools consist of pass-through securities, which means
that they provide investors with payments consisting of both interest and
principal as loans in the underlying loan pool are paid off by the borrower. The
Fund will invest only in Loan Pools that are issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Such Loan Pools are called
"modified pass-throughs," since the holder does not bear the risk of default on
the underlying loan.
Currently, the dominant issuer and guarantor of Loan Pools issued or
guaranteed by the U.S. government, its agencies or instrumentalities is the
Small Business Administration ("SBA"). The SBA creates Loan Pools from pools of
SBA guaranteed portions of loans ("SBA Loan Pools"). SBA Loan Pools have a
guarantee of timely payment of both principal and interest and are backed by the
full faith and credit of the U.S. government.
AR Loan Pools are pass-through Loan Pools collateralized by loans with
adjustable rather than fixed interest rates, which means that there are periodic
adjustments in their coupons subject to limitations or "caps" on the maximum and
minimum interest that is charged to the borrower during the life of the loan or
to maximum and minimum changes to that interest rate during a given period. The
AR Loan Pools in which the Fund invests are primarily SBA Loan Pools and are
actively traded in the secondary market.
MORTGAGE SECURITIES
Most Mortgage Securities are also "modified pass-through" securities. The
dominant issuers or guarantors of Mortgage Securities today are the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
The Mortgage Securities either issued or guaranteed by GNMA, FNMA or FHLMC
are called "pass-through" Mortgage Securities because a pro rata share of both
regular interest and principal payments (less GNMA's, FNMA's or FHLMC's fees and
any applicable loan servicing fees) as well as unscheduled early prepayments on
the underlying mortgage pool are passed through monthly to the holder of the
Mortgage Securities (i.e., the Fund). The principal and interest on GNMA
securities are guaranteed by GNMA and backed by the full faith and credit of the
U.S. government. FNMA guarantees full and timely payment of all interest and
principal. FHLMC guarantees timely payment of interest and the ultimate
collection of principal. Mortgage Securities from FNMA and FHLMC are not backed
by the full faith and credit of the U.S. government and are supported only by
the credit of FNMA and FHLMC. Although their close relationship with the U.S.
government is believed to make them high quality securities with minimal credit
risks, the U.S. government is not obligated by law to support either FNMA or
FHLMC. Historically, however, there have been no defaults in any FNMA or FHLMC
issues.
Adjustable rate mortgages are an increasingly important form of residential
financing. Generally, adjustable rate mortgages are mortgages that have a
specified maturity date and amortize in a manner similar to that of a fixed rate
mortgage. As a result, in periods of declining interest rates there is a
reasonable likelihood that adjustable rate mortgages will behave like fixed rate
mortgages in that current levels of prepayments of principal on the underlying
mortgages could accelerate. However, one difference between adjustable rate
mortgages and fixed rate mortgages is that for certain types of adjustable rate
mortgages the rate of amortization of principal as well as interest payments can
and does change in accordance with movements in a particular, pre-specified,
published interest rate index. The amount of interest due a holder of an
adjustable rate mortgage is calculated by adding a specified additional amount
(margin) to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. It is these special characteristics, unique to the adjustable rate
mortgages underlying the ARMS in which the Fund invests, that are believed to
make ARMS attractive investments in seeking to accomplish the Fund's objective.
For further information, see "Prepayments" in the section on "Risk Factors."
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund may also invest in fixed rate and adjustable rate collateralized
mortgage obligations ("CMOs"), including CMOs with rates that move inversely to
market rates that are issued by and guaranteed as to principal and interest by
the U.S. government, its agencies or instrumentalities. The principal
governmental issuer of CMOs is FNMA. In addition, FHLMC issues a significant
number of CMOs. The Fund will not invest in CMOs that are issued by private
issuers. CMOs are debt obligations collateralized by Mortgage Securities in
which the payment of the principal and interest is supported by the credit of,
or guaranteed by, the U.S. government or an agency or instrumentality of the
U.S. government. The secondary market for CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying Mortgage Securities used as collateral to create
classes with different interest rates, maturities and payment schedules. Instead
of interest and principal payments on the underlying Mortgage Securities being
passed through or paid pro rata to each holder (e.g., the Fund), each class of a
CMO is paid from and secured by a separate priority payment of the cash flow
generated by the pledged Mortgage Securities.
Most CMO issues have at least four classes. Classes with an earlier
maturity receive priority on payments to assure the early maturity. After the
first class is redeemed, excess cash flow not necessary to pay interest on the
remaining classes is directed to the repayment of the next maturing class until
that class is fully redeemed. This process continues until all classes of the
CMO issue have been paid in full. Among the CMO classes available are floating
(adjustable) rate classes, which have characteristics similar to ARMS, and
inverse floating rate classes whose coupons vary inversely with the rate of some
market index. The Fund may purchase any class of CMO other than the residual
(final) class.
An inverse floating rate CMO, i.e., an "inverse floater," bears an interest
rate that resets in the opposite direction of the change in a specified interest
rate index. As market interest rates rise, the interest rate on the inverse
floater goes down, and vice versa. Inverse floaters tend to exhibit greater
price volatility than fixed-rate bonds of similar maturity and credit quality.
The interest rates on inverse floaters may be significantly reduced, even to
zero, if interest rates rise. Moreover, the secondary market for inverse
floaters may be limited in rising interest rate environments.
STRIPPED MORTGAGE SECURITIES
Stripped mortgage securities ("Stripped Mortgage Securities") are currently
issued by agencies or instrumentalities of the U.S. government. Stripped
Mortgage Securities have greater market volatility than the other types of
Mortgage Securities in which the Fund invests. Stripped Mortgage Securities are
usually structured with two classes. One class will receive all of the interest
(the interest only class or "IO"), while the other class will receive all of the
principal (the principal only class or "PO"). If IOs and POs are purchased
together, they may be combined to form a synthetic Mortgage Security. When
combined with additional permitted fixed rate investments, the offsetting price
behavior of these investments will provide opportunity for increased yields from
increases or decreases in market rates consistent with low volatility of
principal.
The yield to maturity on and market value of an IO are extremely sensitive
to changes in the rate of principal prepayments on the related underlying
mortgages, and a rapid rate of principal prepayments may have a material adverse
effect on the Fund's yield and net asset value. As a result, IOs have greater
market volatility than most other Mortgage Securities. If the underlying
mortgages experience greater than anticipated prepayments of principal, the Fund
would lose the right to receive interest payments on such mortgages and may fail
to fully recover its initial investment in these securities and thus may suffer
a loss on its holding.
POs perform best when prepayments on the underlying mortgages rise since
this increases the rate at which the investment is returned and the yield to
maturity on the PO. When payments on mortgages underlying a PO are slow, the
life of the PO is lengthened and the yield to maturity is reduced.
Determinations of the liquidity of Stripped Mortgage Securities issued by
the U.S. government, its agencies and instrumentalities will be made pursuant to
guidelines established by the Fund's Board of Trustees. The Board's guidelines
will be used to ascertain whether such securities can be disposed of promptly in
the ordinary course of business at a value reasonably close to that used in the
calculation of the Fund's net asset value per share. In the event the Fund
purchases Stripped Mortgage Securities determined to be illiquid pursuant to the
guidelines established by the Board, such Stripped Mortgage Securities, together
with investments in other illiquid securities, will be limited to 15% of the
Fund's assets. In any event, the Fund currently intends to invest no more than
15% of its net assets in IOs and to limit investment in POs so that its PO
holdings do not exceed its IO holdings by more than 5%.
GENERAL
Except as described above, the Fund does not currently intend to invest in
derivative Mortgage Securities, including residual interests in Mortgage
Securities.
OTHER PERMITTED INVESTMENTS
The Fund may invest up to 35% of its assets under ordinary circumstances
and up to 100% of its assets for temporary defensive purposes in certain
instruments other than ARMS, adjustable rate CMOs or AR Loan Pools.
Specifically, the Fund may so invest in the following instruments: obligations
of the U.S. government, its agencies or instrumentalities, including the Federal
Home Loan Banks, FNMA, GNMA, Bank for Cooperatives (including Central Bank for
Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks, Tennessee
Valley Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, The Student Loan Marketing Association,
FHLMC, SBA or the National Credit Union Administration. The Fund may assume a
temporary defensive position, for example, upon Keystone's determination that
market conditions so warrant. The Fund may not be pursuing its investment
objective when it assumes a temporary defensive position. Although the
securities described in this section are all issued or guaranteed by the U.S.
government, its agencies or instrumentalities, the value of these securities,
like those of other fixed income securities, fluctuates in response to changes
in interest rates. When interest rates decline, the value of these securities
can be expected to rise. Conversely, when interest rates rise, the value of
these securities can be expected to decline. The corresponding increase or
decrease in the value of fixed rate securities generally becomes more
significant for instruments with longer remaining maturities or expected
remaining lives.
INVESTMENT TECHNIQUES
The Fund may enter into repurchase and reverse repurchase agreements and
interest rate swap agreements. The Fund may also purchase and sell securities or
rights to interest payments on a when issued or delayed delivery basis. The Fund
will not, without thirty days prior notice to shareholders, enter into interest
rate swap contracts or financial futures contracts and related options
transactions. In addition, the Fund may use subsequently developed investment
techniques related to any of its investment policies, unless such investment
techniques violate the securities laws of any state in which the Fund's shares
are registered for sale.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see
"Additional Investment Information" and the statement of additional information.
ADDITIONAL INFORMATION
An investment in the Fund may be a permissible investment for national
banks, federal credit unions and some state savings and loan associations. Any
financial institution considering an investment in the Fund should refer to the
applicable laws and regulations governing its operations in order to determine
if the Fund is a permissible investment.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The investment objective of the Fund is fundamental and may not be changed
without approval of the holders of a majority of the Fund's outstanding voting
shares as defined in the Investment Company Act of 1940 ("1940 Act") (which
means the lesser of (1) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares).
Of course, there can be no assurance that the Fund will achieve its
investment objective since there is uncertainty in every investment.
RISK FACTORS
Investing in the Fund involves the risk inherent to investing in any
security, i.e., the net asset value of a Fund share can increase or decrease in
response to changes in economic conditions, interest rates and the market's
perception of the Fund's underlying securities.
PREPAYMENTS
The Mortgage Securities and Loan Pools in which the Fund principally
invests differ from conventional bonds in that principal is repaid over the life
of the investment rather than at maturity. As a result, the holder of the
investment (i.e., the Fund) receives monthly scheduled payments of principal and
interest and may receive unscheduled principal payments representing prepayments
on the underlying mortgages or loans. When the holder reinvests the payments and
any unscheduled prepayments of principal it receives, it may receive a rate of
interest that is higher or lower than the rate on the existing investment.
RESETS
The interest rates paid on the securities held in AR Loan Pools, ARMS and
adjustable rate CMOs in which the Fund invests are readjusted at intervals of up
to three years (generally one year or less) to an increment over some
predetermined interest rate index.
The Fund's net asset value per share could vary to the extent that current
interest rates on Loan Pools or Mortgage Securities are different from market
interest rates during periods between coupon reset dates. During periods of
rising or falling interest rates, changes in the coupon rate lag behind changes
in the market rate, possibly resulting in a net asset value per share which is
slightly lower or higher, as the case may be, until the coupon resets to market
rates. Investors could suffer some principal loss if they sold their shares of
the Fund during periods of rising interest rates before the interest rates on
the underlying mortgages or loans were adjusted to reflect current market rates.
During periods of extreme fluctuations in interest rates, the Fund's net asset
value per share will fluctuate as well.
CAPS AND FLOORS
The underlying loans or mortgages that collateralize the AR Loan Pools,
ARMS and CMOs in which the Fund invests will frequently have caps and floors,
which limit the maximum amount by which the loan rate to the borrower may change
up or down per reset or adjustment interval and over the life of the loan.
The Fund will not benefit from increases in interest rates to the extent
that interest rates rise to the point where they cause the current coupon of
loans or mortgages held as investments to reach their maximum allowable annual
or lifetime reset limits (cap rates). Fluctuation in interest rates above these
levels would cause such mortgages or loans to "cap" out and to behave more like
long-term fixed rate debt securities. Conversely, the Fund will not benefit from
decreases in interest rates to the extent that prepayments increase. In
addition, when interest rates decline, the Fund's income will be reduced when
the interest rate on an underlying adjustable rate mortgage is reduced.
ADDITIONAL FACTORS
It is possible in an environment in which interest rates on short-term
fixed rate debt securities are rising faster than interest rates on long-term
fixed rate debt securities that the Fund's investments may not perform as
expected primarily because of the reset risk described above. In this abnormal
interest rate environment, the market value of Mortgage Securities in general
will typically under-perform other fixed rate debt securities.
ARMS and AR Loan Pools may be less effective as a means of "locking in"
long-term interest rates than fixed rate debt securities. The market value of
ARMS and AR Loan Pools will generally vary inversely with changes in market
interest rates, declining when interest rates rise and rising when interest
rates decline. However, ARMS and AR Loan Pools have less risk of a decline than
fixed rate debt securities of comparable maturities during periods of rapidly
rising rates and have less potential than such investments for capital
appreciation due to their adjustable rate features and the likelihood of
increased prepayments of mortgages or loans as interest rates decline.
To the extent that ARMS and AR Loan Pools are purchased at a premium,
mortgage foreclosures or loan defaults and unscheduled principal prepayments may
result in some loss of the holder's principal investment to the extent of the
premium paid over the face value of the security. On the other hand, if ARMS and
AR Loan Pools are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal will increase current and total
returns and will accelerate the recognition of income, which, when distributed
to shareholders, will be taxable as ordinary income.
While the securities in which the Fund may invest are issued or guaranteed
by the U.S. government, its agencies or instrumentalities, the market value of
such securities is not guaranteed. In addition, current yield levels should not
be considered representative of yields for any future period of time.
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.
By itself, the Fund does not constitute a balanced investment program.
Investors should take into account their own investment objectives as well as
their other investments when considering the purchase of shares of any
investment company.
Past performance should not be considered representative of results for any
future period of time. Moreover, should many shareholders change from this Fund
to some other investment at about the same time, the Fund might have to sell
portfolio securities at a time when it would be disadvantageous to do so and at
a lower price than if such securities were held to maturity.
For further information about the risks associated with the Fund's
investments and investment techniques, see "Additional Investment Information"
and the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which
may not be changed without the approval of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in the statement of additional
information. Unless otherwise stated, all references to the Fund's assets are in
terms of current market value.
Generally, the Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of
the value of its total assets in the securities of any one issuer; this
limitation does not apply to investments in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities;
(2) borrow money or enter into reverse repurchase agreements, except
that the Fund may enter into reverse repurchase agreements or borrow money
from banks for temporary or emergency purposes in aggregate amounts up to
one-third of the value of its net assets; and
(3) make loans, except that the Fund may purchase or hold debt
securities consistent with its investment objective, lend portfolio
securities valued at not more than 15% of its total assets to broker-
dealers, and enter into repurchase agreements.
If a percentage limit is satisfied at the time of an investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
PRICING SHARES
The net asset value of a Fund share is computed each day on which the New
York Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's portfolio
securities do not affect its current net asset value per share. 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 Fund is arrived at by determining the value
of the Fund's assets, subtracting its liabilities and dividing the result by the
number of its shares outstanding. Net asset value per share is calculated to two
decimal places for purposes of purchases and redemptions of the Fund's shares.
The Fund values most of its securities at the mean of the bid and asked
price at the time of valuation and values other securities at fair value
according to procedures established by the Board of Trustees, including valuing
certain of its fixed rate Mortgage Securities and Loan Pools 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 Mortgage
Securities and Loan Pools, quotations from dealers, market transactions in
comparable securities and various relationships between securities in
determining value.
The Fund values short-term investments with maturities of sixty days or
less at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market. Short-term securities with remaining maturities of more
than 60 days, for which market quotations are readily available, are valued at
market. Short-term securities with remaining maturities of more than 60 days
when purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market. All other investments are valued at market value or, where
market quotations are not readily available, are valued at fair value as
determined in good faith in accordance with procedures established by the Fund's
Board of Trustees.
DIVIDENDS AND TAXES
The Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains annually. Shareholders
receive Fund distributions in the form of additional shares of that class of
shares upon which the distribution is based or, at the shareholder's option, in
cash. Fund distributions in the form of additional shares are made at net asset
value without the imposition of a sales charge. Shareholders who have not opted
to receive cash prior to the payable date for any net investment income dividend
or the record date for any capital gains distribution will have the number of
such shares determined on the basis of the Fund's net asset value per share
computed at the end of that day after adjustment for the distribution. Net asset
value per share is used in computing the number of shares in both capital gains
and income distribution reinvestments. Account statements and/or checks as
appropriate will be mailed to you within seven days after the Fund pays the
distribution. Unless the Fund receives instructions to the contrary from you
before the record or payable date, as the case may be, it will assume that you
wish to receive that distribution and future capital gains and income
distributions in shares. Instructions continue in effect until changed in
writing.
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 Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B and Class C shares.
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). The Fund qualifies if,
among other things, it distributes to its shareholders at least 90% of its net
investment income for its fiscal year. The Fund also intends to make timely
distributions, if necessary, sufficient in amount to avoid the nondeductible 4%
excise tax imposed on a regulated investment company to the extent that it fails
to distribute, with respect to each calendar year, at least 98% of its ordinary
income for such calendar year and 98% of its net capital gains for the one-year
period ending on October 31 of such calendar year. Any such distribution would
be (1) declared in October, November or December to shareholders of record in
such a month, (2) paid by the following January 31, and (3) includable in the
taxable income of the shareholders for the year in which such distribution was
declared. If the Fund qualifies and if it distributes substantially all of its
net investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
The Fund intends to distribute its net long-term capital gains as capital
gain dividends. Such dividends are treated by shareholders as long-term capital
gains. These distributions will be designated as long-term capital gain
dividends by a written notice mailed to each shareholder no later than 60 days
after the close of the Fund's taxable year. If a shareholder receives a capital
gains dividend, any allowable loss on disposition of such shares will be treated
as a long-term capital loss to the extent of such capital gain dividend,
provided such shares have been held for six months or less.
Since none of the Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Board of Trustees, Keystone serves as investment
adviser to the Fund and is responsible for the overall management of the Fund's
business and affairs.
INVESTMENT ADVISER
Keystone, the Fund's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone
Investments, Inc. (formerly named Keystone Group, Inc.) ("Keystone
Investments"), located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current and
former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Investments Family of
Funds.
Pursuant to its Investment Advisory and Management Agreement with the Fund,
(the "Advisory Agreement"), Keystone provides investment advisory and management
services to the Fund.
The Fund pays Keystone a fee for its services at the annual rate set forth
below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- --------------------------------------------------------------------------------
2% of Gross Dividend and
Interest Income
plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid daily.
During the fiscal year ended September 30, 1994, the Fund paid or accrued
to Keystone investment management and administrative services fees of $735,254,
which represented 0.60% of the Fund's average net assets.
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 ("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 by a vote of shareholders of the
Fund.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
advisory and management fee discussed above, the principal expenses that the
Fund is expected to pay include, but are not limited to, transfer, dividend
disbursing and shareholder servicing agent costs and expenses; custodian costs
and expenses; fees of its Independent Trustees, its independent auditors, its
legal counsel, and legal counsel to its Board of Trustees; and fees payable to
government agencies, including registration and qualification fees of the Fund
and its shares under federal and state securities laws. In addition, each class
will pay all of the expenses attributable to it. Such expenses are currently
limited to Distribution Plan expenses. The Fund also pays its brokerage
commissions, interest charges and taxes and certain extraordinary expenses.
In connection with the expense limits in effect for the fiscal year ended
September 30, 1994, Keystone reimbursed the Fund $510,197 with respect to the
Fund's Class B shares, and $13,504 with respect to the Fund's Class C shares.
Until September 30, 1995, Keystone has voluntarily agreed to limit annual
expenses of each of the Fund's Class A, B and C shares to 0.90%, 1.50% and
1.50%, respectively, of average daily net assets. Keystone, from time to time,
will make determinations whether to continue these expense limits and, if so, at
what rates. Keystone will not be required to reimburse the Fund for amounts in
excess of an expense limit if such reimbursement would result in the Fund's
inability to qualify as a regulated investment company under provisions of the
Code.
For the fiscal year ended September 30, 1994, the Fund's Class B and Class
C each paid 1.50% of its average net assets in expenses.
During the fiscal year ended September 30, 1994, the Fund paid or accrued
to Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, and Keystone Investments $18,965 for certain
accounting and printing services and $233,089 for transfer agent fees. KIRC is a
wholly-owned subsidiary of Keystone.
PORTFOLIO MANAGER
Christopher P. Conkey has been the Fund's portfolio manager since 1991. Mr.
Conkey is a Keystone Senior Vice President and Group Head and has more than
eleven years of experience in fixed-income investing.
SECURITIES TRANSACTIONS
Under policies established by the Fund's Board of Trustees, Keystone
selects broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Fund, Keystone may follow a policy of considering, as a factor, the number
of shares of the Fund sold by such broker- dealer. In addition, broker- dealers
executing portfolio transactions may, from time to time, be affiliated with the
Fund, Keystone, the Fund's principal underwriter or their affiliates.
The Fund may pay higher commissions to broker-dealers who provide research
services. Keystone may use these services in advising the Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
The Fund's turnover rates for the fiscal years ended September 30, 1993 and
1994 were 60% and 34%, respectively.
High portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which would be borne directly by the
Fund, 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 Fund from any broker-dealer that has a
selling agreement with Keystone Investment Distributors Company (formerly named
Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of Fund shares by
mailing to the Fund, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121,
a completed account application, specifying that you are investing in the Fund,
and a check payable to the Fund. 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 specifying that you are
investing in the Fund. Subsequent investments in the Fund's shares in any amount
may be made by check, by wiring Federal funds or by an electronic funds transfer
("EFT").
Orders for the purchase of shares of the Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Principal Underwriter (generally as
of the close of the Exchange on that day) plus, in the case of Class A shares,
the applicable sales charge. Orders received by broker-dealers or other
applicable firms prior to the close of the Exchange and received by the
Principal Underwriter prior to its close of its business day will be confirmed
at the offering price effective as of the close of trading on the Exchange on
that day. Orders for shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined (generally
the next business day's offering price) plus, in the case of Class A shares, the
applicable sales charge.
Your initial purchase must be at least $1,000. There is no minimum amount
for subsequent purchases.
The Fund reserves the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly.
Shares become entitled to income distributions declared on the first
business day following receipt by KIRC of payment for the shares. It is the
investor's responsibility to see that his or her broker-dealer promptly forwards
payment to the Principal Underwriter for shares being purchased through a
broker-dealer.
The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free
1-800-343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Generally, the Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class
A shares are not subject to a 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 deferred sales charge upon redemption during the 48 month period following
the month of purchase. Class B shares purchased prior to June 1, 1995 are
subject to a deferred sales charge upon redemption during the four calendar
years following purchase. Class B shares purchased on or after June 1, 1995 that
have been outstanding for eight years following the month of purchase will
automatically convert to Class A shares without imposition of a front-end sales
charge or exchange fee. Class B shares purchased prior to June 1, 1995 will
retain their existing exchange rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its Distribution Plan, pays an annual
service fee of 0.25% of the Fund's average daily net assets attributable to that
class. In addition to the 0.25% service fee, the Class B and C Distribution
Plans provide for the payment of an annual distribution fee of up to 0.75% of
the average daily net assets attributable to their respective classes. As a
result, income distributions paid by the Fund with respect to Class B and Class
C shares will generally be less than those paid with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time
of investment, rather than spreading the cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the intended length of investment.
The Fund will not normally accept any purchase of Class B shares in the
amount of $250,000 or more and will not normally accept any purchase of Class C
shares in the amount of $1,000,000 or more.
---------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge
as follows:
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------------------------------------
Less than $100,000 .................. 3.00% 3.09% 3.00%
$100,000 but less than $250,000 ..... 2.50% 2.56% 2.50%
$250,000 but less than $500,000 ..... 1.50% 1.52% 1.50%
$500,000 but less than $1,000,000 ... 1.00% 1.01% 1.00%
- ---------------
*Rounded to the nearest one-hundredth percent.
---------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan will be at net
asset value without the imposition of a front-end sales charge (each such
purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay
broker/dealers or others concessions based on (1) the investor's cumulative
purchases during the one-year period beginning with the date of the initial NAV
Purchase and (2) the investor's cumulative purchases during each subsequent
one-year period beginning with the first NAV Purchase following the end of the
prior period. For such purchases, concessions will be paid at the following
rate: 0.50% of the investment amount up to $4,999,999, plus 0.25% of the
investment amount over $4,999,999.
Class A shares acquired on or after April 10, 1995 in an NAV Purchase are
subject to a contingent deferred sales charge of 0.50% upon redemption during
the 24 month period commencing on the date the shares were originally purchased.
Certain Class A shares purchased without a front-end sales charge prior to April
10, 1995 are subject to a contingent deferred sales charge of 0.25% upon
redemption during the one year period commencing on the date such shares were
originally purchased.
The sales charge is paid to the Principal Underwriter, which in turn
normally reallows a portion to your broker-dealer. In addition, your
broker-dealer currently will be paid periodic service fees at an annual rate of
up to 0.25% of the average daily net asset value of Class A shares maintained by
such recipient outstanding on the books of the Fund for specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A
shares which are included in a broker dealer managed fee based program (a wrap
account) with broker/ dealers who have entered into special agreements with the
Principal Underwriter. Initial sales charges may be reduced or eliminated for
persons or organizations purchasing Class A shares of the Fund alone or in
combination with Class A shares of other Keystone America Funds. See Exhibit A
to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after a change in the registered representative's employment, where the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front end sales charge, or (2)
was at some time subject to, but did not actually pay, a contingent deferred
sales charge with respect to the redemption proceeds.
In addition, since January 1, 1995 and through June 30, 1995 and upon prior
notification to the Principal Underwriter, Class A shares may be purchased at
net asset value by clients of registered representatives within six months after
the redemption of shares of any registered open-end investment company not
distributed or managed by Keystone or its affiliates, where the amount invested
represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front end sales
charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures, which are
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, to pay expenses associated with the distribution of Class A
shares. Payments under the Class A Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
as service fees currently at an annual rate of up to 0.25% of the average daily
net asset value of Class A shares maintained by the recipients outstanding on
the books of the Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, imposes a deferred sales charge in accordance
with the following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period following month of purchase ................ 3.00%
Second twelve month period following month of purchase ............... 3.00%
Third twelve month period following month of purchase ................ 2.00%
Fourth twelve month period following month of purchase ............... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and the first calendar year after
the year of purchase; 2.00% on shares redeemed during the second calendar year
after the year of purchase; and 1.00% on shares redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver of Sales
Charges" below.
Class B shares purchased on or after June 1, 1995 that have been
outstanding for eight years following the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of a front-end sales charge or exchange fee.
(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 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 2.75% 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.
With respect to the Fund's Class B shares only, for the period June 1, 1995
to August 31, 1995, the Principal Underwriter will reallow an increased
commission equal to 3.50% of the price paid for each Class B share sold to those
broker/dealers or others who allow their individual selling representatives to
participate in the additional 0.75% commission.
CLASS C SHARES
Class C shares are offered only through dealers who have entered into
special distribution agreements with the Principal Underwriter. Class C shares
are offered at net asset value without an initial sales charge. With certain
exceptions, the Fund may impose a deferred sales charge of 1.00% on shares
redeemed within one year after the date of purchase. No deferred sales charge is
imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is
deducted from the redemption proceeds otherwise payable to you. The deferred
sales charge is retained by the Principal Underwriter. See "Contingent Deferred
Sales Charge and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares to
pay expenses of the distribution of Class C shares. Payments under the Class C
Distribution 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 at an annual rate of 0.25%, respectively, of the average daily net asset
value of each Class C share maintained by such recipients outstanding on the
books of the Fund for specified periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class
A, Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of purchase
of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
year 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 48
months after the month of purchase, as the case may be; or (5) Class C shares
held for more than one year from date of purchase. Upon request for redemption,
shares not subject to the 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 Fund also may sell Class A, Class B or Class C shares at net asset
value without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates; to registered representatives of firms with dealer
agreements with the Principal Underwriter; and to a bank or trust company acting
as a trustee for a single account.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, the Principal Underwriter may provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of Fund shares. In addition, from time to time, dealers may receive
additional cash payments. The Principal Underwriter may provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency such as the NASD.
The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to dealers that satisfy certain criteria
established from time to time by the Principal Underwriter. These conditions
relate to increasing sales of shares of 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 dealers.
The Principal Underwriter may also pay banks or other financial service
firms that facilitate transactions in shares of the Fund for their clients a
transaction fee (up to the level of payments allowed by dealers for sale of
shares as described above). The Glass-Steagall Act currently limits the ability
of a depository institution (such as a commercial bank or a savings and loan
association) to become an underwriter or distributor of securities. In the event
the Glass-Steagall Act is deemed to prohibit depository institutions from
accepting payments under the arrangement described above, or should Congress
relax current restrictions on depository institutions, the Board of Trustees
will consider what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As described above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD currently limits the amount that a Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits such annual expenditures to 1% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay 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 contingent deferred
sales charges paid by shareholders to the Principal Underwriter) remaining
unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Distribution Plan. If a Distribution Plan is
terminated, the Principal Underwriter will ask the Independent Trustees to take
whatever action they deem appropriate under the circumstances with respect to
payment of such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to 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.
For the year ended September 30, 1994, the Fund paid the Principal
Underwriter $1,188,065 and $31,570 pursuant to the Fund's Class B and Class C
Distribution Plans, respectively.
Under NASD rules, the maximum uncollected amounts for which the Principal
Underwriter may seek payment from the Fund under its Distribution Plans are, as
of September 30, 1994, $8,559,284 (8.94% of Class B net assets at September 30,
1994) and $299,681 (10.43% of Class C net assets at September 30, 1994) for
Class B and Class C shares, respectively.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem shares for cash at their net asset value upon written order
by you to the Fund, c/o KIRC, and presentation to the Fund of a properly
endorsed share certificate if certificates have been issued. Your signature(s)
on the written order and certificates must be guaranteed as described below. In
order to redeem by telephone you must have completed the authorization in your
account application.
The redemption value is the net asset value adjusted for fractions of a
cent and may be more or less than your cost depending upon changes in the value
of the Fund's portfolio securities between purchase and redemption. The Fund may
impose a deferred sales charge at the time of redemption of certain shares as
explained in "Alternative Sales Options."
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case, the Fund will mail the
redemption proceeds upon clearance of the purchase check, which may take up to
15 days or more. Any delay may be avoided by purchasing shares either with a
certified check or by Federal Reserve or bank wire of funds or by EFT. Although
the mailing of a redemption check or the wiring or EFT of redemption proceeds
may be delayed, the redemption value will be determined and the redemption
processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after the redemption and prior to the release of
the proceeds, no appreciation or depreciation will occur in the value of the
redeemed shares, and no interest will be paid on the redemption proceeds. If the
payment of a redemption has been delayed, the check will be mailed or the
proceeds wired or sent EFT promptly after good payment has been collected.
The Fund computes the redemption value at the close of the Exchange at the
end of the day on which it has received all proper documentation from you.
Payment of the amount due on redemption, less any applicable contingent deferred
sales charge (as described above), will be made within seven days thereafter
except as discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase the Fund's
shares upon orders from dealers at the redemption value described above computed
on the day the Principal Underwriter receives the order. If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds to the broker-dealer placing the order within seven days thereafter.
The Principal Underwriter charges no fees for this service. Your broker- dealer,
however, may do so.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC may waive
this requirement, but may also require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less where the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption or repurchase order, but you have not
clearly indicated the amount of money or number of shares involved, the Fund
cannot execute the order. In such cases, the Fund will request the missing
information from you and process the order on the day such information is
received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your
account by telephone by calling toll free 1-800-343- 2898. You must complete the
pertinent section of the application to enjoy telephone redemption privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by
check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to
your previously designated bank account as you direct. If you do not specify how
you wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in your account if its value has fallen to less than
$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 the account to the minimum investment
level. No contingent deferred sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property. The Fund has obligated itself, however, under the
1940 Act to redeem for cash all shares presented for redemption by any one
shareholder in any 90 day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
GENERAL
The Fund reserves the right, at any time, to terminate, suspend or change
the terms of any redemption method described in this prospectus, except
redemption by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1)
the Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or
by calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price, total return
and yield quotations as well as the ability to do account transactions,
including investments and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange
shares of the Fund for shares of certain other Keystone America Funds and
Keystone Liquid Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone
America Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of
other Keystone America Funds and for the same type of Class B shares of
KLT; and
Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares acquired in an NAV purchase or otherwise without a front
end sales charge, or
(2) Class B shares that have been held for less than 48 months after the
month of purchase or four years, as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone Fund for a $10 fee by calling
or by 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. The Fund reserves the right to terminate this exchange
offer or to change its terms, including the right to change the service charge
for any exchange.
Orders to exchange a certain class of shares of the Fund for the
corresponding class of shares of KLT will be executed by redeeming the shares of
the Fund and purchasing the corresponding class of shares of KLT at the net
asset value of KLT shares determined after the proceeds from such redemption
become available, which may be up to seven days after such redemption. In all
other cases, orders for exchanges received by the Fund prior to 4:00 p.m. on any
day the funds are open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
CHECKWRITING
If requested, the Fund will establish a checking account for each class of
shares held by you with State Street Bank and Trust Company (the "Bank"). Checks
may be drawn for $500 or more payable to anyone. When a check is presented to
the Bank for payment, it will cause the Fund to redeem at the net asset value
next determined a sufficient number of your shares to cover the check. You
receive the daily dividends declared on the shares redeemed to cover your check
through the day the Bank instructs the Fund to redeem them. There is currently
no charge to you for this checking account. A redemption by check constitutes a
sale for federal tax purposes and may result in a taxable event for the
shareholder.
Amounts redeemed by check will be subject to the contingent deferred sales
charge if applicable.
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 the Fund's shares in any amount and to redeem up to $50,000
worth of the Fund's shares. You can use Keystone America Money Line like an
"electronic check" to move money between your bank account and your account in
the Fund with one telephone call. You must allow two business days after the
call for the transfer to take place. For money recently invested, you must allow
normal check clearing time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in
your account. Once proper authorization is given, your bank account will be
debited to purchase shares in the Fund. You will receive confirmation from the
Principal Underwriter for every transaction.
To change the amount of or terminate a Keystone America Money Line service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, and include your account number.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account for the Fund's shares
has a value of at least $10,000, you may arrange for regular monthly or
quarterly fixed withdrawal payments. Each payment must be at least $100 and may
be as much as 1.5% per month or 4.5% per quarter of the total net asset value of
the Fund shares in your account when the Automatic Withdrawal Plan is opened.
Excessive withdrawals may decrease or deplete the value of your account.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more shares
being purchased when the net asset value of the selected class is relatively low
and fewer shares being purchased when the fund's net asset value is relatively
high, which may cause a lower average cost per share than a less systematic
investment approach.
Prior to participating in dollar cost averaging, you must have established
an account in a Keystone America Fund or a money market fund managed or advised
by Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent. See Exhibit A -- "Reduced Sales Charges" at
the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class
of Keystone America Fund shares you may own automatically invested to purchase
the same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent. See Exhibit A --
"Reduced Sales Charges" at the back of the prospectus.
RETIREMENT PLANS
The Fund has various pension and profit sharing plans available to
investors, including Individual Retirement Accounts ("IRAs"); Rollover IRAs;
Simplified Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans
("TSAs"); 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; Pension and
Target Benefit Plans; Money Purchase Pension Plans; and Salary- Reduction Plans.
For details, including fees and application forms, call toll free 1-800-247-
4075 or write to KIRC.
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 per share.
PERFORMANCE DATA
From time to time, the Fund may advertise "total return" and "current
yield." ALL DATA IS BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE. Total return and yield are computed separately for
each class of shares of the Fund. Total return refers to average annual
compounded rates of return over specified periods determined by comparing the
initial amount invested in a particular class to the ending redeemable value of
that amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares when advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc. or other industry publications.
FUND SHARES
Generally, the Fund currently has authorized three classes of shares, which
participate in dividends and distributions and have equal voting, liquidation
and other rights except that (1) expenses related to the distribution of each
class of shares or other expenses that the Board of Trustees may designate as
class expenses from time to time, are borne solely by each class; (2) each class
of shares has exclusive voting rights with respect to its Distribution Plan; (3)
each class has different exchange privileges; and (4) each class generally has a
different designation. When issued and paid for, the shares will be fully paid
and nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are redeemable, transferable and freely assignable
as collateral. There are no sinking fund provisions. The Fund is authorized to
issue additional series or classes of shares.
Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares. Shares of the Fund vote together except
when required by law to vote separately by 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. As prescribed by Section 16(c) of
the 1940 Act, the Fund is prepared to assist shareholders in communications with
one another for the purpose of convening such a meeting.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by Keystone
to be creditworthy. Such persons must be registered as U.S. government
securities dealers with an appropriate regulatory organization. Under such
agreements, the bank, primary dealer or other financial institution agrees to
repurchase the security at a mutually agreed upon date and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. Under a
repurchase agreement, the seller must maintain the value of the securities
subject to the agreement at not less than the repurchase price, such value will
be determined on a daily basis by marking the underlying securities to their
market value. Although the securities subject to the repurchase agreement might
bear maturities exceeding a year, the Fund only intends to enter into repurchase
agreements that provide for settlement within a year and usually within seven
days. Securities subject to repurchase agreements will be held by the Fund's
custodian or in the Federal Reserve book entry system. The Fund does not bear
the risk of a decline in the value of the underlying security unless the seller
defaults under its repurchase obligation. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses including (1)
possible declines in the value of the underlying securities during the period
while the Fund seeks to enforce its rights thereto; (2) possible subnormal
levels of income and lack of access to income during this period; and (3)
expenses of enforcing its rights. The Board of Trustees of the Fund has
established procedures to evaluate the creditworthiness of each party with whom
the Fund enters into repurchase agreements by setting guidelines and standards
of review for Keystone and monitoring Keystone's actions with regard to
repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having to
sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement, it
will establish a segregated account with the Fund's custodian containing liquid
assets 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 that the Fund is obligated to repurchase may decline below the
repurchase price. Borrowing and reverse repurchase agreements magnify the
potential for gain or loss on the portfolio securities of the Fund and,
therefore, increase the possibility of fluctuation in the Fund's net asset
value. Such practices may constitute leveraging. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund's obligation to repurchase the
securities and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such determination. The staff of
the Securities and Exchange Commission has taken the position that reverse
repurchase agreements are subject to the percentage limit on borrowings imposed
on a fund under the 1940 Act.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities on a when issued or delayed
delivery basis. When issued and delayed delivery transactions arise when
securities or rights to interest on securities are purchased or sold by the Fund
with payment and delivery taking place in the future. This practice is intended
to secure what is considered to be an advantageous price and yield to the Fund
at the time of entering into the transaction. When the Fund engages in when
issued or delayed delivery transactions, the Fund relies on the buyer or seller,
as the case may be, to consummate the sale. Failure to do so may result in the
Fund missing the opportunity to obtain a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. No payment or delivery is made by
the Fund, however, until it receives payment or delivery from the other party to
the transaction. The Securities and Exchange Commission has established certain
requirements to assure that a Fund is able to meet its obligations under these
contracts. For example, a separate account of liquid assets equal to the value
of such purchase commitments may be maintained until payment is made. When
issued or 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 Fund does not accrue any income on such
securities prior to their delivery. To the extent the Fund engages in when
issued or delayed delivery transactions, it will do so for the purpose of
acquiring portfolio securities or rights to interest on securities consistent
with its investment objective and policies and not for the purpose of investment
leverage. The Fund does not currently intend to invest more than 5% of its
assets in when issued or delayed delivery transactions.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers 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 Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made, however, to borrowers deemed to be of good standing, under
standards approved by the Board of Trustees, when the income to be earned from
the loan justifies the attendant risks.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Code; a pension, profit-sharing or other employee benefit plan whether or
not qualified under Section 401 of the 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., 2.50% 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 of Fund shares, the sales charge for the $5,000 purchase would
be at the next lower sales charge of 2.50% 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 speci- fied in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary), 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by KIRC. Any redemptions made by the Purchaser during the
thirteen- month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and
appoints KIRC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC
that a Letter of Intent is in effect each time a purchase is made.
<PAGE>
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KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
- ------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
CP&I-P 6/95 [Recycle Logo]
6-35M
--------------------------------------------
KEYSTONE
PHOTO:
STARS &
STRIPES
CAPITAL
PRESERVATION AND
INCOME
FUND
--------------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 27, 1995
AS SUPPLEMENTED
FEBRUARY 14, 1995 AND JUNE 1, 1995
This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone Capital
Preservation and Income Fund (formerly named Keystone America Capital
Preservation and Income Fund and formerly Keystone America Capital Preservation
and Income Fund - II) (the "Fund") dated January 27, 1995, as supplemented
February 14, 1995 and June 1, 1995. A copy of the prospectus may be obtained
from Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
TABLE OF CONTENTS
Page
The Fund 2
Investment Objective and Policies 2
Investment Restrictions 3
Distributions and Taxes 6
Valuation of Securities 7
Sales Charges 8
Distribution Plans 12
Investment Adviser 15
Trustees and Officers 18
Principal Underwriter 21
Brokerage 23
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-12
<PAGE>
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THE FUND
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The Fund is an open-end diversified management investment company commonly
known as a mutual fund. The Fund was formed as Massachusetts business trust on
December 19, 1990. The Fund is one of thirty funds managed or advised by
Keystone Investment Management Company (formerly named Keystone Custodian Funds,
Inc.) ("Keystone"), the Fund's investment adviser.
On December 30, 1994, the Fund acquired substantially all of the assets of
Keystone America Capital Preservation and Income Fund in exchange for Class A
shares of the Fund. Immediately following the reorganization, the Fund changed
its name from Keystone America Capital Preservation and Income Fund - II to
Keystone America Capital Preservation and Income Fund.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund.
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INVESTMENT OBJECTIVE AND POLICIES
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The following information supplements that in the prospectus:
MORTGAGE SECURITIES
The Government National Mortgage Association ("GNMA") creates mortgage
securities ("Mortgage Securities") from pools of government-guaranteed or
insured Federal Housing Authority ("FHA") or Veterans Administration ("VA")
mortgages originated by mortgage bankers, commercial banks, and savings and loan
associations. The Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") issue Mortgage Securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations, savings
banks, commercial banks, credit unions, and mortgage bankers.
ADDITIONAL CHARACTERISTICS OF THE FUND'S MORTGAGE SECURITIES INVESTMENTS
ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable rate Mortgage Securities ("ARMs") are pass-through Mortgage
Securities collateralized by mortgages with adjustable rather than fixed
interest rates. The ARMs in which the Fund invests are issued primarily by GNMA,
FNMA and FHLMC and are actively traded in the secondary market. The underlying
mortgages that collateralize ARMs issued by GNMA are fully guaranteed by the FHA
or the VA, while those collateralizing ARMs issued by FHLMC or FNMA are
typically conventional residential mortgages conforming to standard underwriting
size and maturity constraints.
RESET CHARACTERISTICS OF THE FUND'S LOAN POOLS AND MORTGAGE SECURITIES
The interest rates paid on the loan pool securities, ARMs and
collateralized mortgage obligations ("CMOs") in which the Fund invests are
generally readjusted at intervals of three years or less to an increment over
some predetermined interest rate index. There are various categories of indices,
including (1) those based on United States ("U.S.") Treasury securities; (2)
those derived from a calculated measure, such as a cost of funds index; or (3) a
moving average of mortgage rates. Commonly utilized indices include the
one-year, three-year and five-year constant maturity Treasury rates; the
three-month Treasury Bill rate; the 180-day Treasury Bill rate; rates on
longer-term Treasury securities; the 11th District Federal Home Loan Bank Cost
of Funds; the National Median Cost of Funds; the one-month, three-month,
six-month or one year London Interbank Offered Rate ("LIBOR"); the prime rate of
a specific bank; or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Home Loan Bank Cost of Funds Index,
tend to lag behind changes in market rate levels and tend to be somewhat less
volatile.
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INVESTMENT RESTRICTIONS
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The following investment restrictions of the Fund are fundamental and may
not be changed without the vote of a majority of the Fund'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). Unless otherwise stated, all references to
the assets of the Fund are in terms of current market value. The Fund shall not
do any of the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer; this limitation
does not apply to investments in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
(2) 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;
(3) 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);
(4) borrow money or enter into reverse repurchase agreements, except that
the Fund may enter into reverse repurchase agreements or borrow money from banks
for temporary or emergency purposes in aggregate amounts up to one-third of the
value of the Fund's net assets; provided that, while borrowings from banks (not
including reverse repurchase agreements) exceed 5% of the Fund's net assets, any
such excess borrowings will be repaid before additional investments are made;
(5) make loans, except that the Fund may purchase or hold debt securities
consistent with its investment objective, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers, and enter into
repurchase agreements;
(6) 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;
(7) 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;
(8) 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;
(9) purchase securities of other investment companies, except as part of a
merger, consolidation, purchase of assets or similar transaction;
(10) purchase or sell commodities or commodity contracts or real estate,
except that it may purchase and sell securities secured by real estate and
securities of companies which invest in real estate, and may engage in financial
futures contracts and related options transactions; and
(11) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including at this time (1) treating as illiquid, securities that may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment on its
books and (2) limiting its holdings of such securities to 15% of its net assets.
Additional restrictions adopted for the Fund, which may be changed by the
Board of Trustees, provide that the Fund may not purchase or retain securities
of an issuer if, to the knowledge of the Fund, officers, Trustees or Directors
of the Fund or Keystone each owning beneficially more than 1/2 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
have a substantial beneficial interest in the securities of such issuer.
Portfolio securities of the Fund may not be purchased from or sold to Keystone
or any affiliate thereof or any of their Directors, officers or employees.
Portfolio securities of the Fund may be loaned if collateral values are
continuously maintained at not less than 100% by "marking to market" daily.
The Fund is also subject to various investment restrictions imposed by
certain states securities authorities. These restrictions are not fundamental
and do not require a shareholders' vote to be changed.
Specifically, so long as the respective state authority requires and shares
of the Fund are registered for sale in that state, the Fund
(1) (a) will not invest in interests in oil, gas or other mineral
exploration or development programs, except publicly traded securities of
companies engaging in such activities; and (b) will not purchase puts, calls,
straddles, spreads or combinations thereof, if by reason thereof the value of
its aggregate investments in such securities will exceed 5% of its total assets,
except that it may purchase "stand-by commitments" and master demand notes;
(2) (b) will limit its purchase of warrants to 5% of net assets, of which
2% may be warrants not listed on the New York Stock Exchange (the "Exchange");
(b) will not invest in oil, gas or other mineral leases;
(3) will not write, buy or sell stock index futures, financial futures
contracts or options thereon unless (a) the option is written by other persons;
(b) the options on futures are offered through the facilities of a national
securities association approved by the state or are listed on a national
securities or commodities exchange; (c) the aggregate premiums paid on all
options held at any time do not exceed 20% of the Fund's net assets; and (d) the
aggregate margin deposits required on all futures and options thereon at any
time do not exceed 5% of the Fund's total assets; and
(4) will not invest in real estate limited partnerships.
In order to permit the sale of the Fund'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 its best interests, it will revoke the commitment by terminating sales of its
shares in the state involved.
If a percentage limit is satisfied at the time of investment or borrowing,
a later increase or decrease resulting from a change in asset value is not a
violation of the limit.
Although not a fundamental restriction or policy requiring a shareholder's
vote to change, the Fund has agreed that so long as the state authority requires
and shares of the Fund are registered for sale in that state, the Fund will
maintain 300% asset coverage on any leverage or bank borrowings.
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DISTRIBUTIONS AND TAXES
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The Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare all net
realized long-term capital gains annually. Fund distributions are made in the
form of additional shares of that class of shares upon which the distribution is
based or, at the option of the shareholder, in cash. All shareholders may
receive dividends in shares without being subject to a deferred sales charge
when such shares are redeemed. Shareholders who have not opted prior to the
record date for any distribution to receive cash will have the number of such
shares determined on the basis of the Fund's net asset value per share computed
at the end of the day on the record date after adjustment for the distribution.
Net asset value is used in computing the number of shares in both gains and
income distribution reinvestments. Account statements and/or checks as
appropriate will be mailed to shareholders within seven days after the Fund pays
the distribution. Unless the Fund receives instructions to the contrary before
the record date, it will assume that the shareholder wishes to receive that
distribution and all future gains and income distributions in shares.
Instructions continue in effect until changed in writing.
It is not expected that the Fund's income dividends will be eligible for
the corporate dividends received deduction. Distributed long term capital gains
are taxable as such to the shareholder whether received in cash or in additional
Fund shares and regardless of the period of time Fund shares have been held by
the shareholder. However, if such shares are held less than six months and
redeemed at a loss, the shareholder will recognize a long term capital loss on
such shares to the extent of the capital gains distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment,
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income taxation
and such dividends and distributions may also be subject to state and local
taxes.
When the Fund makes a distribution it intends to distribute only the Fund's
net capital gains and such income as has been predetermined to the best of the
Fund's ability to be taxable as ordinary income. Therefore, net investment
income distributions will not be made on the basis of distributable income as
computed on the books of the Fund, but will be made on a federal income tax
basis. Shareholders of the Fund will be advised annually of the federal income
tax status of distributions.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined in the
following manner:
1. securities for which market quotations are readily available are valued
at market value, which is deemed to be the mean of the bid and asked prices at
the time of valuation;
2. (a) short-term investments having maturities of sixty days or less when
purchased 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;
(b) 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 Fund's Board of Trustees;
3. short-term investments having maturities of more than sixty days, for
which market quotations are readily available, are valued at current market
value; and
4. 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 market quotations are not readily
available; and (b) other assets.
The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing Mortgage Securities. As a result, depending on
the particular Mortgage Securities owned by the Fund, it is likely that most of
the valuations for such obligations will be based upon their fair value
determined under procedures approved by the Board of Trustees. The Board of
Trustees has authorized the use of a pricing service to determine the fair value
of the Fund's Mortgage Securities and certain other securities. Securities for
which market quotations are readily available are valued on a consistent basis
at that price quoted that, in the opinion of the Board of Trustees or the person
designated by the Board of Trustees to make the determination, most nearly
represents the market value of the particular security. Any securities for which
market quotations are not readily available or other assets are valued on a
consistent basis at fair value as determined in good faith using methods
prescribed by the Board of Trustees.
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SALES CHARGES
- --------------------------------------------------------------------------------
GENERAL
Generally, the Fund currently offers three classes of shares: Class A, B
and C shares. The Fund began publicly offering its Class A shares on January 3,
1995. Class A shares are offered with a maximum front end sales charge of 3.00%
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 48 month period following the month of
purchase. Class B shares purchased prior to June 1, 1995 are sold without an
initial sales charge and are subject to a contingent deferred sales charge
payable upon redemption within three calendar years after the year of purchase
("Back End Load Option"). Class B shares purchased on or after June 1, 1995 that
have been outstanding for eight years following the month of purchase will
automatically convert to Class A shares without imposition of a front-end sales
charge. Class B shares purchased prior to June 1, 1995 may be exchanged for
Class A shares as described in the prospectus. (Conversion of Class B shares
represented by stock certificates will require the return of stock certificates
to Keystone Investor Resource Center, Inc., the Fund's transfer and dividend
disbursing agent ("KIRC").) Class C shares are sold without an initial sales
charge and are subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Fund 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 also "Distribution Plans"), a contingent deferred sales charge
is imposed at the time of redemption of certain Fund shares as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after April
10, 1995 (1) in an amount equal to or exceeding $1,000,000 and/or (2) by a
corporate qualified retirement plan or a non-qualified deferred compensation
plan sponsored by a corporation having 100 or more eligible employees (a
"Qualifying Plan"), in either case without a front-end sales charge, will be
subject to a contingent deferred sales charge of 0.50% during the 24 month
period following the date of purchase. Certain Class A shares purchased without
a front-end sales charge prior to April 10, 1995 may be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one-year period
commencing on the date such shares were originally purchased. The contingent
deferred sales charge will be retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of the lesser of net asset value or net cost of such Class B shares
redeemed during succeeding twelve-month periods following the month of purchase
as follows: 3% during the first period; 3% during the second period; 2% during
the third period; and 1% during the fourth 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, will impose a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and the first calendar year after
the year of purchase; 2.00% on shares redeemed during the second calendar year
after the year of purchase; and 1.00% on shares redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS C SHARES
With certain exceptions, the Fund may impose a deferred sales charge of 1%
on shares redeemed within one year after the date of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of Class
A, Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held during more than four consecutive calendar years or more than 48 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 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 or a contingent deferred sales charge to
officers, Directors, Trustees, full-time employees and sales representatives of
the Fund, Keystone Management, Inc. ("Keystone Management"), Keystone, Keystone
Investments, Inc. (formerly named Keystone Group, Inc.) ("Keystone
Investments"), Harbor Capital Management Company, Inc., their subsidiaries and
the Principal Underwriter, who have been such for not less than ninety days and
to the pension and profit-sharing plans established by such companies, their
subsidiaries and affiliates, for the benefit of their officers, Directors,
Trustees, full-time employees and sales representatives, to registered
representatives of firms which have dealer agreements with the Principal
Underwriter, provided all such sales are made upon the written assurance of the
purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
In addition, a sales charge is not imposed on a purchase of Fund shares by
a bank or trust company in a single account in the name of such bank or trust
company as trustee if the initial investment in shares of the Fund and/or any
other Keystone Group Fund is at least $500,000 in the aggregate and any
commission paid at the time of such purchase is not more than 1% of the amount
invested. Moreover, no deferred sales charge is imposed on redemptions of such
shares.
No contingent deferred sales charge is imposed on redemptions of shares of
the Fund held by a bank or trust company in a single account in the name of such
bank or trust company as trustee, if the initial investment in shares of the
Fund and/or any fund in the Keystone Investments Family of Funds is at least
$500,000 in the aggregate, and no commission has been paid.
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 qualified plans if the shareholder is at least 59-1/2
years old; (4) involuntary redemptions of accounts with a net asset value of
less than $1,000; (5) automatic withdrawals under a 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.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act") permits
investment companies such as the Fund to use their assets to bear expenses of
distributing their shares if they comply with various conditions, including
adoption of a distribution plan containing certain provisions set forth in Rule
12b-1. The Fund bears some of the costs of selling its classes of shares under
individual Distribution Plans adopted pursuant to Rule 12b-1 for each class of
shares (referred to herein as the "Distribution Plans" or "Plans").
The National Association of Securities Dealers, Inc. ("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. NASD rules also limit the aggregate amount that the Fund may pay
for such distribution costs to 6.25% of gross share sales since the inception of
the 12b-1 Plan, plus interest at the prime rate plus 1% on such amounts (less
any contingent deferred sales charges paid by shareholders to the Principal
Underwriter).
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts currently at the rate of 0.25% of the Fund's average daily net asset
value attributable to Class A shares to finance any activity that is primarily
intended to result in the sale of Class A shares, including, without limitation,
expenditures consisting of payments to a principal underwriter of the Fund
(currently the Principal Underwriter) to enable the Principal Underwriter to pay
or to have paid to others who sell Class A shares a service or other fee, at
such intervals as the Principal Underwriter any determine, in respect of Class A
shares maintained by such recipients outstanding on the books of the Fund for
specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are currently
used to pay others, such as dealers, service fees at an annual rate of up to
0.25% of the average net asset value of Class A shares maintained by such
recipients outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans for its Class B shares that provide
that the Fund may expend daily amounts at an annual rate of up to 1.00% of the
Fund's average daily net asset value attributable to Class B shares to finance
any activity that is primarily intended to result in the sale of Class B shares,
including, without limitation, expenditures consisting of payments to the
principal underwriter of the Fund (currently the Principal Underwriter) (1) to
enable the Principal Underwriter to pay to others (dealers) commissions in
respect of Class B shares sold since inception of the Distribution Plan; and (2)
to enable the Principal Underwriter to pay or to have paid to others a service
fee, at such intervals as the Principal Underwriter may determine, in respect of
Class B shares maintained by any such recipients outstanding on the books of the
Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 2.75% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods.
The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with each 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 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. See also "Distribution Plans - General."
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Fund may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
may expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class C shares to finance any activity
that is primarily intended to result in the sale of Class C shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter of the Fund (currently the Principal Underwriter) (1) to enable the
Principal Underwriter to pay to others (dealers) commissions in respect of Class
C shares sold since inception of the Distribution Plan; and (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipients outstanding on the books of the Fund
for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class of the Fund. Any change in a Distribution Plan that
would materially increase the distribution expenses of the Fund provided for in
a Distribution Plan requires shareholder approval. Otherwise, a Distribution
Plan may be amended by the Trustees, including the Independent Trustees.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by the
Trustees, including the Rule 12b-1 Trustees.
While a Distribution Plan is in effect, the Fund will be required to commit
the selection and nomination of candidates for Independent Trustees to the
discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limit specified above, and the amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by the Distribution Plan
as stated above.
The Independent Trustees of the Fund have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plans are expected
to benefit the Fund.
For the year ended September 30, 1994, the Fund paid the Principal
Underwriter $1,188,065 and $31,570 pursuant to the Fund's Class B and C
Distribution Plans, respectively.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone serves as investment adviser to the Fund and is responsible for the
overall management of the Fund's business and affairs.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Keystone Investments is a corporation predominantly owned by current and
former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey, and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Investments Family of
Funds.
Pursuant to an Investment Advisory and Management Agreement between the
Fund and Keystone (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 ("SEC" or "Commission") or
under state or other securities laws; expenses of preparing, printing and
mailing prospectuses, statements of additional information, notices, reports and
proxy materials to shareholders of the Fund; expenses of shareholders' and
Trustees' meetings; charges and expenses of legal counsel for the Fund and for
the Trustees of the Fund on matters relating to the Fund; charges and expenses
of filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services to the Fund at the annual
rate set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- -----------------------------------------------------------------
2% of Gross Dividend and
Interest Income plus
0.50% of the first $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000
computed as of the close of business each business day and paid daily.
During the fiscal year ended September 30, 1992, the Fund paid or accrued
to Keystone investment management and administrative services fees of $888,247,
which represented 0.62% of the Fund's average net assets.
During the fiscal year ended September 30, 1993, the Fund paid or accrued
to Keystone investment management and administrative services fees of
$1,027,987, which represented 0.60% of the Fund's average net assets.
During the fiscal year ended September 30, 1994, the Fund paid or accrued
to Keystone investment management and administrative services fees of $735,254,
which represented 0.60% of the Fund's average net assets.
Until September 30, 1995, Keystone has voluntarily agreed to limit annual
expenses of each of the Fund's Class A, B and C shares to 0.90%, 1.50%, and
1.50%, respectively. Keystone, from time to time, will make determinations
whether to continue these limits and, if so, at what rates. Keystone will not be
required to reimburse the Fund for amounts in excess of an expense limit if such
reimbursement would result in the Fund's inability to qualify as a regulated
investment company under the provisions of the Internal Revenue Code of 1986, as
amended.
The Fund is subject to certain annual state expense limitations the most
restrictive of which is currently:
2.5% of the first $30 million of a Fund's average net assets; 2.0% of the
next $70 million of a Fund's average net assets; and 1.5% of a Fund's average
net assets over $100 million.
Capital charges and certain expenses, including a portion of the fees
arising under the Fund's Distribution Plans, are not included in the calculation
of the state expense limitation. This limitation may be modified or eliminated
in the future.
The Advisory Agreement continues in effect if approved at least annually by
the Board of Trustees of the Fund or by a vote of a majority of the outstanding
shares of the Fund 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 of the Fund. The Advisory Agreement will
terminate automatically upon its "assignment" as that term is defined in the
1940 Act.
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and officers of the Fund, their principal occupations and some of
their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments; President, Chief Executive Officer and
Trustee or Director of all 30 Funds in the Keystone Investments Family of
Funds; Director and Chairman of the Board, Chief Executive Officer and Vice
Chairman of Keystone; Chairman of the Board and Director of Keystone
Institutional Company, Inc. ("Keystone Institutional") (formerly named
Keystone Investment Management Corporation), and Keystone Fixed Income
Advisors ("KFIA"); Director, Chairman of the Board, Chief Executive Officer
and President of Keystone Management, Keystone Software Inc. ("Keystone
Software"); Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"), Keystone Asset Corporation, Keystone Capital
Corporation, and Keystone Trust Company; Director of the Principal
Underwriter, KIRC, and Fiduciary Investment Company, Inc. ("FICO");
Director and Vice President of Robert Van Partners, Inc.; Director of
Boston Children's Services Association; Trustee of Anatolia College,
Middlesex School, and Middlebury College; Member, Board of Governors, New
England Medical Center; and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member, Board
of Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation (investment
advice) and former Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of all
other Keystone Investments Funds; Director and Chairman of the Board of
Hartwell Keystone; Chairman of the Board and Trustee of Anatolia College;
Trustee of University Hospital (and Chairman of its Investment Committee);
former Chairman of the Board and Chief Executive Officer of Keystone
Investments; and former Chief Executive Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; and former Dean, School of Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Director of Phoenix Total Return Fund and Equifax, Inc.;
Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund and The
Phoenix Big Edge Series Fund; and former President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman of the Board, Director and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board
and Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former Director
and President, Associated Industries of Vermont; former Chairman and
President, Vermont Marble Company; former Director of Keystone; and former
Director and Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR International,
Inc. (executive recruitment); former Senior Vice President, Boyden
International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman, Environmental Warranty, Inc., and Consultant,
Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital,
Old State House Association and Enhanced Financial Services, Inc.; Member,
Georgetown College Board of Advisors; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Kingswood-Oxford School and Greater Hartford
YMCA; former Director, Executive Vice President and Vice Chairman of The
Travelers Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky &
Armentano, P.C.; President, Nassau County Bar Association; former Associate
Dean and Professor of Law, St. John's University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, Keystone Trust Company; Treasurer of KIMCO, Robert Van
Partners, Inc., and FICO; Treasurer and Director of Keystone Management,
Keystone Software, and Hartwell Keystone; Vice President and Treasurer of
KFIA; and Director of KIRC.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other Keystone Investments Funds; and President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer of
KIRC.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain
other Keystone Investments Funds; and Senior Vice President of Keystone.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone; Senior
Vice President, General Counsel, Secretary and Director of the Principal
Underwriter, Keystone Management and Keystone Software; Senior Vice
President and General Counsel of Keystone Institutional; Senior Vice
President, General Counsel and Director of FICO and KIRC; Senior Vice
President and Secretary of Hartwell Keystone; and Robert Van Partners,
Inc.; Vice President and Secretary of KFIA; Senior Vice President, General
Counsel and Secretary of Keystone Investments, Keystone Asset Corporation,
Keystone Capital Corporation and Keystone Trust Company.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended September 30, 1994, no Trustee affiliated with
Keystone or any officer received any direct remuneration 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 $585,946. On December 30, 1994, the Trustees and
officers of the Fund did not beneficially own any of the Fund's then outstanding
shares.
The address of all the Fund's Trustees and officers is 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to a Principal Underwriting Agreement between the Fund and the
Principal Underwriter (the "Underwriting Agreement"), the Principal Underwriter
acts as the Fund's principal underwriter. The Principal Underwriter, located at
200 Berkeley Street, Boston, Massachusetts, 02116-5034, is a wholly-owned
subsidiary of Keystone. The Principal Underwriter, as agent, has agreed to use
its best efforts to find purchasers for the shares. The Principal Underwriter
may retain and employ representatives to promote distribution of the shares and
may obtain orders from brokers, dealers and others, acting as principals, for
sales of shares to them. The Underwriting Agreement provides that the Principal
Underwriter will bear the expense of preparing, printing and distributing
advertising and sales literature and prospectuses used by it. In its capacity as
principal underwriter, the Principal Underwriter may receive payments from the
Fund pursuant to the Fund's Distribution Plan.
All subscriptions and sales of shares by the Principal Underwriter are at
the offering price of the shares in accordance with the provisions of the
Declaration of Trust, By-Laws, the current prospectus and statement of
additional information of the Fund. 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.
Under the Underwriting Agreement, the Fund has agreed to pay all expenses
in connection with registration of Fund shares with the Commission and auditing
and filing fees in connection with registration of such shares under the various
state "blue-sky" laws. The Principal Underwriter assumes the cost of sales
literature and preparation of prospectuses used by it and certain other
expenses.
From time to time, if, in the Principal Underwriter's judgment, it could
benefit the sales of Fund's 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 Fund's
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, which arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Principal Underwriter or any other person for
whose acts the Principal Underwriter is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the Fund.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved by a majority of Independent Trustees
of the Fund and a majority of the Fund's Rule 12b-1 Trustees at least annually
in accordance with the 1940 Act and rules and regulations thereunder.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or the Principal Underwriter or
terminated by a vote of a majority of outstanding shares of the Fund. The
Underwriting Agreement will terminate automatically upon its "assignment" as
that term is defined in the 1940 Act.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. 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 is considered to be in addition to
and not in lieu of services required to be performed by Keystone under the
Advisory Agreement. The cost, value and specific application of such information
are indeterminable and cannot be practically allocated among the Fund and other
clients of Keystone 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
Advisory Agreement, Keystone is permitted to pay higher brokerage commissions
for brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone does follow such a
practice, it will do so on a basis which is fair and equitable to the Fund.
The Fund expects that purchases and sales of Mortgage Securities and
short-term instruments usually will be principal transactions. Mortgage
Securities and short-term instruments are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
will be no brokerage commissions paid by the Fund for such purchases. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for the
purchase directly from an issuer of certain securities for the Fund's portfolio
in order to take advantage of the lower purchase price available to members of
such a group.
Neither Keystone nor the Fund intends to place securities transactions with
any particular broker-dealer or group thereof. The Fund's Board of Trustees,
however, has determined that the Fund may 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 that is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the 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.
For the fiscal years ended September 30, 1994, 1993 and 1992, the Fund paid
no 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
1940 Act and rules and regulations issued thereunder.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated December 19, 1990. The Fund is similar in most respects to a
business corporation. The principal distinction between the Fund and a
corporation relates to the shareholder liability described below. A copy of the
Declaration of Trust (the "Declaration of Trust") has been filed as an exhibit
to the Fund's Registration Statement. 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. Each share represents an equal proportionate
interest with each other share of the series. 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
transferable, redeemable and fully assignable as collateral. There are no
sinking fund provisions. 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 Massachusetts courts, shareholders of
a Massachusetts business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. If the Fund were
held to be a partnership, the possibility of the shareholders incurring
financial loss for that reason appears remote because the Fund's Declaration of
Trust (1) contains an express disclaimer of shareholder liability for
obligations of the Fund; (2) requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund or
the Trustees; and (3) provides for indemnification out of Fund property for any
shareholder held personally liable for the obligations of the Fund.
<PAGE>
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold annual
meetings. Shares of the Fund are entitled to one vote per share on matters
subject to vote by the Fund, such as investment advisory agreements. Shares
generally vote together as one class on election of Trustees and selection of
accountants. Classes of shares of the Fund have equal voting rights except that
each of shares has exclusive voting rights with respect to its respective
Distribution Plan. No amendment may be made to the Declaration of Trust that
adversely affects any class of shares without the approval of a majority of the
shares of that class. Shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees to be elected at a meeting and, in such event,
the holders of the remaining 50% or less of the shares voting will not be able
to elect any Trustees.
After the initial meeting to elect Trustees no further meetings of
shareholders for the purpose of electing Trustees will be held unless required
by law or until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for
his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management and
disposition of all assets of the Fund and may perform such acts as in their sole
judgment and discretion are necessary and proper for conducting the business and
affairs of the Fund or promoting the interests of the Fund and the shareholders.
<PAGE>
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
The cumulative total return for Class B shares for the period July 1, 1991
(commencement of operations) through the fiscal year ended September 30, 1994
was 10.33% (including any applicable contingent deferred sales charge). The
cumulative total return for Class C shares for the period February 1, 1993
(commencement of operations) through the fiscal year ended September 30, 1994
was 3.78%.
The compounded average annual rates of return for Class B and Class C
shares for the fiscal year ended September 30, 1994 were (2.33)% (including any
applicable contingent deferred sales charge) and 0.48%, respectively. The
compounded average annual rates of return for Class B and Class C shares for the
respective periods beginning on commencement of class operations through
September 30, 1994 were 3.07% (including any applicable sales charge) and 2.25%,
respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any.
The Fund's current yields for Class B and Class C for the 30-day period
ended September 30, 1994 were 0.02% and (0.08)%, respectively.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
The Fund may also include comparative performance information in
advertising or marketing the Fund's yield or total return for any future period.
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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. State
Street 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, One Boston Place, Boston, Massachusetts 02108,
Certified Public Accountants, are the independent auditors for the Fund.
Keystone Investor Resource Center, Inc., 101 Main Street, Cambridge,
Massachusetts 02142, a wholly-owned subsidiary of Keystone, acts as transfer and
dividend disbursing agent for the Fund.
Except as otherwise stated in its prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in its prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
No dealer, salesman or other person is authorized to give any information
or to make any representation not contained in the Fund's prospectus, statement
of additional information or in supplemental sales literature issued by the Fund
or the Principal Underwriter, and no person is entitled to rely on any
information or representation not contained therein.
As of December 29, 1994, the Principal Underwriter owned of record 100% of
the Fund's outstanding Class A shares.
As of December 30, 1994, Merrill Lynch Pierce, Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr, E 3rd FL, Jacksonville, FL 32246-6484, owned of record
13.74% of the Fund's outstanding Class B shares.
As of December 30, 1994, Merrill Lynch Pierce, Fenner & Smith, Inc., Attn:
Book Entry, 4800 Deer Lake Dr., E 3rd FL, Jacksonville, FL 32246-6486, owned of
record 15.0% of the Fund's outstanding Class C shares; NFSC, FBO: Sonya Vermaak,
A/C # CK5-07235, P.O. Box 1769 Honeydue, Johannesburg, South Africa Rep., owned
9.32% of the Fund's outstanding Class C shares.
The Fund's prospectus and statement of additional information omit certain
information contained in the registration statement filed with the Commission,
which may be obtained from the Commission's principal office in Washington, D.C.
upon payment of the fee prescribed by the rules and regulations promulgated by
the Commission.
The Fund is one of 15 different investment companies in the Keystone
America Family, which offers a range of choices to serve shareholder needs. In
addition to the Fund, the Keystone America Family includes the following funds
having the various investment objectives described below:
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund currently offering 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.
101605AA
<PAGE>
APPENDIX
This Appendix is solely intended to provide additional investment
information and is qualified in its entirety by the information and language
contained in the Fund's prospectus.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include (i) a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and (ii) securities issued by GNMA. Treasury
bills have maturities of one year or less. Treasury notes have maturities of one
to ten years 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. government.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, The Tennessee Valley Authority,
District of Columbia Armory Board and FNMA.
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 FNMA, a
private corporation, are supported only by the credit of the instrumentality.
The U.S. government is not obligated by law to provide support to an
instrumentality it sponsors. U.S. government securities held by the Fund do not
include international agencies or instrumentalities in which the U.S.
government, its agencies or instrumentalities participate, such as the World
Bank, Asian Development Bank or the Inter-American Development Bank, or issues
insured by the Federal Deposit Insurance Corporation.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into financial futures contracts as a hedge
against changes in prevailing levels of interest rates to seek relative
stability of principal and to establish more definitely the effective return on
securities held or intended to be acquired by the Fund or as a hedge against
changes in the prices of securities held by the Fund or to be acquired by the
Fund. The Fund's hedging may include sales of futures as an offset against the
effect of expected increases in interest rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest rates.
For example, when the Fund anticipates a significant change in interest
rates, it will purchase a financial futures contract as a hedge against not
participating in such change in interest rates at a time when the Fund is not
fully invested. The purchase of a futures contract serves as a temporary
substitute for the purchase of individual securities which may then be purchased
in an orderly fashion. As such purchases are made, an equivalent amount of
financial futures contracts would be terminated by offsetting sales. In
contrast, the Fund would sell financial futures contracts in anticipation of or
in a general interest rate decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a change in interest
rates, and, by doing so, provide an alternative to the liquidation of the Fund's
securities positions and the resulting transaction costs.
The Fund intends to engage in options transactions which are related to
financial futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify financial instruments or financially
based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
("GNMA") certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S.
government securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS, OTHER THAN STOCK INDEX BASED
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable the initial margin of the Fund and any variation margin to be
held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
OPTIONS ON FINANCIAL FUTURES
The Fund intends to purchase call and put options on financial futures
contracts and sell such options to terminate an existing position. Options on
futures are similar to options on stocks except that an option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
stock at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
The Fund intends to use options on financial futures contracts in
connection with hedging strategies. In the future, when permitted by applicable
law, the Fund may use such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts
is analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on financial futures contracts represents
a means of obtaining temporary exposure to market appreciation at limited risk.
It is analogous to the purchase of a call option on an individual stock, which
can be used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the futures contract upon which it is
based, or upon the price of the underlying financial instrument or index itself,
purchase of a call option may be less risky than the ownership of the interest
rate or index based futures contract or the underlying securities. Call options
on commodity futures contracts may be purchased to hedge against an interest
rate increase or a market advance when the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING FINANCIAL FUTURES CONTRACTS OR
RELATED OPTIONS
The Fund may employ new investment techniques involving financial
futures contracts and related options. The Fund intends to take advantage of new
techniques in these areas which may be developed from time to time and which are
consistent with the Fund's investment objective. The Fund believes that no
additional techniques have been identified for employment by the Fund in the
foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin deposits on
such futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract or
option is considered to be 60% long term and 40% short term, without regard to
the holding period of the contract. In the case of a futures transaction
classified as a "mixed straddle," the recognition of losses may be deferred to a
later taxable year. The federal income tax treatment of gains or losses from
transactions in options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
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 credit-worthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. In addition
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a wellconceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for financial futures
contracts, there are several special risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market.
There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
<PAGE>
EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTIONS. 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 holds on a share for share basis
a put on the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or,
if less than the exercise price of the put written, the difference is maintained
by the writer in cash, U.S. Treasury bills, or other high grade, short term
obligations in a segregated account with the writer's broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange, in the
Netherlands, the European Options Exchange, and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for option transactions are published in various
financial publications.
COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago; Chicago Mercantile Exchange;
International Monetary Market (a division of the Chicago Mercantile Exchange);
the Kansas City Board of Trade; and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlying security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the
option at the stated exercise price by the filing of an exercise notice prior to
the expiration time of the option. The Fund will sell ("write") and purchase
puts only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be 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 in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise price and expiration date.
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>
SCHEDULE OF INVESTMENTS--September 30, 1994
<TABLE>
<CAPTION>
Interest Maturity Face Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (91.1%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (61.8%)
FHLMC, Cap 13.125%, Margin 1.750% + CMT, Resets Annually 5.250% 11/01/16 $ 777,533 $ 783,489
FHLMC, Cap 12.500%, Margin 1.750% + CMT, Resets Annually 5.375 02/01/17 1,272,488 1,270,108
FHLMC, Cap 12.881%, Margin 2.115% + CMT, Resets Annually 6.481 09/01/17 1,825,311 1,865,248
FHLMC, Cap 13.598%, Margin 2.125% + CMT, Resets Annually 6.225 03/01/19 4,073,611 4,174,800
FHLMC, Cap 14.11%, Margin 2.337% + CMT, Resets Annually 6.906 05/01/19 108,054 108,864
FHLMC, Cap 13.23%, Margin 2.125% + CMT, Resets Annually 6.678 07/01/19 155,847 157,990
FHLMC, Cap 12.785%, Margin 2.015% + CMT, Resets Annually 7.830 05/01/20 27,208 27,633
FHLMC, Cap 13.577%, Margin 2.035% + CMT, Resets Annually 5.925 03/01/21 1,149,456 1,169,756
FHLMC, Cap 12.638%, Margin 2.279% + CMT, Resets Annually 6.635 06/01/21 3,789,325 3,886,445
FHLMC, Cap 12.375%, Margin 2.125% + CMT, Resets Annually 7.375 07/01/21 1,485,524 1,517,091
FHLMC, Cap 12.125%, Margin 2.125% + CMT, Resets Annually 5.500 09/01/21 1,327,197 1,345,658
FHLMC, Cap 12.058%, Margin 2.159% + CMT, Resets Annually 5.570 10/01/21 2,809,855 2,869,564
FHLMC, Cap 12.450%, Margin 2.084% + CMT, Resets Annually 5.770 10/01/21 4,553,309 4,661,450
FHLMC, Cap 12.065%, Margin 2.17% + CMT, Resets Annually 5.961 11/01/21 4,245,933 4,320,237
FHLMC, Cap 11.375%, Margin 2.125% + CMT, Resets Annually 5.625 01/01/22 1,608,381 1,621,200
FHLMC, Cap 11.849%, Margin 2.118% + CMT, Resets Annually 5.826 01/01/22 6,365,765 6,493,080
FHLMC, Cap 12.362%, Margin 2.000% + CMT, Resets Annually 5.907 03/01/22 3,052,066 3,113,107
FHLMC, Cap 12.479%, Margin 1.965% + CMT, Resets Annually 5.670 02/28/22 2,086,258 2,107,121
FHLMC, Cap 11.000%, Margin 2.250% + CMT, Resets Annually 5.875 03/01/22 4,716,293 4,739,875
FHLMC, Cap 10.375%, Margin 2.250% + CMT, Resets Annually 6.500 05/01/22 2,200,800 2,214,555
FHLMC, Cap 11.236%, Margin 2.156% + CMT, Resets Annually 6.668 06/01/22 3,087,266 3,119,589
FHLMC, Cap 10.462%, Margin 2.31% + CMT, Resets Annually 6.697 06/01/22 696,263 699,744
FHLMC, Cap 10.337%, Margin 2.163% + CMT, Resets Annually 5.682 02/01/23 1,634,721 1,637,533
FHLMC, Cap 10.392%, Margin 2.332% + CMT, Resets Annually 5.889 02/01/23 6,999,613 7,057,569
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION 60,961,706
FEDERAL NATIONAL MORTGAGE ASSOCIATION (29.3%)
FNMA, Cap 15.862%, Margin 1.975% + CMT, Resets Annually 6.260 01/01/16 2,023,047 2,060,352
FNMA, Cap 12.750%, Margin 2.125% + CMT, Resets Annually 7.375 06/01/18 506,992 520,301
FNMA, Cap 13.250%, Margin 2.250% + CMT, Resets Annually 5.750 08/01/18 1,375,685 1,412,223
FNMA, Cap 13.143%, Margin 2.179% + CMT, Resets Annually 6.569 09/01/18 5,243,788 5,372,418
FNMA, Cap 14.226%, Margin 2.000% + CMT, Resets Annually 5.480 03/01/19 1,492,374 1,506,597
FNMA, Cap 13.319%, Margin 1.811% + CMT, Resets Annually 6.294 11/01/18 2,531,203 2,561,654
FNMA, Cap 13.708%, Margin 2.07% + CMT, Resets Annually 6.279 12/01/19 1,426,157 1,463,593
FNMA, Cap 13.432%, Margin 2.01% + CMT, Resets Annually 6.229 09/01/21 7,925,120 8,098,521
FNMA, Cap 13.51%, Margin 2.033% + CMT, Resets Annually 5.924 01/01/22 1,117,482 1,139,307
FNMA, Cap 10.685%, Margin 2.165% + CMT, Resets Annually 5.913 06/01/23 1,799,444 1,826,435
See Notes to Schedule of Investments.
F-1
<PAGE>
FEDERAL NATIONAL MORTGAGE ASSOCIATION (continued)
FNMA, Cap 13.327%, Margin 2.323% + CMT, Resets Annually 6.543% 06/01/31 $2,821,106 $ 2,920,720
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 28,882,121
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost--$91,369,948) 89,843,827
FIXED RATE MORTGAGE SECURITIES (5.8%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (1.1%)
Federal Home Loan Mortgage Corporation CMO, Series 11 Class C
(Estimated Maturity 1998) (a) 9.500 04/15/19 61,480 63,535
Federal Home Loan Mortgage Corporation CMO, Series 41 Class E
(Estimated Maturity 1996) (a) 10.000 08/15/19 1,000,000 1,019,380
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION 1,082,915
FEDERAL NATIONAL MORTGAGE ASSOCIATION (4.6%)
Federal National Mortgage Association #004534 10.750 10/01/12 734,180 795,300
Federal National Mortgage Association #002497 11.000 01/01/16 1,895,639 2,083,952
Federal National Mortgage Association #058442 11.000 01/01/18 1,500,663 1,637,583
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION 4,516,835
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (0.1%)
GNMA Pool #265615 10.000 03/15/04 59,313 63,316
GNMA Pool #272915 10.000 04/15/04 61,314 65,453
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 128,769
TOTAL FIXED RATE MORTGAGE SECURITIES (Cost--$5,757,202) 5,728,519
SHORT-TERM INVESTMENTS (1.6%)
Maturity
Value
CERTIFICATE OF DEPOSIT (0.0%)
State Street Bank & Trust Co. 3.250% 10/31/94 $ 24,000 $ 24,000
REPURCHASE AGREEMENT (1.6%)
HSBC Repurchase Agreement
(Collateralized by $1,640,000 U.S. Treasury Notes, 4.125%, due
6/30/95) 4.800 10/03/94 1,597,639 1,597,000
TOTAL SHORT-TERM INVESTMENTS (Cost--$1,621,000) 1,621,000
See Notes to Schedule of Investments.
F-2
<PAGE>
Market
Value
TOTAL INVESTMENTS (Cost--$98,748,150)(b) $97,193,346
OTHER ASSETS AND LIABILITIES--NET (1.5%) 1,441,483
NET ASSETS--(100.0%) $98,634,829
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
(a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected pre-payment rates. Changes in interest rates
can cause the estimated maturity to differ from the listed date. These
estimated maturity dates are unaudited.
(b) The cost of investment for federal income tax purposes is the same as for
book purposes. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at September 30, 1994, are as follows:
Gross unrealized appreciation $ 19,062
Gross unrealized depreciation 1,573,866
Net unrealized depreciation $1,554,804
Legend of Portfolio Abbreviations
CMO--Collateralized Mortgage Obligation
CMT--1, 3, or 5 year Constant Maturity Treasury Index
FNMA--Federal National Mortgage Association
FHLMC--Federal Home Loan Mortgage Association
GNMA--Government National Mortgage Association
See Notes to Financial Statements.
F-3
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
July 1, 1991
(Commencement of
Year Ended September 30, Operations) to
1994 1993 1992 September 30, 1991
<S> <C> <C> <C> <C>
Net asset value beginning of period $ 9.910 $ 9.880 $ 10.060 $10.000
Income from investment operations
Investment income--net 0.466 0.457 0.579 0.179
Net gains (losses) on investments (0.409) (0.054) (0.213) 0.062
Total from investment operations 0.057 0.403 0.366 0.241
Less distributions from (c):
Investment income--net (0.339) (0.373) (0.546) (0.181)
In excess of investment income--net (0.008) -0- -0- -0-
Total distributions (0.347) (0.373) (0.546) (0.181)
Net asset value end of period $ 9.620 $ 9.910 $ 9.880 $10.060
Total return 0.58% 4.16% 3.71% 2.43%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.36% 1.19%(a)
Net investment income 4.05% 4.44% 5.50% 6.42%(a)
Portfolio turnover rate 34% 60% 41% 2%
Net assets, end of period (thousands) $95,761 $144,725 $186,742 $25,769
<FN>
(a) Annualized for the period July 1, 1991 (Commencement of Operations) to
September 30, 1991.
(b) Figures are net of expense reimbursement by Keystone in connection with the
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.93%, 1.94%, 2.03%, and 3.19% (annualized) for the years ended September
30, 1994, 1993 and 1992, and the period July 1, 1991 (Commencement of
Operations) to September 30, 1991, respectively.
(c) Effective October 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income
Capital Gain and Return of Capital Distributions by Investment Companies".
As a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis capital
gains on a temporary basis) are presented as "Distributions in excess of
realized capital gains".
</FN>
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Year (Date of Initial
Ended Public Offering)
September 30, 1994 to September 30, 1993
<S> <C> <C>
Net asset value beginning of period $ 9.900 $ 9.820
Income from investment operations
Investment income--net 0.403 0.228
Net gains (losses) on investments (0.356) 0.092
Total from investment operations 0.047 0.320
Less distributions from (c):
Investment income--net (0.338) (0.240)
In excess of investment income--net (0.009) -0-
Total distributions to shareholders (0.347) (0.240)
Net asset value end of period $ 9.600 $ 9.900
Total return 0.48% 3.28%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses
(b) 1.50% 1.50%(a)
Net investment income 4.08% 2.91%(a)
Portfolio turnover rate 34% 60%
Net assets, end of period
(thousands) $ 2,874 $ 2,077
<FN>
(a) Annualized.
(b) Figures are net of expense reimbursement by Keystone in connection with the
voluntary expense limitations. Before the expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.94% and 1.67% (annualized) for the year ended September 30, 1994 and for
the period February 1, 1993 (Date of Initial Public Offering) to September
30, 1993.
(c) Effective October 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income
Capital Gain and Return of Capital Distributions by Investment Companies".
As a result, distribution amounts exceeding book basis net investment income
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis capital
gains on a temporary basis) are presented as "Distributions in excess of
realized capital gains".
</FN>
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
September 30, 1994
Assets:
Investments at market value (identified cost--
$98,748,150) (Note 1) $ 97,193,346
Cash 502
Receivable for:
Principal paydowns 1,009,890
Interest 866,301
Fund shares sold 21,759
Due from Investment Adviser (Note 4) 119,900
Unamortized organization expenses (Note 1) 9,468
Prepaid expenses 3,755
Total assets 99,224,921
Liabilities:
Payable for:
Fund shares redeemed 174,431
Income distribution 327,923
Accrued reimbursable expenses (Note 4) 3,117
Other accrued expenses 84,621
Total liabilities 590,092
Net assets $ 98,634,829
Net assets represented by:
Paid-in capital $104,517,228
Distributions in excess of investment income--net (327,922)
Accumulated realized gains (losses) on investment
transactions--net (3.999,673)
Net unrealized depreciation on investments (1,554,804)
Total net assets $ 98,634,829
Net asset value, offering and redemption price
per share (Note 2):
Class B Shares
($9.62 on 9,957,006 shares outstanding) $ 95,761,109
Class C Shares
($9.60 on 299,200 shares outstanding) 2,873,720
$ 98,634,829
STATEMENT OF OPERATIONS--
Year Ended September 30, 1994
Investment income
Interest $ 6,829,683
Expenses (Notes 1, 2 and 4):
Management fee $ 735,254
Transfer agent fees 233,089
Accounting, auditing and legal 43,285
Custodian fees 50,000
Printing 18,585
Amortization of organization
expenses 5,505
Distribution Plan expenses 1,219,635
Registration fees 38,090
Insurance expense 9,876
Miscellaneous expenses 14,911
Total expenses 2,368,230
Less: Reimbursement from
Investment Adviser (Note 4) (523,701)
Net expenses 1,844,529
Investment income--net (Note 1) 4,985,154
Realized and unrealized gain (loss)
on investments--net:
Realized loss on investments sold:
Proceeds from sales 86,034,426
Cost of investments sold 87,183,917
Realized loss on investment
transactions--net (Note 3) (1,149,491)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year 1,502,799
End of year (1,554,804)
Increase (decrease) in unrealized
appreciation or depreciation--net (3,057,603)
Net loss on investments (4,207,094)
Net increase in net assets resulting $ 778,060
from operations
See Notes to Financial Statements.
F-6
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended September 30,
1994 1993
<S> <C> <C>
Operations:
Investment income--net (Note 1) $ 4,985,154 $ 7,599,292
Realized loss on investments--net (Note 3) (1,149,491) (3,099,676)
Increase (decrease) in unrealized appreciation or depreciation--net (3,057,603) 2,382,596
Net increase in net assets resulting from operations 778,060 6,882,212
Distributions to shareholders from (Note 5):
Investment income--net--Class B Shares (4,106,725) (6,482,769)
In excess of investment income--net--Class B Shares (102,697) -0-
Investment income--net--Class C Shares (110,103) (18,442)
In excess of investment income--net--Class C Shares (3,081) -0-
Total distributions to shareholders (4,322,606) (6,501,211)
Capital share transactions (Note 2):
Proceeds from shares sold--Class B Shares 5,381,706 10,842,000
Proceeds from shares sold--Class C Shares 4,231,471 2,199,808
Payments for shares redeemed--Class B Shares (53,383,466) (57,258,048)
Payments for shares redeemed--Class C Shares (3,402,642) (137,665)
Net asset value of shares issued in reinvestment of distributions from
investment income--net and in excess of investment
income--net--Class B Shares 2,480,644 4,018,937
Net asset value of shares issued in reinvestment of distributions
from investment income--net and in excess of investment
income--net--Class C Shares 69,654 13,482
Net decrease in net assets resulting from capital
share transactions (44,622,633) (40,321,486)
Total decrease in net assets (48,167,179) (39,940,485)
Net assets:
Beginning of year 146,802,008 186,742,493
End of year (distributions in excess of investment income--net
as follows: September, 1994--$(327,923) and
September, 1993--$(172,442) $ 98,634,829 $146,802,008
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Keystone America Capital Preservation and Income Fund II (the "Fund") is a
Massachusetts business trust for which Keystone Custodian Funds, Inc.
("Keystone") is the Investment Advisor and Manager. The Fund was organized on
December 19, 1990 and had no operations prior to July 1, 1991. It is registered
under the Investment Company Act of 1940 as a diversified open-end investment
company.
The Fund currently issues Class B and Class C shares. Class B shares are sold
subject to a contingent deferred sales charge payable upon redemption within
three calendar years after the year of purchase. Class C shares are sold subject
to a contingent deferred sales charge payable upon redemption within one year
after purchase. Class C shares are available only through dealers who have
entered into special distribution agreements with Keystone Distributors, Inc.
("KDI"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting
of members of current management of Keystone. 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. U.S. Government agency securities and certificates are traded in the
over-the-counter market and are valued at the mean of bid and asked prices at
the time of valuation. Short-term investments which are purchased with
maturities of sixty days or less are valued at amortized cost (original purchase
cost as adjusted for amortization of premium or accretion of discount) which
when combined with accrued interest approximates market. Short-term investments
maturing in more than sixty days for which market quotations are readily
available are valued at current market value. Short-term investments maturing in
more than sixty days when purchased which are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount) which when combined with
accrued interest approximates market. All other securities for which market
quotations are readily available are valued at current market value. Management
values the following securities at prices it deems in good faith to be fair: (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.
B. Securities transactions are accounted for on the trade date. Realized
gains and losses are computed on the identified cost basis. Interest income
is recorded on the accrual basis. Distributions to shareholders are recorded
by the Fund at the close of business on the record date.
C. The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). Thus, the Fund expects to be relieved of any federal
income or excise tax liability by distributing all of its net taxable investment
income and net taxable capital gains, if any, to its shareholders. The Fund
intends to avoid excise tax liability by making the required distributions under
the Internal Revenue Code.
F-8
<PAGE>
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 collateral falls below required levels, the Fund intends to
seek additional collateral from the seller or terminate the repurchase
agreement. If the seller defaults, the Fund would suffer a loss to the extent
that the proceeds from the sale of the underlying securities were less than the
repurchase price. Any such loss would be increased by any cost incurred on
disposing of such securities. If bankruptcy proceedings are commenced against
the seller under the repurchase agreement, the realization on the collateral may
be delayed or limited. Repurchase agreements entered into by the Fund will be
limited to transactions with dealers or domestic banks believed to present
minimal credit risks, and the Fund will take constructive receipt of all
securities underlying repurchase agreements until such agreements expire.
E. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses in
the same proportion as the number of initial shares being redeemed bears to the
number of initial shares outstanding at the time of redemption.
F. The Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, at least annually.
Distributions are determined in accordance with income tax regulations.
Effective October 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As a
result of this statement, the Fund changed the classification of distributions
to shareholders to better disclose the differences between financial statement
amounts and distributions determined in accordance with income tax regulations.
Accordingly, the following reclassifications have been made as of September 30,
1993: an increase in net realized gains (losses) on investment transactions of
$1,950,212 and decreases in distributions in excess of investment income--net
and paid-in capital of $1,840,413 and $109,799, respectively, to reflect
adoption of the statement.
Differences between book basis investment income-- net available for
distribution and tax basis investment income--net available for distribution are
primarily attributable to differences in the treatment of paydown gains and
losses.
(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:
F-9
<PAGE>
Class B Shares
Year Ended Year Ended
September 30, September 30,
1994 1993
Shares sold 549,945 1,101,250
Shares redeemed (5,448,882) (5,798,235)
Shares issued in reinvestment
of distributions from
investment income--net and
distributions in excess of
investment income-- net 253,073 407,277
Net Decrease (4,645,864) (4,289,708)
Class C Shares
Year Ended Year Ended
September 30, September 30,
1994 1993
Shares sold 432,197 222,368
Shares redeemed (349,958) (13,910)
Shares issued in reinvestment
of distributions from
investment income--net and
distributions in excess of
investment income-- net 7,141 1,362
Net Increase 89,380 209,820
The Fund bears some of the costs of selling its shares under a Distribution Plan
adopted with respect to its Class B and Class C shares.
The Class B Distribution Plan provides for payment 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 other (dealers) (i) a commission at
the time of purchase normally equal to a 3.00% of the value of each share sold;
and/or (ii) service fees at an annual rate of 0.25% of the average daily net
asset value of shares sold by such others and remaining outstanding on the books
of the Fund for specified periods.
The Class C Distribution Plan provides for payments at an annual rate of 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. Amounts paid by the Fund under the Class C
Distribution Plan are currently used to pay others (dealers) (i) a payment at
the time of purchase of 1.00% of the value of each share sold, such payment to
consist of a commission in the amount of 0.75% and the first year's service fee
in advance in the amount of 0.25%; and (ii) 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.) and service fees at an annual rate of 0.25%, of the average net
asset value of each share sold by such others and remaining outstanding on the
books of the Fund for specified periods. There were no unreimbursed distribution
plan expenses at September 30, 1994 for Class C shares.
Each of the Distribution Plans may be terminated at any time by vote of the
Independant Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of the Class B
Distribution Plan, KDI would be entitled to receive payment, at the annual rate
of 1.00% of the average daily net asset value of Class B shares, as compensation
for its services which had been earned at any time during which the Class B
Distribution Plan was
F-10
<PAGE>
in effect. There were no unreimbursed distribution plan expenses at September
30, 1994 for Class B shares.
For the year ended September 30, 1994 the Fund paid KDI $1,188,065 pursuant to
the Fund's Class B Distribution Plan and $31,570 pursuant to the Class C
Distribution Plan.
(3.) Securities Transactions
As of September 30, 1994 the Fund had a capital loss carryover of approximately
$3,697,000 which expires in 2001. Purchases and sales of investment securities
(including proceeds received at maturity) for the year ended September 30, 1994
were as follows:
Cost of Proceeds
Purchases From Sales
Portfolio securities $ 40,460,612 $ 86,034,426
Short-term investments 537,177,828 537,459,827
$577,638,440 $623,494,253
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the Fund, dated March 20, 1991, Keystone provided investment
advisory and management services to the Fund for the year ended September 30,
1994. In return, Keystone was paid a management fee computed and payable daily
calculated at a rate of 2.0% of the Fund's gross investment income plus an
amount determined by applying percentage rates, starting at 0.50% and declining
as net assets increase to 0.25% per annum, to the net asset value of the Fund.
During the year ended September 30, 1994 the Fund paid or accrued to Keystone
investment management and advisory services fees of $735,254, which represented
0.60% of the Fund's average net assets on an annualized basis.
During the year ended September 30, 1994, the Fund paid or accrued to KIRC and
KGI $18,965 as reimbursement for the cost of certain accounting and printing
services provided to the Fund and $233,089 was paid or accrued to KIRC 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 over $100 million.
Keystone voluntarily agreed to reimburse all expenses incurred by the Fund in
excess of certain expense limitations. In accordance with this voluntary expense
limitation, Keystone reimbursed the Fund $510,197 with respect to the Fund's
Class B shares for the year ended September 30, 1994; and $13,504 with respect
to the Fund's Class C shares for the period ended September 30, 1994. Keystone
does not intend to seek repayment for this amount.
Certain officers and/or Directors of Keystone are also officers and/or Trustees
of the Fund. Officers of Keystone and Affiliated Trustees receive no
compensation directly from the Fund. Currently, the Independent Trustees of the
Fund receive no compensation for their services.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone America Capital Preservation and Income Fund-II
We have audited the accompanying statements of assets and liabilities of
Keystone America Capital Preservation and Income Fund-II including the schedule
of investments, as of September 30, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the three-year period then ended and the period from
July 1, 1991 (commencement of operations) to September 30, 1991 for Class B
shares, and for the year then ended and the period from February 1, 1993 (date
of initial public offering) to September 30, 1993 for 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, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone America Capital Preservation and Income Fund-II as of September 30,
1994, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years or periods specified in the first
paragraph above in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 28, 1994
F-12
