<PAGE>
SUPPLEMENT TO CURRENT PROSPECTUS
OF
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND
(THE "FUND")
The Fund's prospectus is hereby supplemented as follows:
The last sentence of the section entitled "Alternative Sales Options/Class B
Shares - Back End Load Option" located on page 15 of the prospectus is hereby
deleted.
The last paragraph of the section entitled "Alternative Sales Options/Class B
Shares" located on page 17 of the prospectus is hereby deleted, and the
following language inserted in lieu thereof:
" In addition to the exchange privileges described in the section of
the prospectus entitled "Exchanges," Class B shares that have been
outstanding during seven calendar years may be exchanged for Class A
shares of the Fund, which are subject to a lower Distribution Plan
charge, without imposition of a front end sales charge. The Class B
shares so 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
exchange, although the dollar value will be the same, a shareholder may
receive more or less Class A shares than the number of Class B shares
exchanged. For more information on current exchange privileges, see
"Exchanges." "
February 22, 1995 KACPIF
#101f02a7
<PAGE>
KEYSTONE AMERICA CAPITAL PRESERVATION
AND INCOME FUND
PROSPECTUS JANUARY 27, 1995
Keystone America Capital Preservation and Income Fund (formerly Keystone
America Capital Preservation and Income Fund-II) (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.
The Fund offers three classes of shares. The Fund began publicly offering its
Class A shares on January 3, 1995. 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 AMERICA 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, 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 14
Alternative Sales Options 15
Contingent Deferred Sales Charge and
Waiver of Sales Charges 18
Distribution Plans 19
How to Redeem Shares 20
Shareholder Services 22
Performance Data 24
Fund Shares 24
Additional Information 25
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 AMERICA CAPITAL PRESERVATION AND INCOME FUND
(FORMERLY KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND-II)
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>
SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION OPTION<F1>
<S> <C> <C> <C>
Sales Charge 3.00% None None
(as a percentage of offering price)
Contingent Deferred Sales Charge
(as a percentage of the lesser of
cost ormarket value of shares
redeemed) 0.25%<F2> 3.00% in the first year 1.00% in the first year
declining to 1.00% in the and 0.00% thereafter
fourth year and 0.00%
thereafter
Exchange Fee (per exchange)<F3> $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F4>
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%<F5> 0.60%<F5>
Other Expenses 0.31% 0.31% 0.31%
Total Fund Operating Expenses 0.90% 1.50% 1.50%
EXAMPLES<F6> 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 C shares are available only through dealers who have entered into
special distribution agreements with Keystone Distributors, Inc., the
Fund's underwriter.
<PAGE>
<F2> Purchase of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge, but are subject to a contingent deferred sales
charge. See the "Contingent Deferred Sales Charge and Waiver of Sales
Charges" section of this prospectus for an explanation of the charge.
<F3> 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.")
<F4> Expense ratios (annualized as appropriate) are estimated for the fiscal
year ended September 30, 1995 after giving effect to the reimbursement by
Keystone Custodian Funds, Inc. ("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."
<F5> 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").
<F6> The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND
(FORMERLY KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND-II)
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 auditors' report, in the Fund's Annual Report (under
the Fund's former name, Keystone America Capital Preservation and Income Fund-
II). The Fund's financial statements, related notes, and 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
(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<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
<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 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."
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND
(FORMERLY KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND-II)
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 auditors' report, in the Fund's Annual Report (under the Fund's former
name, Keystone America Capital Preservation and Income Fund- II). The Fund's
financial statements, related notes, and 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 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 twenty-eight funds managed or advised by
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 risks associated therewith, 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 (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
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 the section of this prospectus entitled
"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 majority of the Fund's outstanding
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). These restrictions and certain other
fundamental restrictions are set forth in the statement of additional
information. Unless otherwise stated, all references to the Fund's assets are in
terms of current market value.
Generally, the Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of 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.
In addition, the Fund is subject to various investment restrictions imposed by
certain state securities authorities. These restrictions are discussed in the
statement of additional information.
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. All dividends and
distributions will be payable in shares or, at the option of the shareholder, in
cash. 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.
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 Group, Inc.
("Keystone Group"), located at 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Keystone Group is a corporation privately owned by current and former members
of management of Keystone and its affiliates. The shares of Keystone Group
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,
Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Group of Mutual 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.
Keystone and the Fund have each 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 Group $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 Vice President and Senior Portfolio Manager 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 Distributors, Inc. ("KDI"), the Fund's principal
underwriter. KDI, 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 KDI (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 KDI 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
KDI 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
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 that
shares sold in a single purchase in excess of $1,000,000 without a front end
sales charge will be subject to a contingent deferred sales charge for one
year).
CLASS B SHARES -- BACK END LOAD OPTION
Class B 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 three
calendar years after the calendar year of purchase. Class B shares will
automatically convert to Class A shares at the end of seven calendar years after
the year of purchase.
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 KDI.
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:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED<F1> OFFERING PRICE
<S> <C> <C> <C>
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%
$1,000,000 and over<F2> 0% 0% 0.25%
<FN>
<F1> Rounded to the nearest one-hundredth percent.
<F2> Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge of 0.25%. See the "Contingent Deferred Sales Charge and Waiver
of Sales Charges" section of this prospectus.
</TABLE>
--------------------------
The sales charge is paid to KDI, 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 outstanding 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, KDI may
reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
to be included in a broker dealer managed fee based program (a wrap account)
with broker/dealers who have entered into special agreements with KDI. 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 KDI, 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.
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 or more on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge is retained by KDI. See "Contingent Deferred
Sales Charge and Waiver of Sales Charges" below.
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 KDI
(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 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 certain exceptions, the Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and the first
calendar year after the year of purchase; 2.00% on shares redeemed during the
second calendar year after the year of purchase; and 1.00% on shares redeemed
during the third calendar year after the year of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by KDI. Amounts received by KDI under the
Class B Distribution Plan are reduced by deferred sales charges retained by KDI.
See "Contingent Deferred Sales Charge and Waiver of Sales Charges" below.
Class B shares that have been outstanding during seven calendar years will
automatically convert to Class A shares, which are subject to a lower
Distribution Plan charge, without imposition of a front end sales charge.
(Conversion of the Class B shares represented by stock certificates will require
the return of the stock certificates to KIRC.) The Class B shares so converted
will no longer be subject to the higher expenses borne by Class B shares.
Because the net asset value per share of shares of the Class A shares may be
higher or lower than that of the Class B shares at the time of conversion,
although the dollar value will be the same, a shareholder may receive more or
less Class A shares than the number of Class B shares converted. Under current
law, it is the Fund's opinion that such a conversion will not constitute a
taxable event. If this ceases to be the case, the Board of Trustees will
consider what action, if any, is appropriate and in the best interests of the
Class B shareholders.
CLASS B DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
(the "Class B Distribution Plan") that provides 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 Plan are currently made to KDI (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 KDI under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above. KDI
generally reallows to brokers or others a commission equal to 3% of the price
paid for each Class B share sold as well as a shareholder service fee at the
rate of 0.25% per annum of the net asset value of Class B shares maintained by
such recipients outstanding on the books of the Fund for specified periods. See
"Distribution Plans" below.
CLASS C SHARES
Class C shares are offered only through dealers who have entered into special
distribution agreements with KDI. 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 KDI. 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 KDI
(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 KDI under (1) and (2) in the aggregate may not exceed the annual
limitation referred to above. KDI 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 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) Class C shares and certain Class A shares held
for more than one year from the date of purchase; or (4) Class B shares held
during more than four consecutive calendar years. 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.
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 5912 years
old; (4) involuntary redemptions of accounts having an aggregate net asset value
of less than $1,000; or (5) automatic withdrawals under an automatic withdrawal
plan of up to 112% per month of the shareholder's initial account balance.
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 KDI; 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, KDI 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. KDI 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.
KDI 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
KDI. 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 up to 0.25% of the
value of shares sold by such dealers.
KDI 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
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"). Payments
under the Class A Distribution Plan are currently limited to 0.25% annually of
the average daily net asset value of Class A shares. The Class B Distribution
Plan and the Class C Distribution Plan provide for the payment at an annual rate
of up to 1.00% of the average daily net asset value of Class B shares and Class
C shares, respectively.
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 KDI).
KDI intends, but is not obligated, to continue to pay or accrue distribution
charges incurred in connection with the Class B Distribution Plan that exceed
current annual payments permitted to be received by KDI from the Fund. KDI
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.
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. After the termination of the Class B Distribution Plan,
however, 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 that had been earned at any time during which the Class B Distribution
Plan was in effect.
If the Fund is unable to pay a commission on a new sale of Class C shares
because the annual maximum (0.75% of average daily net assets) has been reached,
KDI intends, but is not obligated, to continue to accept new orders for the
purchase of Class C shares and to pay or accrue commissions and service fees to
dealers in excess of the amount it currently receives from the Fund. While the
Fund is under no obligation to pay KDI such amounts that exceed the Class C
Distribution Plan limitation, KDI intends to seek full payment of such charges
(together with interest at the rate of prime plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
For the year ended September 30, 1994, the Fund paid KDI $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 KDI 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 Fund deducts the
deferred sales charge from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI.
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 bank wire of funds. Although the mailing of a redemption check 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 mailing of a
redemption check has been delayed, the check will be mailed 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 deferred sales charge, will
be made within seven days thereafter except as discussed herein.
You may also redeem your shares through broker-dealers. KDI, 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 KDI receives
the order. If KDI has received proper documentation, it will pay the redemption
proceeds to the broker-dealer placing the order within seven days thereafter.
KDI 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 KDI 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 KDI 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 Class B shares of other Keystone America
Funds and 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 where the original purchase was for $1,000,000 or more and
no sales charge was paid, or
(2) Class B shares that have been held for less than four years, 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 shares of the Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing 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 KDI 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 of your
Keystone America Funds automatically invested to purchase Class A 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 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
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 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
credit-worthy. 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 Purchaserto purchase, nor the Fund to sell, the
amountindicated.
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 capitalgains distributions taken in additional shares willnot apply
toward completion of the Letter ofIntent.
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 KDI 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 KDI
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 KDI or KIRC that a Letter of Intent is
in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
*
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 Inc.
Omega Fund Inc.
Fund of the Americas
Strategic Development Fund
[Logo] KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
KEYSTONE
AMERICA
CAPITAL
PRESERVATION AND
INCOME FUND
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
<TABLE>
KEYSTONE AMERICA FUNDS
APPLICATION
- ------------------------------------------------------------------------------ -----------------------------------------
Make check payable to the fund selected and mail with the application to Keystone, P.O. Box 2121, Boston, MA 02106-2121
- ------------------------------------------------------------------------------ -----------------------------------------
A. FUND SELECTION Indicate investment amount and share class below. There is
a $1,000 minimum initial investment. If a class is not
indicated, your investment will be made in Class A shares.
<S> <C> <C> <S> <S> <S>
CLASS AMOUNT CLASS AMOUNT
INCOME TAX FREE INCOME
Capital Preservation and Income Fund -------- $ -------- Tax Free Income Fund -------- $ --------
Government Securities Fund -------- $ -------- Florida Tax Free Fund -------- $ --------
Intermediate Term Bond Fund -------- $ -------- Pennsylvania Tax Free Fund -------- $ --------
World Bond Fund -------- $ -------- Massachusetts Tax Free Fund -------- $ --------
Strategic Income Fund -------- $ -------- New York Insured Tax Free Fund -------- $ --------
GROWTH & INCOME Texas Tax Free Fund -------- $ --------
Fund for Total Return -------- $ -------- California Insured Tax Free Fund -------- $ --------
Fund of the Americas -------- $ -------- Missouri Tax Free Fund -------- $ --------
MONEY MARKET GROWTH
Keystone Liquid Trust -------- $ -------- Global Opportunities Fund -------- $ --------
Hartwell Emerging Growth Fund -------- $ --------
Hartwell Growth Fund -------- $ --------
Omega Fund, Inc. -------- $ --------
Strategic Development Fund -------- $ --------
If you have an existing Keystone account, please enter the account number here >
- ------------------------------------------------------------------------------ -----------------------------------------
B. INVESTMENT DEALER
- ------------------------------------------------------------------------------ -----------------------------------------
Name of Broker/Dealer Firm Rep/AE No. Last Name First Initial
- ------------------------------------------------------------------------------ -----------------------------------------
Broker/Dealer Branch Office Telephone Number Investor's Account Number (if any) with your Firm
- ------------------------------------------------------------------------------ -----------------------------------------
C. SHAREHOLDER REGISTRATION (please print) For information about naming a beneficiary in your account registration, please
call Keystone.
Individual -------------------------------------------------------------------------------------------------------------
First Name Middle Initial Last Name Social Security #
Joint Tenant -----------------------------------------------------------------------------------------------------------
First Name Middle Initial Last Name Social Security #
Other ------------------------------------------------------------------------------------------------------------------
Name of Corporation, Organization, Fiduciary Taxpayer I.D. #
If trust give date of trust agreement: ------------------------------------------------------------------
Uniform Gifts to Minors Act --------------------------------------------------------------------------------------------
Custodian's Name
Uniform Transfers to Minors Act ----------------------------------------------------------------------------------------
Custodian's Name
As Custodian for --------------------------------------------------------------------------------------- Under ---------
Minor's Name Minor's Social Security # State
- ------------------------------------------------------------------------------------------------------------------------
Street Address City State 9-digit Zip Code
Daytime Telephone ( ) Evening Telephone ( )
------------------------------------------------------------------------------------------------------
Area Code Area Code
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------
D. DISTRIBUTIONS. Choose One (If no choice is indicated, distributions will be reinvested)
[] Reinvest all income dividends and capital gains in additional shares [] Pay all dividends and capital gains distributions
in cash (if payment is to be made to other than
registered owner, identify in Section I).
[] Invest my dividends in another Keystone America Fund* ---------------- [] Pay all dividends in cash and reinvest
Designate Fund capital gains.
[] Invest my capital gains in another Keystone America Fund* -------------
Designate Fund
*See "Two Dimensional Investing" under the "Shareholder Services" section of the Prospectus.
- ------------------------------------------------------------------------------------------------------------------------
E. OPTIONAL SERVICES (please select by checking appropriate box)
1. Telephone Exchanges (1-800-343-2898) [] Subject to Prospectus provisions, I authorize Keystone
to accept my telephone instructions to exchange my shares
in any Keystone America Fund for shares in any other
Keystone America Fund. There is a $10.00 fee for each
exchange; however, if the exchange is made through KARL by
an individual investor, there is no fee.
[] Subject to Prospectus provisions, I authorize Keystone
to accept telephone instructions from my financial adviser
of record to exchange my shares in any Keystone America
Fund for shares of any other Keystone America Fund. There
is a $10.00 fee for each exchange.
Please refer to the Prospectus for a more complete
description of telephone privileges.
- ------------------------------------------------------------------------------------------------------------------------
2. Telephone Redemptions (1-800-343-2898) [] Subject to Prospectus provisions, I authorize Keystone to
accept my telephone instructions to redeem up to $50,000
from my account in any Keystone America Fund and to
deposit the proceeds to my bank by electronic funds
transfer. Redemptions of less than $2,500 will be mailed
by check. Only shares on deposit with Keystone can be
redeemed by telephone. 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.
(Please provide information on your bank in Section I.)
Please refer to the Prospectus for a more complete
description of telephone privileges.
- ------------------------------------------------------------------------------------------------------------------------
3. Automatic Investments by [] I wish to make automatic investments of $ ------------ in
Electronic Funds Transfer my Keystone America Fund
($100 minimum) ----------------------------------------------------------------------------
Name of Fund
[] Monthly. On [] the 5th or [] 20th day of each month, commencing ---------- 19 ---- or
[] Quarterly. Every three months on the [] 5th or [] 20th day, commencing ---------- 19 ----
Please provide information on your bank in Section I. You must receive
notification from Keystone that your electronic transfer feature is active
before you make electronic transactions. This is normally 30 business days
after we receive your application.
- ------------------------------------------------------------------------------ -----------------------------------------
4. Automatic Withdrawals by Electronic Funds Transfer or Check. ($100 minimum
per withdrawal; withdrawals may be as much as 1.5% per month or 4.5% per
quarter of account asset value at time withdrawals commence.)
[] Beginning ---------- 19 ---- please electronically transfer to my bank the
amount of $ --------- on the first day of each
[] month or [] quarter Please allow 30 days for payments to begin. Please
provide information on your bank under Section I.
[] I prefer to have checks sent to the registered
owner's address. [] Payment by check made to payee other than
registered shareholders. Please identify in
Section I.
- ------------------------------------------------------------------------------ -----------------------------------------
5. Dollar Cost Averaging [] Monthly [] Quarterly
[] I authorize Keystone to withdraw $ ---------- ($100 minimum) from my Keystone America -----------------------------
Designate Fund
account to purchase shares of Keystone America --------------------,
beginning ---------- 1st, 19 -----------------. Designate Fund
Month
- ------------------------------------------------------------------------------ -----------------------------------------
F. CHECKWRITING (Capital Preservation & Income Fund and Keystone Liquid Trust ONLY)
[] Yes, I want free checkwriting ($500 minimum per check). Please be sure to fill out the attached signature card.
<PAGE>
- ------------------------------------------------------------------------------ -----------------------------------------
G. LETTER OF INTENT (Letter of Intent applies only to Class A shares)
[] I agree to the terms of the Letter of Intent set forth in the Prospectus (including the escrowing of
shares). Although I am not obligated to do so, it is my intention to invest over a thirteen-month
period in shares of one or more Keystone America Funds in an aggregate amount at least equal to:
[] $50,000 [] $100,000 [] $250,000 [] $500,000 [] $1,000,000
- ------------------------------------------------------------------------------ -----------------------------------------
H. RIGHTS OF ACCUMULATION (Rights of Accumulation applies only to Class A shares)
I qualify for Rights of Accumulation as described in the Prospectus. Listed below are accounts in the
Keystone America Family of Funds which may entitle me to a reduced sales charge:
- ------------------------------------------------------------------------------------------------------------------------
Fund Account Number
- ------------------------------------------------------------------------------------------------------------------------
Fund Account Number
- ------------------------------------------------------------------------------------------------------------------------
I. BANK AND PAYEE INFORMATION IMPORTANT -- YOUR BANK MUST BE A MEMBER OF THE AUTOMATED
CLEARING HOUSE IN ORDER FOR YOU TO USE ELECTRONIC
FUNDS TRANSFER SERVICES.
If you have elected to have funds deposited to or withdrawn from your bank account, please attach here a
voided check or pre-printed deposit slip for your bank account. Your Keystone America account and your
bank account must have one name in common.
- ------------------------------------------------------------------------------------------------------------------------
Name on Bank Account Bank Account Number
Type of Bank Account: [] Savings [] Checking [] NOW
I am identifying below the: [] Payee for distributions [] Payee for telephone redemptions [] Payee for automatic
withdrawals
- ------------------------------------------------------------------------------------------------------------------------
Name of Payee (other than bank) Street Address City State Zip
- ------------------------------------------------------------------------------------------------------------------------
Keystone Use Only Bank Routing/Transit
- ----------------------------------------------------------------------------------------------------------------------
J. SIGNATURES
[] Check if any owner is a citizen or resident of the U.S.
[] Check if any owner is a foreign Indicate Country -----------------------------------
person not subject to U.S. tax
reporting requirement.
NOTE: See reverse side for important tax information.
I (we) am (are) of legal age and have received the prospectus(es) and agree to its (their) terms.
IF I (WE) HAVE ELECTED ANY OF THE OPTIONAL EXCHANGE, REDEMPTION, AUTOMATIC INVESTMENT OR AUTOMATIC
WITHDRAWAL SERVICES DESCRIBED ABOVE: (I) I (WE) HEREBY RATIFY ANY INSTRUCTIONS RECEIVED BY KEYSTONE IN
WRITING AND I (WE) AGREE THAT NEITHER THE FUND, KIRC NOR KDI WILL BE HELD RESPONSIBLE FOR THE
AUTHENTICITY OF SUCH INSTRUCTIONS; (II) I (WE) AGREE THAT NEITHER THE FUND, KIRC NOR KDI WILL BE HELD
LIABLE WHEN FOLLOWING INSTRUCTIONS RECEIVED OVER KARL OR BY TELEPHONE WHICH ARE REASONABLY BELIEVED TO
BE GENUINE; AND (III) I (WE) UNDERSTAND, THAT IF SUCH REASONABLE PROCEDURES ARE NOT FOLLOWED, THE FUND,
KIRC OR KDI MAY BE LIABLE FOR ANY LOSSES DUE TO UNAUTHORIZED OR FRAUDULENT INSTRUCTIONS.
UNDER PENALTIES OF PERJURY, EACH OF THE UNDERSIGNED CERTIFIES THAT THE NUMBER SHOWN ABOVE IS THE
UNDERSIGNED'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND THAT THE UNDERSIGNED IS NOT SUBJECT TO BACKUP
WITHHOLDING UNLESS INDICATED BY CHECKING THE BOX BELOW.
[] THE UNDERSIGNED IS SUBJECT TO BACKUP WITHHOLDING UNDER THE PROVISIONS OF THE INTERNAL REVENUE CODE
SECTION 3406(A)(1)(C).
[] CHECK HERE IF YOU DO NOT HAVE A NUMBER BUT HAVE APPLIED OR INTEND TO APPLY FOR ONE. THE SIGNATURE OF
EACH PERSON ON THIS APPLICATION SERVES TO CERTIFY THIS, AND THAT EACH UNDERSIGNED UNDERSTANDS THAT IF
THE UNDERSIGNED DOES NOT PROVIDE A NUMBER WITHIN 60 DAYS WE ARE REQUIRED BY LAW TO WITHHOLD 31% OF ALL
DIVIDENDS, CAPITAL GAINS, REDEMPTIONS, EXCHANGES, AND CERTAIN OTHER PAYMENTS.
> >
Signature Date
- ------------------------------------------------------------------------------ -----------------------------------------
> >
Signature Date
- ------------------------------------------------------------------------------ -----------------------------------------
</TABLE>
<PAGE>
CAPITAL PRESERVATION AND INCOME
STATE STREET BANK & TRUST CO.
SIGNATURE CARD ACCOUNT NO.
- ------------------------------------------- ------------------------------
FOR BANK USE ONLY
- ------------------------------------------- ------------------------------
PRINT FULL NAME AND ADDRESS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT: Corporate accounts must include corporate resolution forms. By
signing this signature card the undersigned agree(s) to be subject to the
rules and regulations of the State Street Bank & Trust Co. now or hereafter
pertaining thereto and as amended from time to time, and set forth on the
reverse side.
PLEASE SIGN BELOW SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER
- --------------------------------------------------- ---------------------------
- --------------------------------------------------- ---------------------------
[] CHECK HERE IF BOTH SIGNATURES ARE REQUIRED ON CHECKS.
[] CHECK HERE IF ONLY ONE SIGNATURE IS REQUIRED ON CHECKS. (SEE REVERSE SIDE)
CHECKWRITING
To establish a checking account, you
must complete the form to the left.
Please attach card to your
application. We will send you a
supply of checks.
Corporations or business trusts must also
complete Certificate of Resolutions.
FOR INFORMATION OR ASSISTANCE CALL
TOLL FREE 1-800 343-2898
<PAGE>
This payment of funds is authorized by the signature(s) appearing on the
reverse side. If this card is signed by two persons, all checks will require two
signatures or one signature as indicated on the face of this card. If no
indication is given, all checks will require both signatures. Each signatory
guarantees the genuineness of the other's signature.
State Street Bank and Trust Co. (the "Bank") is hereby appointed agent by
the person(s) signing this card and, as such agent, is directed, upon receipt of
checks drawn upon this checking account, to (i) redeem, without signature
guarantee, a sufficient number of full shares beneficially owned by such
person(s) to cover such checks, (ii) deposit in this checking account the
proceeds of such redemptions up to the exact amount of such checks, in so
acting, the Bank shall be liable only for its own negligence. I/we understand
that this appointment does not create a checking or other bank account
relationship between myself and the Bank or the Trust.
State Street Bank and Trust Co. may at any time terminate this checking
account and the above agency.
SIGNATURES REQUIRED ON APPLICATION
IF SHARES ARE REGISTERED IN THE NAME OF:
* AN INDIVIDUAL, individual must sign
* JOINT ACCOUNT, both parties must sign
* CUSTODIAN FOR MINOR, custodian must sign
* INSTITUTIONAL ACCOUNT, an officer must sign
indicating corporate office or title
* TRUST ACCOUNT, trustee or other fiduciary(ies)
must sign indicating capacity
<PAGE>
IMPORTANT TAX NOTICE
BACKUP WITHHOLDING INFORMATION
- ------------------------------------------------------------------------------
Federal tax law requires us to obtain your certification that:
1. The taxpayer identification number you provide is correct, and
2. That you are not subject to backup withholding. (For most individuals, the
taxpayer identification number is the Social Security Number.)
Nonresident aliens must certify that they qualify as foreign persons, exempt
from U.S. tax reporting requirements. On joint accounts where an owner is a U.S.
citizen or resident, that owner must certify that the taxpayer identification
number provided is correct and is not subject to backup withholding.
Certification of foreign status must be filed every three years.
If you do not provide us with the above information on the application, we are
required by law to withhold 31% of all your dividends, capital gains,
redemptions, exchanges and certain other payments.
The following are the other conditions under which you will be subject to backup
withholding:
1. If you have received a notice from the Internal Revenue Service that you
provided an incorrect taxpayer identification number.
2. If you have received a notice from the Internal Revenue Service that you
underreported interest or dividend payments or did not file a return
reporting such payments.
DO NOT CHECK THE BOX INDICATING THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING
UNLESS YOU HAVE RECEIVED A NOTICE FROM THE INTERNAL REVENUE SERVICE.
If you fall within one of the following categories, you are exempt from backup
withholding on ALL payments and should NOT check the box:
* CORPORATION * FINANCIAL INSTITUTION * REGISTERED SECURITIES DEALER * COMMON
TRUST FUND * COLLEGE, CHURCH OR CHARITABLE ORGANIZATION * RETIREMENT PLAN *
OTHER ENTITY LISTED IN INTERNAL REVENUE CODE SEC. 3452.
FOR FURTHER DETAILS, REFER TO INTERNAL REVENUE SERVICE FORM W-9.
<PAGE>
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 27, 1995
AS SUPPLEMENTED FEBRUARY 14, 1995
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
America Capital Preservation and Income Fund, formerly known as Keystone America
Capital Preservation and Income Fund - II (the "Fund") dated January 27, 1995,
as suupplemlented February 14, 1995. A copy of the prospectus may be obtained
from Keystone Distributors, Inc. ("KDI"), the Fund's principal underwriter
("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 11
Investment Adviser 14
Trustees and Officers 16
Principal Underwriter 20
Brokerage 21
Declaration of Trust 23
Standardized Total Return and Yield Quotations 25
Additional Information 26
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-12
<PAGE>
THE FUND
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 the twenty-eight funds managed or
advised by 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 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.
INVESTMENT OBJECTIVE AND POLICIES
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.
INVESTMENT RESTRICTIONS
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.
DISTRIBUTIONS AND TAXES
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 in shares of the Fund 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.
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.
SALES CHARGES
GENERAL
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 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 may be exchanged for Class
A shares as described in the prospectus. 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 KDI, the Fund's 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 may be imposed at the time of redemption of certain Fund shares as
follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge will be retained by KDI. See "Calculation of
Contingent Deferred Sales Charge" below.
CLASS B SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and the first
calendar year after the year of purchase; 2.00% on shares redeemed during the
second calendar year after the year of purchase; and 1.00% on shares redeemed
during the third calendar year after the year of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by KDI. 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. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI. 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) Class B shares held during more than four consecutive
calendar years; or (4) Class C shares and certain Class A shares held during
more than one year. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed. 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, Keystone Group, Inc., Harbor
Capital Management Company, Inc., their subsidiaries and KDI, 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 KDI, 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 Keystone fund is at least $500,000 in the aggregate, and no
commission has been paid.
Lastly, 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; or (5) automatic withdrawals under a automatic withdrawal plan
of up to 1-1/2% per month of the shareholder's initial account balance.
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 KDI).
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at a maximum annual rate of 0.75% (currently limited to 0.25%) of the
Fund's average daily net asset value attributable to Class A shares to finance
any activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to a
Principal Underwriter of the Fund (currently KDI) 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 PLAN
The Class B Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares.
Payments under the Class B Distribution Plan are currently made to KDI
(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 KDI under (1) and (2) in the aggregate may not exceed the annual
limitation referred to above. KDI generally reallows to brokers or others a
commission equal to 3% of the price paid for each Class B share sold as well as
a shareholder service fee at the rate of 0.25% per annum of the net asset value
of Class B shares maintained by such recipients outstanding on the books of the
Fund for specified periods.
KDI intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plan
that exceed current annual payments permitted to be received by KDI from the
Fund. KDI 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."
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.
Payments under the Class C Distribution Plan are currently made to KDI
(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 KDI under (1) and (2) in the aggregate may not exceed the annual
limitation referred to above. KDI 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, begining approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules)
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.
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. After the termination of the Class B
Distribution Plan, however, 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 that had been earned at any time during which the
Class B Distribution Plan was in effect. 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 KDI $1,188,065 and
$31,570 pursuant to the Fund's Class B and C Distribution Plans, respectively.
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 Group, Inc. ("Keystone
Group"), 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Group is a corporation privately owned by current and former
members of management of Keystone and its affiliates. The shares of Keystone
Group 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, Roger T. Wickers, Edward F. Godfrey, and Ralph J. Spuehler, Jr. Keystone
Group provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Group of Mutual 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.
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, Trustee and Chief Executive Officer of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Group; President and Trustee or Director of
Keystone America Intermediate Term Bond Fund, Keystone America
Strategic Income Fund, Keystone America World Bond Fund, Keystone Tax
Free Income Fund, Keystone America State Tax Free Fund, Keystone
America State Tax Free Fund - Series II, Keystone America Fund for
Total Return, Keystone America Global Opportunities Fund, Keystone
America Hartwell Emerging Growth Fund, Inc., Keystone America Hartwell
Growth Fund, Inc., Keystone America Omega Fund, Inc., Keystone Fund of
the Americas Luxembourg and Keystone Fund of the Americas - U.S.,
Keystone Strategic Development Fund (together with the Fund,
collectively, "Keystone America Funds"); Keystone Custodian Funds,
Series B-1, B-2, B-4, K-1, K-2, S-1, S-3, and S-4; Keystone
International Fund, Keystone Precious Metals Holdings, Inc., Keystone
Tax Free Fund, Keystone Tax Exempt Trust, Keystone Liquid Trust
(collectively, "Keystone Custodian Funds"); Keystone Institutional
Adjustable Rate Fund and Master Reserves Trust (all such funds,
collectively, "Keystone Group Funds"); Director and Chairman of the
Board, Chief Executive Officer and Vice Chairman of Keystone; Chairman
of the Board and Director of Keystone Investment Management Corporation
("KIMCO") and Keystone Fixed Income Advisors ("KFIA"); Director,
Chairman of the Board, Chief Executive Officer and President of
Keystone Management, Inc. ("Keystone Management"), Keystone Software
Inc. ("Keystone Software"); Director and President of Hartwell Keystone
Advisers, Inc. ("Hartwell Keystone"), Keystone Asset Corporation,
Keystone Capital Corporation, and Keystone Trust Company; Director of
KDI, Keystone Investor Resource Center, Inc. ("KIRC"), and Fiduciary
Investment Company, Inc. ("FICO"); Director and Vice President of
Robert Van Partners, Inc.; Director of Boston Children's Services
Association; Trustee of Anatolia College, Middlesex School, and
Middlebury College; Member, Board of Governors, New England Medical
Center and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Group 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 Group 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 Group; Chairman of the Board and Trustee or Director of all
other Keystone Group 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 Group; and former Chief Executive Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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 Group 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 Group 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 Group 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 Group and
Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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 Group 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 Group 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 Group 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 Group Funds; Director, Senior Vice President, Chief
Financial Officer and Treasurer of Keystone Group, KDI, 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 Group Funds; and President of Keystone.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain
other Keystone Group Funds; and Vice President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Group Funds; Vice President of Keystone Group; Assistant Treasurer of
FICO and Keystone; and former Vice President and Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Group Funds; Senior
Vice President, General Counsel and Secretary of Keystone; Senior Vice
President, General Counsel, Secretary and Director of KDI, Keystone
Management and Keystone Software; Senior Vice President and General
Counsel of KIMCO; 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
Group, 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 Group and several of its
affiliates including Hartwell Keystone, KDI and KIRC. Mr. Elfner and Mr. Bissell
own shares of Keystone Group. Mr. Elfner is Chairman of the Board, Chief
Executive Officer and Director of Keystone Group. Mr. Bissell is a Director of
Keystone Group.
During the fiscal year ending September 30, 1994, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund. On
December 30, 1994, the Trustees, officers and former Advisory Board members 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.
PRINCIPAL UNDERWRITER
Pursuant to a Principal Underwriting Agreement between the Fund and KDI
(the "Underwriting Agreement"), KDI acts as the Fund's Principal Underwriter.
KDI, located at 200 Berkeley Street, Boston, Massachusetts, 02116-5034, is a
wholly-owned subsidiary of Keystone. KDI, as agent has agreed to use its best
efforts to find purchasers for the shares. KDI 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 KDI will bear the expense of preparing,
printing and distributing advertising and sales literature and prospectuses used
by it. In its capacity as principal underwriter, KDI may receive payments from
the Fund pursuant to the Fund's Distribution Plan.
All subscriptions and sales of shares by KDI 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. KDI assumes the cost of sales literature and
preparation of prospectuses used by it and certain other expenses.
From time to time, if, in KDI's judgment, it could benefit the sales of
Fund's shares, KDI 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.
KDI 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
KDI or any other person for whose acts KDI 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 KDI 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.
BROKERAGE
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, KDI or any of their affiliated persons, as defined in the 1940 Act and
rules and regulations issued thereunder.
DECLARATION OF TRUST
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. 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.
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.
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.
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 subsidary of Keystone, acts as transfer and
dividend disburing 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 KDI, and no person is entitled to rely on any
information or representation not contained therein.
As of December 29, 1994, KDI 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. 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 AMERICA HARTWELL GROWTH FUND, INC. - Seeks capital appreciation by
investment in securities selected for their long-term growth prospects.
KEYSTONE AMERICA FUND FOR TOTAL RETURN - Seeks above-average income, dividend
growth and capital appreciation potential from quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).
KEYSTONE AMERICA GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from
foreign and domestic securities.
KEYSTONE AMERICA GOVERNMENT SECURITIES FUND - Seeks income and capital
preservation from U.S. government securities.
KEYSTONE AMERICA 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 AMERICA 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 AMERICA 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 AMERICA 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 AMERICA TAX FREE INCOME FUND - Seeks income exempt from federal income
taxes and capital preservation from the four highest grades of municipal bonds.
KEYSTONE AMERICA WORLD BOND FUND - Seeks current income by investing primarily
in a non-diversified portfolio consisting of investments in debt securities
denominated in U.S. and foreign currencies. The Portfolio seeks capital
appreciation as a secondary objective.
KEYSTONE FUND OF THE AMERICAS - Seeks growth and income from a diversified
portfolio of established North American stocks, Latin American stocks and Latin
American bonds.
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long term capital growth by
investing primarily in equity securities.
<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
